Speaking to CNBC in May on the subject of tax inversion deals, Warren Buffett said, "it does get a little annoying when we see other people paying far lower tax rates while engaging in the same sorts of businesses that we engage in."
Now Buffett appears to have decided to get in on the game: The Oracle of Omaha is extending financing to Burger King for its planned takeover of Canadian coffee-and-donuts chain
UPDATE: On Tuesday morning, the companies confirmed Warren Buffet’s involvement in financing the transaction, saying in a statement: “Berkshire Hathaway has committed $3 billion of preferred equity financing. Berkshire is simply a financing source and will not have any participation in the management and operation of the business.” More on the deal here.
After the completion of the deal, Burger King plans to move its headquarters from Miami to Oakville, Ontario, where it could be able to reduce its tax bill in a couple of ways. Canada's federal corporate tax rate is 15%, well below the top U.S. marginal rate of 35%. At the provincial level, Ontario's corporate tax rate is 11.5%, and the federal government is pushing the provinces to harmonize their corporate rates at 10%. However that alone isn't likely to reduce Burger King's tax payments all that much (in 2013, taking advantage of exemptions, Burger King's effective tax rate wasn't much higher than Tim Hortons, 27.5% vs. 26.8%). What should have a bigger impact for Burger King is that it will no longer be subject to double taxation on earnings overseas, as it currently is in the United States, plus it will gain the ability to strip income from its U.S. operations and shift them to subsidiaries incorporated in lower-tax countries.
It would be the latest in a series of foreign acquisitions by U.S. companies designed to lower their tax bills. In a so-called tax inversion deal, a U.S. company reincorporates in the country of a business it buys -- Ireland, with its 12.5% corporate tax rate, is a favored destination -- or in another country altogether. To get around previous restrictions passed by Congress to discourage corporate tax flight, a U.S. company must do a deal that raises the foreign share of ownership in its stock above 20%. A spate of tax inversions this year, mostly involving health care companies, has raised the ire of President Obama and Congress, and the Treasury Department is preparing tax rule changes to curb the practice.
However, lower taxes aren't the only rationale for Burger King to do the deal, as Forbes' Clare O'Connor points out: the two companies could be stronger together. Management is likely to take Tim Hortons international, copying from the same overseas expansion playbook that Burger King has used to good effect since 2010, and there could be synergies to offering overseas diners two vastly different takes on Western fast food. Also Tim Hortons could supply Burger King with better coffee and food to strengthen its breakfast menu, an area where Burger King faces an uphill climb to compete with
Investors gave an enthusiastic reception to the news of the talks between the companies, which broke Sunday night; Tim Hortons shares rose 18.9% on the New York Stock Exchange on Monday, while Burger King shot up 19.5%.
The combined company would be controlled by Burger King's biggest shareholder, Brazilian private-equity firm 3G Capital. Buffett partnered with 3G last year to buy Heinz, and he has said that he would be happy to work with them again.
Buffett told CNBC in May that he doesn't think U.S. companies are overtaxed compared to their competitors overseas. "If you look at corporate taxes as a percentage of GDP since World War II, they've come down from 4% to about 2% -- in fact under 2%. That's while corporate profits have been hitting record levels. ... Corporations are doing fine in the United States."
But he said he expected the surge in companies looking to move their tax domiciles overseas would force Congress to address the issue, and perhaps even rethink the corporate tax code completely. "This whole thing ... will cause one hell of a fight in corporate America."
The participation of America's most famous investor in the flight of one our country's most well-known fast-food brands only seems likely to make that fight more intense.
