Burger King and Corporate Inversion

By: Dale Weckbacher

Matthew 22:21

And He said to them, "Render therefore to Caesar the things that are Caesar's, and to God the things that are God's."

NKJV

For those not wishing to pay taxes, this verse may be bad news for God does want His people to pay their taxes.  However, the verse tells us to render unto Caesar what is Caesars but also unto God what belongs to God.  Yes, God does want us to pay our taxes but He does not require us to pay more than the law requires.  Finding legal ways to pay less in taxes is not going against God’s Word and is something I as an accounting and tax professional advise people to do.  Even though it is August and taxes are the furthest thing from most of our minds, taxes were a whopper of a topic in this week’s news.

Inversion is a process where a business headquarters outside of a country in order to avoid high taxation.  (1)  Recently the process has been occurring with increased frequency as companies seek to maximize profits in the current economic climate.  Liberals view companies that engage in the process as lacking “economic patriotism.”  I guess these anti-capitalist liberals would prefer companies cut jobs and profits in order to pay higher taxes instead of inverting so they can continue to provide jobs and cheaper products for the customers.  (2) 

Listening to these anti-capitalist liberals one would believe that Burger King will be continuing to do business in the United States but will avoid paying any U.S. income tax.  However, this is not true and the reason for their merger with Tim Hortons has other benefits for both companies besides taxation.  If we take the time to look at the bigger picture, we can gain an understanding of what is going on with this merger. 

If Burger King follows through on its intentions to relocate its corporate offices to Canada, it will become a foreign corporation doing business in the United States.  This does not excuse the corporation from paying U.S. Income Taxes on income it generates from its U.S. operations for foreign corporations doing business in the United States are required to file form 1120F with the IRS.  (3)  On this form, the corporation declares its income from operations within the United States and pays the appropriate taxes.  I am not familiar with Canadian tax law but they may qualify for tax credits in Canada to help pay their U.S. tax liability, which would be a tax benefit for the corporation but would not reduce tax revenues received by the U.S. Treasury.  The only possible reduction in tax revenues to the United States would be that Burger King would no longer pay payroll taxes for its employees working at the relocated corporate offices since they would no longer be working in the United States but in Canada. 

Since Burger King Restaurants are franchise operations, the restaurants are actually privately owned businesses whose owners are required to claim their income on either their individual tax return or corporate return if they are incorporated.  (4)  The Burger King Corporation does not receive any direct profit from the sales of Whoppers and has never been required to claim these profits on its corporate tax return for these belong to the owner of the franchise.  The Burger King Corporation, however, does receive revenue from franchise fees paid by franchise owners.  However, since franchise fees received from U.S. based franchises are part of its U.S. operations, the corporation will be required to pay U.S. income taxes on these fees.  However, as Ben Shapiro wrote in his August 27 article (2), the potential tax savings incurred from potential Canadian tax credits and reduced payroll taxes for corporate employees will enable the corporation to keep its franchise fees at their current level thus potentially saving franchises and the jobs and tax revenues they create in the U.S.  

However, tax savings are only one consideration in the merger of Burger King and Tim Hortons.  Tim Hortons, considered the Dunkin Donuts of Canada, represents a great acquisition for Burger King.  Because of this acquisition, Tim Hortons will expand into the United States and be able to compete with Dunkin Donuts and Krispy Kreme.  (5)  Upon completion of the merger, consumers will be able to go to a U.S. Burger King and purchase a Tim Hortons coffee and donut with their breakfast sandwich.  In Canada, they will be able to visit a Tim Hortons and purchase a Whopper with their coffee and donut. 

In addition, one of the benefits in a merger is the consolidation of corporate operations.  One of the decisions the newly formed merged corporation must make is where to locate their corporate operations.  When the two corporations have corporate headquarters in two different countries, anyone with any business sense would expect them to locate corporate operations in the country with the lower tax rate, which is what Burger King is proposing to do. 

For those still not convinced that Burger King is making the best decision for their business, and who intend to boycott Burger King, I want you to  remember you are not actually boycotting the Burger King Corporation but the independent franchise.  The only persons you will be punishing are the person that waited on you at the window and the franchise owner who provides jobs and pays taxes in your local community.  The answer to stopping corporate inversions outside the United States is for the United States to lower its corporate tax rate and become competitive in the global market place. 

Even after inversion, Burger King will still be rendering unto Caesar what belongs to Caesar for what they are doing violates no current tax laws.  The question is will the United States government do the wise thing and reduce its corporate tax rate lessoning the incentive for corporate inversion outside the United States or pass some law taxing corporations that choose to invert thus requiring them to pay higher taxes leading to the cutting of jobs in the U.S. and closure of some franchise operations. 

1. Investopedia. Corporate Inversion. www.investopedia.com. [Online] Investopedia. [Cited: August 29, 2014.] http://www.investopedia.com/terms/c/corporateinversion.asp.

2. Shapiro, Ben. DOZENS OF BUSINESSES MOVE HQS OUTSIDE AMERICA UNDER OBAMA. www.breitbart.com. [Online] Breitbart News, August 27, 2014. [Cited: August 29, 2014.] http://www.breitbart.com/Big-Government/2014/08/27/businesses-move-inversion.

3. Internal Revenue Service. Instructions for Form 1120-F. www.irs.gov. [Online] U.S. Treasury. [Cited: August 29, 2014.] http://www.irs.gov/pub/irs-pdf/i1120f.pdf.

4. Franchise Direct. Burger King Franchise Cost & Fees. www.franchisedirect.com. [Online] Franchise Direct. [Cited: August 29, 2014.] http://www.franchisedirect.com/foodfranchises/burger-king-franchise-07118/ufoc/.

5. Ferdman, Roberto A. Tim Hortons makes more money than Burger King and Dunkin’ Donuts, combined. www.washingtonpost.com. [Online] The Washington Post, August 26, 2014. [Cited: August 29, 2014.] http://www.washingtonpost.com/blogs/wonkblog/wp/2014/08/26/tim-hortons-makes-more-money-than-burger-king-and-dunkin-donuts-combined/.