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Burger King's Play Not For Taxes?

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August 26, 2014 – Comments (0) | RELATED TICKERS: BKW , THI , BRK-A

Board: Berkshire Hathaway

Author: howardroark

It seems very unlikely that inversion turns out to be an important or even meaningful part of this deal, though it will be probably be an important part of the narrative.

Some things to note: Inversion does not allow companies like Burger King (or Tim Horton's) to avoid taxes on their US operations, even if they are headquartered in another country. Admittedly, they can try fancy tricks to increase foreign earnings (for example, selling the Burger King trade name to a subsidiary in Bermuda). But they can try this with or without inversion. Neither BK nor THI actually does as best I can tell.

Also, BKC today has about 50% of its operations outside the US. It currently already pays lower foreign tax rates on those operations, not US tax rates. It must, however, pay repatriations taxes if it wants to bring those profits back home. The only thing inversion does for BKC is eliminate that potential future repatriation liability. But Burger King does not actually have a big build up of foreign cash awaiting repatriations. Therefore, its actual tax payments already look extremely similar to the same BKC that was headquartered in, say, Canada.

Tim Horton's has 80-85% of its operations in Canada. If it was acquired by BK and suddenly had its headquarters in the US, those Canadian profits would suddenly have a deferred repatriation liability attached to them for US taxes. That seems a little strange. The only other country in the world besides the US where that situation would apply is...Eritrea. The combined BKC/THI would have more than 50% of its earnings and operations outside of the US. The word inversion has a particular connotation.

Burger King's effective tax rate prior to the merger has recently been running at 25.6%. Tim Horton's effective tax rate prior to the merger has been running...28.5%! Canada has a low federal tax rate but very high provincial taxes that are more difficult to avoid than US state taxes.

This is almost certainly not a tax deal in any important sense. But let the music play. 

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