Corporate tax break key to Tim Hortons-Burger King merger

Canada’s lower rate attractive to businesses pursuing tax inversion strategy

Burger King (NYSE:BKW), and to a lesser extent Tim Hortons (TSX, NYSE:THI), are struggling to turn the tide of public backlash over news that the two companies will merge.

In an August 26 investor conference call, the fast-food companies were at pains to explain the move was not made so Burger King could benefit from Canada's lower corporate tax rate, but rather so that the companies could aggressively expand globally as they face stiff competition from industry heavyweights like McDonald's (NYSE:MCD).

With Tim Hortons' corporate offices remaining in Oakville, Ontario, and Burger King's remaining in Miami, Florida, and the companies saying they have no plans to change products or how they operate, that's difficult to believe.

“From everything I've heard, this is clearly a tax play, but it's not crazy to put coffee and hamburgers under the same corporate control,” Thomas Davidoff, a professor at the University of British Columbia's Sauder School of Business, told Business in Vancouver.

According to Bloomberg data, more than a dozen U.S. companies have either acquired or attempted to acquire companies in the past two years during a recent wave of “tax inversion” moves.

The strategy is particularly popular for tech and pharmaceutical companies, although countries like Ireland, the Netherlands and the United Kingdom have been more popular places to set up shop than Canada.

In June, U.S. drug maker Auxilium (Nasdaq:AUXL) bought QLT (TSX:QLT), a Vancouver biotech company. The deal gave Auxilium access to QLT's technology and allowed Auxilium to “redomicile” in Canada.

Lionsgate Entertainment (NYSE:LGF), a film production company that got its start in Vancouver, is domiciled in B.C. but has its corporate headquarters in Santa Monica, California.

Just a few months ago, Sony Pictures Imageworks raised the ire of Californians when it decamped from Culver City to Vancouver. The company will be able to take advantage of B.C.'s competitive film tax credits.

The discrepancy between the United States' corporate income tax rate and that of other countries is stark: the American rate can be as high as 40% and is higher than that of most developed countries, and applies to income generated domestically and abroad.

The corporate income tax rate in Canada varies by province but is around 26%.

Davidoff said tax inversion moves make sense for multinational companies like Burger King, which generates around 48% of its revenue outside the U.S., or for pharmaceutical and tech companies.

“Burger King can run away, but Joe's Dry Cleaners in Cleveland can't very well create a tax headquarters in Canada.”

While the trend has become a hot political issue in the United States, recent attempts by President Barack Obama to change the corporate tax system, including lowering the corporate income tax rate, were blocked by Republicans in Congress.

And while companies may move their headquarters to Canada, they are unlikely to move their top-paid executives here because of personal income tax rates.

“If you move to Canada, it's a highly taxed environment outside of the corporate tax,” Davidoff said.

- With files from Tyler Orton