Burger King, one of America’s most recognizable fast-food restaurants, has entered into discussions to buy out the Canada-based coffee-and-doughnut chain Tim Horton’s Inc., seeking an opportunity to merge and create a new company.
The merger of Burger King, with a $9.6 billion market capitalization, and Tim Horton’s, valued at around $8.4 billion, would create a massive shift in the industry.
Furthermore, should the talks prove successful, the new company’s headquarters would be located north of the border.
A merger would mark the most high-profile instance of tax-inversion, a process by which an American company reincorporates abroad, after a merger with a foreign company, to take advantage of lower foreign tax rates. Treasury Secretary Jack Lew and President Barack Obama called attention to this practice last month, with the latter calling it a violation of “economic patriotism.”
“Rather than double-down on the top-down economics that let a fortunate few play by their own rules,” the president said in a recorded weekly address, “let’s embrace an economic patriotism that says we rise or fall together, as one nation, and as one people. Let’s reward the hard work of ordinary Americans who play by the rules.”
While a fine sentiment, his appeal loses a fair amount of power when Americans are being asked to play by bad rules. This is certainly the case for U.S. corporations, which pay the highest base corporate tax rate in the developed world - the federal rate alone is 35 percent. And while that number is mitigated by a selection of loopholes and deductions - Burger King’s effective tax rate last year was 27.5 percent - it can hardly compare with Canada’s federal rate of 15 percent, considerably lower than the 28 percent rate in place when conservative Prime Minister Stephen Harper took office in 2006.
Canada, in fact, has been quickly climbing the ranks as a desirable place to do business. Bloomberg Rankings placed it second, ahead of the U.S. and behind only Singapore, as the best country in the world for business.
This bodes poorly for the U.S. Losing large companies, like Burger King, with a yearly tax bill of almost $90 million, is clearly not in America’s interest.
Scolding companies for not being “patriotic” is not a solution; making the U.S. a better place to do business is.