The U.S. government may soon clamp down on companies reducing their U.S. tax payments by way of foreign acquisitions, but such a change wouldn't stop the merger of Burger King Worldwide Inc. and Tim Hortons Inc., filings show.
The takeover circular jointly filed Tuesday by the U.S. burger giant and the Canadian coffee company addressed the widespread uncertainty in how Washington will handle future "tax inversion deals," which let some companies avoid paying corporate taxes in the U.S. by moving their home base to another country with lower tax rates, such as Canada.
But changes in U.S. law or regulations related to such transactions would not provide a legal reason for either company to walk away from the deal, the filing indicates. Should either company withdraw from the merger for reasons other than the ones allowed in the agreement, it could be forced to pay termination fees in the hundreds of millions of dollars.
The controversy stems from the structure of the $12.5-billion takeover of Tim Hortons, which is based in Oakville, Ont., where the merged parent company would be headquartered. The filing says the combined businesses are not expected to be a U.S. resident for tax purposes.
Executives of Miami-based Burger King and its biggest shareholder 3G Capital Group, a Brazilian private equity fund, insist that tax benefits are not a driving force behind the deal.
"I want to point out that [this] is a strategic transaction that's creating a new global leader in the [quick service restaurant] sector, and is not being driven by tax rates," Alexandre Behring, Burger King's executive chairman and a founding partner of 3G, said on a conference call following the deal's announcement.
"Burger King's effective tax rate is currently in the mid to high 20-per-cent [range], which is largely consistent with Canadian tax rates."
The taxation of multinational corporations has come under the microscopes of the U.S. Congress, the Organization for Economic Co-operation and Development (OECD) and other groups in recent months, and the filing outlines the lingering uncertainty around tax changes in the U.S.
"It is presently uncertain whether any of such legislative proposals will be enacted into law and, if so, what impact such legislation would have … and whether such legislation would be retroactive," the filing states.
The document points to the U.S. Treasury's recent criticism of the use of tax inversions. Treasury Secretary Jacob Lew condemned these loopholes in the U.S. tax system in a recent speech, calling them "wrong," in principle, and said the government was planning to take action soon.
Changes to law or regulations could be detrimental to the financial or tax position of the holding company or the partnership, the filing said.
The motivation for the tax inversion could be the treatment of the merged company's future profits.
If Tim Hortons and Burger King weren't allowed under U.S. law to be considered a Canadian entity, the merged company would have to pay U.S. tax rates on earnings repatriated from future expansions in foreign countries – a big part of the plan for future growth of both brands.
Still, the fast food companies gave no indication that a change in tax regulation would derail the deal. The filing states that "no such change of law or regulatory action would be grounds for terminating the transactions."
Even famed investor Warren Buffett caught heat for his company Berkshire Hathaway Inc.'s $3-billion (U.S.) financing of the merger because of the deal's perceived effort to steer away from higher U.S. tax rates. Mr. Buffett historically has spoken out in favour of tax fairness for corporations and wealthy U.S. taxpayers.