Question

Explain the Burger King Inversion

Answer 1

From its proposed merger with Tim Hortons, a Canadian company, Burger King and its leading investors would save an additional $400 million to $1.2 billion in taxes between 2015 and 2018. This contradicts CEO Daniel Schwartz's assertion that the plan of Burger King to become a Canadian company (known as an inversion) "is not really about taxes."Burger King could dodge U.S. taxes on profits that he kept overseas at the end of 2013 at $117 million. Burger King could permanently delay paying taxes on those profits under U.S. law; it could never pay U.S. taxes on those profits by becoming a Canadian company. Therefore, Burger King can save an estimated $275 million in U.S. taxes between 2015 and 2018 as it will no longer have to pay U.S. taxes on potential worldwide income under Canadian law (even on a deferred basis).

Nonetheless, the really fascinating part of the story is not that an American burger company buys a Canadian national treasure (Wendy's has previously owned Tim Horton's for some time), but that Canadian corporate tax rates are favorable to American corporate tax rates enough to justify a "business inversion." A tax inversion occurs when an American company merges with a foreign company and re-enters the tax domicile of the foreign country. So long as the investors of the Canadian target end up owning at least 20 percent of the new parent's stock immediately after the merger, an American company that merges with a Canadian target company for equity valuation may escape U.S. tax residency.

The proposed merger of Burger King to gain Canada's favorable corporate tax rate is a true reflection of the highest corporate tax rate in the OECD. Instead of taking the same stance on cutting the corporate tax rate outright as the Harper government did, though, to make the U.S. a profitable place to do business