Burger King might be going Canadian. On Monday, Bloomberg reported that currently, Burger King is in talks with the Canadian coffee and donut chain Tim Hortons. The two chains, one insanely popular in Canada, and the other a pretty burger chain in America, are said to be thinking of banding together to combat McDonald's and YUM Brands and their multi-brand stores that combine KFC and Taco Bell.
But it’s actually seeming much more likely that these two chains are combining so that Burger King can benefit from paying Canada's corporate taxes instead of America’s. Right now America’s corporate tax rate is 35 percent tax. Canada’s is just 15 percent, a move they made in 2012. The Wire notes that provincial corporate taxes would jack the rate up to about 26 percent, but it’s still not the high rates the company sees in America.
The move these two companies are considering has become a popular one. It’s so popular, in fact, that the White House has already discussed penalizing companies that move to foreign soils just to escape the American corporate tax rate. The Treasury Department has considered limiting the tax benefits companies could receive if they relocate their headquarters out of the country. They also considered preventing companies that are involved in inversions from getting any federal contracts.
The process for taking part in an inversion is incredibly easy. All a company needs to do is purchase 20 percent of another company’s stock. Boom, now they can relocate. The White House could change that law, but a far more productive approach would be to reduce the tax rate. According to the Wire, both Republicans and Democrats have agreed that the 35 percent rate is too high. However, now we’re at a standstill since no one can agree on how to fix the problem. Surprise.
Now that inversions have captured the White House’s attention, companies are even more likely to participate in inversions. On the off-chance the White House decides to just make it harder for inversions to take place, more and more companies are hopping on that bandwagon while the getting is still good.
For Burger King and Tim Hortons, both companies are already benefiting just from the talk of an inversion. Both companies are experiencing a surge in shares, with Burger King seeing a 15 percent increase and Tim Hortons experiencing a 19 percent increase. Their merger would create the third largest fast food company in the world.
While it’s clear that Burger King will benefit from the tax break, what does Tim Hortons stand to gain? Business Insider uses a few numbers to tout the chain’s success. The company on its own is worth $8.4 billion dollars, is the largest coffee chain in Canada and it claims to sell eight out of 10 cups of coffee sold in all of Canada. However, they also report that the last nine quarters for the donut and coffee joint have been declining. The company is now in a phase of “menu innovation” to try to catch up to changing trends, which includes adding more healthy options and hot sandwiches. A pairing with Burger King might not be ideal to chase down that health trend, but it could certainly attract the audience they’re looking for. However, BBC reports that the two companies would remain separate, but just benefit from “sharing corporate services.”
So now we wait and see if the White House will make good on their threats of penalizing companies that participate in inversions. This could potentially be the first time the administration would try to block one, which would set a precedent for what is to follow. Though overall, its a pretty standard deal, this could turn out to be an interesting story, politically.