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Why did Burger King decide to purchase Tim Hortons and move to Canada?

Burger King purchases number one Canadian food chain Tim Hortons and moves its corporate residence to Canada, presumably to avoid significantly higher US tax rates.
Burger King purchases number one Canadian food chain Tim Hortons and moves its corporate residence to Canada, presumably to avoid significantly higher US tax rates.
Photo by Spencer Platt/Getty Images

Burger King is following the lead of companies such as Walgreens by purchasing a foreign company, a move that most people assume is an effort to avoid increasingly high corporate taxes in the US.

Specifically, Burger King is purchasing Tim Hortons for 11 billion dollars, and moving its corporate residence to Canada. For those of you who’ve never ventured into Canada or the Northeastern US, Tim Hortons is a massively popular restaurant chain best known for its coffee and doughnuts. To put in perspective how popular it is in Canada, it controls more of the food market than McDonalds, more of the coffee market than Starbucks, and continues to grow rapidly. As Burger King’s CEO explains, this growth is their primary motivation for the move.

The Real Reason Burger King is Moving to Canada

The obvious and most controversial reason why Burger King would purchase Tim Hortons at much higher than their listed value is that Burger King is seeking lower tax rates globally, in this case, with Canada. While American tax rates can reach 40%, Canada caps them off at 26.5%, showing that there will be a significant savings.

However, according to a CNN interview with Burger King Worldwide CEO, Daniel Schwartz, he explains that the tax situation would be about the same in Canada, stating that “This transaction is not about tax rates, but about growth." Although skeptics will insist that the tax savings is the motivator, his statement holds credibility since Tim Hortons has experienced remarkable increases in profit and popularity in recent years.

What does this mean to you?

The first way this decision has affected the general public is that it caused a major boycott from American customers. Similar to when LeBron James left Cleveland, people seem to hate when companies or celebrities turn their back on their hometown for financial gain. These people are right that America will lose out on this deal: in 2013, Burger King paid $89 million in corporate taxes.

Another implication of this deal is that it refocuses the spotlight on America’s corporate tax structure. Since it is becoming a trend for major American companies to seek foreign avenues for avoiding the United States tax system, then the problem is either too high a tax structure or rampant corporate greed. Either way, Obama is expected to continue efforts to make this type of tax inversion illegal.

Prediction: Will Tim Hortons ever catch on in America?

I don’t think Tim Hortons will experience nearly the same level of popularity in America, and here’s why: Branding. The reason they are such a juggernaut in Canada’s food industry is not because of phenomenal doughnuts, but because it was founded by, and bares the name of, a beloved Canadian hockey player. It would be like if there was a decent American food chain called Michael Jordans. People would go for the same reason they buy the shoes. Also, the facts that hockey is not popular in most places in America, and 90% of the public would not know who Tim Horton is are not going to help matters. Finally, the way that Canada has loyalty towards Tim Hortons, America has loyalty to brands that would be its competitors, such as Starbucks and Duncan Donuts. Overall, it seems that if Burger King plans on using Tim Hortons to greatly increase growth in the US, it is waging a massively uphill battle in a highly competitive territory.

Related Links

Senator Sherrod Brown (D-OH) suggest a boycott of Burger King: http://www.brown.senate.gov/newsroom/press/release/-with-burger-king-in-...

Burger King’s Corporate Responsibility Page: http://www.bk.com/corp-respon