Small, medium or large? The amount of outrage over Burger King’s deal to buy a Canadian donut chain could possibly determine whether the deal goes through — and helps Burger King dodge millions of dollars in U.S. taxes.
Burger King’s (BKW) plan to buy the Tim Hortons (THI) chain — now confirmed, following initial leaks — seems like a smart strategic fit that would benefit both companies, even without a tax savings. Horton’s would get a much broader global distribution chain than it can build on its own. Burger King would get a popular breakfast lineup to help it draw early risers from competitors such as McDonald’s (MCD) and Starbucks (SBUX). Overall, the deal would create a fast-food giant with a current $22 billion market cap and 18,000 outlets in 100 countries that could generate $23 billion in system sales.
Burger King has a problem, though, because the deal also includes a plan to change the new firm’s nominal headquarters from Miami to Oakville, Ontario, where Hortons is based. That would subject the new company to Canada’s far lower corporate tax rates. Last year Burger King paid $89 million in taxes on $1.1 billion in revenue, according to its annual filing with the U.S. government. Uncle Sam would lose some of that money if the deal goes through.
Federal, state and local tax rates in the United States can reach as high as 40%. In Canada, the maximum is 26.5%. That makes Burger King the latest of several big U.S. companies seeking a “tax inversion” that would allow it to merge with a foreign partner and pay taxes in another country, where rates are lower.
Unlike most other firms that have sought inversions recently, Burger King is a well-known consumer brand in a business with lots of competition — which makes it easy to boycott the chain. And that’s exactly what a vocal group of Burger King critics say they plan to do. Here are a few of the developments so far:
Activist group MoveOn.org is sponsoring a petition to scuttle the “Whopper Tax Dodge” or else institute a boycott. The petition has more than 1,000 signatures.
MSNCB TV host Joe Scarborough called for a Burger King boycott. Sen. Sherrod Brown (D-OH) did too, saying in a statement, “Burger King’s decision to abandon the United States means consumers should turn to Wendy’s Old Fashioned Hamburgers or White Castle sliders.”
Burger King’s Facebook (FB) page has filled with comments criticizing the deal. “I’ve eaten my last whopper,” one complainer declared. Another critic, a veteran, urged his senator to propose a bill banning Burger King outlets on U.S. military bases. Burger King, meanwhile, seemed to be hustling to delete negative comments from its Facebook page and instead turn the attention back to burgers, chicken strips and cinnamon buns.
On Twitter and Instagram, a #BoycottBurgerKing movement has been gathering steam.
Still, boycotts often sound grandiose at the outset, then peter out quickly — or never get traction in the first place. Minimum-wage workers have been urging boycotts of McDonald’s, Walmart (WMT) and other retailers for months, part of their bid for higher pay and better working conditions. Neither company has budged, yet there’s little evidence those campaigns have harmed their bottom line.
What happens next may be decisive for Burger King. President Obama has personally criticized companies that seek a better tax deal overseas, calling for “economic patriotism” (whatever that is) by American firms. Were he to criticize Burger King by name, it would certainly amplify the bad publicity and perhaps penetrate deeper into consumer consciousness than if the deal just came and went as a news story. At least three other firms — Pfizer (PFE), Mylan (MYL) and Walgreen (WAG) — canceled inversion deals earlier this year after controversy broke out, though all three cited other factors.
The Buffett factor
Another factor is Warren Buffett, America’s favorite investor. Uncle Warren is reportedly financing about 25% of the deal, for a total of about $3 billion. Buffett usually explains himself publicly and will probably address the whole controversy over tax dodging at some point. He may point out the real problem isn’t corporate behavior but the coagulated mess known as the U.S. tax code, which forces U.S. corporations to do inversions and other sorts of legal acrobatics to remain globally competitive. Buffett may also highlight the fact that many other nations have lowered corporate rates to draw foreign companies, while the U.S. Congress has dithered. If Buffett can shift blame to Congress or even offer a plausible defense of the deal, it might defuse most of the controversy.
Burger King, meanwhile, has begun damage-control efforts, assuring visitors to its Facebook page that the Hortons deal isn’t driven by an effort to evade U.S. taxes. “Our headquarters will remain in Miami,” the company says. “BKC will continue to pay all of our federal, state and local U.S. taxes."
Still, it’s possible Burger King will become a U.S. division in the larger company, while one level up, the corporate HQ atop both brands moves to Canada. And the company can still pay “all” its U.S. taxes even if it significantly reduces its U.S. tax obligation. Slinging burgers is a heck of a lot easier than figuring out where to pay taxes on them.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.