Investors cheer Burger King-Tim Hortons 'combo deal'

Mon Aug 25, 2014 5:27pm EDT
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By Euan Rocha and Solarina Ho

TORONTO (Reuters) - Investors in Burger King Worldwide Inc and Tim Hortons Inc applauded news of a potential merger between the two fast food chains, seeing both tax savings and strategic rationale for a combination.

The two companies confirmed late on Sunday that Burger King is in talks to acquire the Canadian coffee and doughnut chain, and that the combined entity would be based in Canada. Shares of Tim Hortons jumped 18.9 percent to close at $74.72 on the New York Stock Exchange on Monday, while shares of Burger King, which is majority owned by investment firm 3G Capital, rose 19.5 percent to $32.40.

Investors and tax experts said the main reason for Burger King to move its domicile to Canada is to avoid having to pay double taxation on profits earned abroad, as the company would have to do if it remained in the United States.

This element of the Canadian tax regime is seen as a bigger draw than its federal corporate tax rate of 15 percent, though that is nominally lower than the U.S. rate of 35 percent. Canadian provincial taxes typically bring the tax rate companies pay closer to 26 percent, while many U.S. companies can find exemptions to bring down their taxes to a comparable level.

Burger King's effective tax rate was 27.5 percent in 2013 and Tim Hortons was 26.8 percent.

While Burger King's pre-tax foreign income was just a few hundred million dollars last year, the benefits of a Canadian domicile will grow as the combined companies expand overseas, experts said.

"I think it has significant potential to substantially decrease Burger King's corporate income taxes in the United States," said Bret Wells, an assistant law professor at the University of Houston. The benefit would come through "earnings stripping" the U.S. tax base in a way that is not available now, he said.

With a so-called tax inversion deal, Burger King could set-up a foreign affiliate in a low-tax regime such as Switzerland, have the U.S. operations pay income to that affiliate, and repatriate the money back to Canada.   Continued...

Tim Hortons employees serve shareholders before the company's annual general meeting in Toronto, May 8, 2014. REUTERS/Peter Jones