CREDIT: AP/LM Otero
American fast food chain Burger King is in talks to buy Tim Hortons, a doughnut and coffee chain based in Canada, the New York Times reported Monday.
A deal, which could be reached as soon as this week, would mean the iconically American company would be headquartered in Canada, and benefit from the country’s lower corporate tax rate, 15 percent, compared to the on-paper 35 percent rate in the U.S.
The tax benefits may not be the biggest driver of the deal. Burger King has been seeking more coffee offerings to keep up with competitors, keeping headquarters in Canada may placate that country’s regulators, and the combined entity would be the third-largest quick-service restaurant in the world. But it will reduce Burger King’s tax rate from the 27 percent it currently pays.
So-called “inversion” deals that moved a company headquarters from the U.S. and reduce tax rates are common, even when they are to somewhere as close Canada. In 2010, Valeant Pharmaceuticals moved from California north by combining with Biolvail Corp., lowering the tax rate it paid to less than 5 percent.
Yet despite the nominally high 35 percent American corporate tax rate, most multinational companies based here don’t pay that rate — the average is 12.6 percent thanks to a variety of ways they can lower their bills. A recent paper argued that the ability to lower their taxes actually makes American companies more competitive than others around the world. Meanwhile, companies that have done inversion deals haven’t necessarily seen a payoff in better performance. There’s no evidence suggesting that higher corporate tax rates lower economic growth and instead companies that pay the highest rates actually create the most jobs.
None of this has deterred the uptick in inversion deals over recent years, however. About a dozen have occurred this year and dozens are still in the works. The rate has sped up, with more than half of the 76 deals over the last three decades competed since the recession began. Drug company Pfizer is looking to acquire British AstraZeneca, and the maker of Adderall, AbbVie, is seeking to buy Irish Shire. Chiquita banana is also looking to merge with Irish Fyffes.
But public pressure has unraveled at least one deal: Walgreens, the largest American drug store, decided not to go through with an inversion through buying Swiss Alliance Boots. It was the third major deal to collapse in recent months.
Pressure could ramp up. The White House has been promising to take action to make these deals more difficult and less attractive, and the Treasury Department is looking at its options on that front. A bill was introduced in the house to close a loophole making inversions legal and other lawmakers have urged action.