Burger King Eyes Canadian Inversion

Amid all of the recent news coverage of American multinational corporations inverting to redomicile in distant foreign countries, a massive deal is going down just next door.  Burger King announced this morning that it reached a deal with Canadian fast food restaurant Tim Hortons, which primarily serves breakfast fare. If the proposed merger were to go through, the resultant company would be the world’s third-largest fast food restaurant chain, with a total of more than 18,000 outlets and roughly $22 billion in system sales.

At least part of this fervor likely comes from the plans to create a new, publicly traded company headquartered in Ontario Canada. Why Canada?

There are a number of benefits for Burger King in seeing this inversion through. First of all, Canada’s top corporate tax rate in Ontario is 26.5 percent, according to Forbes. This includes both the top federal rate of 15 percent and the provincial corporate tax rate of 11.5 percent, making for a significantly lower rate than the federal rate of 35 percent experienced by Burger King currently.

The hidden gem may be the Canadian treatment of a foreign affiliate’s “exempt surplus.” Dividends paid from exempt surplus are generally exempt from Canadian tax by virtue of a 100% dividends received deduction.  Canada uses a combined exemption and credit system applies to dividends received from a foreign affiliate, including a Controlled Foreign Affiliate. Imagine all of the profits held offshore by US companies, such as Apple, Microsoft and Google escaping tax upon repatriation to the parent. Small wonder why Canada was chosen.

Burger King also operates in about 100 countries. This means that its earnings in foreign countries would be protected from the U.S. tax rate, as the U.S. is one of the only developed countries in the world to tax global income for corporations and individuals.

It is still too soon to tell what the long term effects of the Canadian government’s move will be.

Corporate tax inversion is an extremely hot topic right now in the United States, so much so, it has even spread into Canada. Frank Brunetti and I have been keeping up with this topic since the beginning. You can get involved and follow the story from some of our previous posts:

• Democrats Ask Obama To Act Alone On Inversions
• Mark Cuban Protests Tax Inversions
• What Corporate Inversions Are Telling Us (And What Washington Refuses To Hear)
• Treasury Secretary urges Congress to end inversions
• New Congressional Report Highlights Tax Inversion