[Forbes] In an unexpected and interesting move, Burger King is in talks to buy Canadian coffee-and-doughnut chain Tim Horton's Inc., a merger that would be structured as a "tax inversion" which would effectively move Burger King's headquarters to Canada (more specifically, my hometown of Oakville, Ontario).For those who are unfamiliar with Tim Horton's, the brand is tantamount to Canada's version of Dunkin Donuts that could just as easily adopt its own version of the tagline "America Runs on Dunkin" (think "Canada Runs on Tim Horton's").
Tim Horton's is no small coffee-shop chain.
Tim Horton's, Canada's largest coffee-shop chain, has a market capitalization of about $8.4 billion, while Burger King's market capitalization is about $9.6 billion; the proposed merger would form a new entity worth about $18 billion.
The really interesting part to the story however is not the pure fact that an American burger giant is buying up a Canadian national treasure (Wendy's has previously owned Tim Horton's for some time), but rather that Canadian corporate tax rates are favorable relative to American corporate tax rates enough to justify a "tax inversion". A tax inversion occurs when an American company merges with a foreign one and, in the process, reincorporates abroad, effectively entering the foreign countr's tax domicile. An American company that merges with a Canadian target company for share consideration can avoid U.S. residency for tax purposes as long as the shareholders of the Canadian target end up owning at least 20% of the shares of the new parent immediately after the acquisition.
Canada's corporate tax rate in Ontario of 26.5% (the federal rate of 15% plus Ontario's provincial corporate tax rate of 11.5%) is considerably favorable to the American corporate tax rate of 35% thanks in large part to the conservative Canadian government led by Stephen Harper. The Harper government lowered the federal tax rate to 15% in 2012 down originally from 28% since it took office in 2006.