Americans love freedom, or at least the idea of freedom, or the illusion of freedom, so it made sense, back in 1974, for Burger King to launch a major advertising campaign with a tag line that would stick in the mind of every American with the munchies – “Have it your way!” That says freedom. Of course it does.
Pillsbury had to do something. They had acquired the Burger King business in 1967 – a company that began in 1953 as Insta-Burger King, down in Jacksonville. It almost went under in 1954 but was purchased by two franchisees and renamed Burger King – short and sweet – but it was still not doing well. But it could be acquired on the cheap and maybe something could be made of it. McDonalds was conquering the world. Why should they have all the fun, and make all the money? Unfortunately it turned out that it wasn’t easy to crack the market that McDonalds had cornered, so in 1968, Pillsbury hired BBDO to fix things in their failing hamburger experiment – a famous advertising agency can always fix things, and this one did. America was then subjected to endless thirty-second spots with wholesome young out-of-work actors pretending to be cheerful and chirpy Burger King line-workers, singing that jingle – “Hold the pickles, hold the lettuce. Special orders don’t upset us. All we ask is that you let us serve it your way!”
That was amazingly irritating, and rightly ridiculed, but it did the trick. Burger King was flexible and friendly and would let you be yourself, and the McDonalds were rigid and authoritarian – they were probably fascists. They wouldn’t hold the pickles. Sales took off. There were new Burger Kings all over the place. Freedom won. Pillsbury cut BBDO loose in 1976 – they couldn’t come up with a follow-up campaign that made any sense – but they had saved the grand experiment. Americans love the illusion of freedom.
There was only one problem with this. Burger King is also known as the Home of the Whopper – their signature big hamburger meant to counter the Big Mac – and all this stuff about true American freedom, at least in terms of hamburgers, was itself a bit of a whopper. These were all corporate hamburgers. This was about return-on-investment to the shareholders, not about supporting some vaguely hungry sixteen-year-old’s struggle for autonomy and sense of self. Sales slipped. Pillsbury management did a lot of restructuring but that did not go well, and Pillsbury itself was acquired by the British entertainment conglomerate Grand Metropolitan in 1989 – and they weren’t all that impressed with the hamburger business. They ignored it, and then there was Grand Metropolitan’s merger with Guinness in 1997, forming a new holding company, Diageo. They ignored this Burger King outlier too, and that neglect of the brand, through this odd string of owners, nearly killed the brand. It really was dying.
Diageo eventually decided to divest itself of this money-losing Burger King mess. In 2000 they put Burger King up for sale, which led to a new set of owners, a partnership of TPG Capital, Mitt Romney’s Bain Capital, and Goldman Sachs Capital Partners. They bought Burger King on the cheap and took it public in 2002, making a mint, and in late 2010, 3G Capital of Brazil acquired a majority stake in Burger King. Everyone got to extract a lot of money along the way – Mitt Romney walked away richer than ever – as the company limped along, diminished and now irrelevant. The Brazilians were left holding the bag, and they are pouring in billions to turn things around, but they’re only majority shareholders. This is an American company, incorporated here, still headquartered in Florida, paying American corporate taxes, employing Americans, and still shoving unremarkable fast food at Americans. The Brazilians invested in a quintessentially American company, in America, run by Americans, because they saw the same potential for profits that Pillsbury saw back in the late sixties. This might work. Toss in two or three billion. See what happens.
Have it your way? That was a corporate-designed tag line to trick you into increasing one particular corporation’s profits, and not another’s. That was the big whopper, and it worked for a year or two, and then it didn’t. This isn’t about you, or about freedom. It’s about the bottom line, the solid growth shareholders expect. It’s a matter of fiduciary responsibility, responsibility to those shareholders, whose capital has financed the whole operation, not to the customer who wants fries with that, and wants to feel good about our American freedoms and all that stuff. In fact, this has nothing to do with America at all:
Fast food giant Burger King has signed a deal to acquire coffee chain Tim Hortons for more than $11 billion, creating the world’s third largest fast-food conglomerate and decisively transferring the global headquarters of the iconic American brand into Canadian territory.
The companies announced the deal on Tuesday, framing it as an opportunity to expand the global footprint of the two companies, which have 18,000 restaurants across 100 countries. “The new global company will be based in Canada, the largest market of the combined company,” the companies said in a joint press release, confirming speculation that the merger would enable Burger King to arrange a “tax inversion,” or a merger with a foreign company that enables a U.S. company to reincorporate abroad under a more favorable tax environment. A recent spate of inversions has drawn fire from President Obama and administration officials, who have vowed to crack down on the practice. …
Alex Behring – executive chairman of Burger King and managing partner at the private venture firm 3G Capital – will take over as executive chairman of the company, while Marc Caira, president and CEO of Tim Hortons, will be appointed vice-chairman. Burger King CEO Daniel Schwartz will become the new company’s group CEO.
Those are the bare bones of the deal, and this puts flesh on the bones:
To many, Burger King is an American icon that has served up flame-broiled Whoppers and fries for six decades. But with a deal to buy the doughnuts-and-coffee chain Tim Hortons on Tuesday, it will soon become a Canadian company majority owned by a Brazilian investment firm – with the assistance of the American billionaire Warren E. Buffett. In announcing their $11.4 billion merger, Burger King and Tim Hortons declared their intentions to become a truly global fast-food empire whose offerings span from breakfast to dinner.
But executives devoted more time during their tightly planned introduction on Tuesday tamping down outrage over whether Burger King was moving to Canada to lower its tax bill than talking up the merits of the deal.
The acquisition highlights the ever-higher ambitions of Burger King’s majority owner, the relatively low-key 3G Capital. In just six years, the firm, backed by one of Brazil’s wealthiest men, has taken over Burger King and the ketchup colossus H.J. Heinz and helped orchestrate the megamerger of the beer giants InBev and Anheuser-Busch.
The 3G combination of operating prowess and hyper-efficient cost-cutting – it has clamped down on expenses as small as color copies at Burger King and mini-fridges at Heinz – has won the investment firm plaudits from the business world. And it has no bigger admirer than Mr. Buffett, who is a longtime friend of the 3G co-founder Jorge Paulo Lemann and was a partner in buying Heinz last year for $23 billion.
There’s a lot going on in the background, and who owns what now? As for Heinz, what are those damned Brazilians doing in Pittsburgh anyway? They’re making decisions at the ketchup-and-pickles factory on the North Side? And is Burger King now Canadian? The first Tim Hortons opened in 1964 in Hamilton, Ontario, a business founded by Miles G. “Tim” Horton – a National Hockey League star long ago – and now they’re all over Canada – but then from 1995 to 2006 Tim Hortons was part of Wendy’s – the hamburger chain based in Columbus, Ohio. This is getting confusing, and folks are confused:
Since news of the talks emerged this week, customers and lawmakers have worried that the deal would be a corporate inversion aimed at trimming Burger King’s tax rate.
Mr. Schwartz argued on Tuesday that his company’s tax rate, now about 27 percent, would remain about the same even after the deal closes. Even before 3G bought Burger King, the company had already taken some moves to reduce its taxes.
Still, customers flooded the company’s Facebook page with angry comments. “If you attempt to buy Tim Hortons for the purposes of evading US Taxes, I will NEVER step foot in another Burger King again,” one user wrote. Some Tim Hortons consumers appeared dismayed about their daily coffee stop losing some of its hometown character.
“In my naïveté, I’m disappointed because I think Tim’s is Canadian and now it’s going to be owned by Americans – well, Brazilians,” said Linda Ladouceur as she made her way into a store in an Ottawa residential neighborhood for a coffee.
There’s that, and there’s that other matter, as Danny Vinik explains:
You may be wondering, how does Burger King reduce its tax liability by purchasing a Canadian fast food company? The answer is that the deal is structured as a “tax inversion” which allows Burger King to switch its official tax jurisdiction from the United States, where the federal corporate tax rate is 35 percent, to Canada, where it is 15 percent. Presto! Burger King’s tax bill is suddenly much lower.
If it sounds ridiculous that an American company can purchase a foreign firm and suddenly avoid the U.S. corporate tax system, that’s because it is. Under current U.S. tax law, if the American company transfers 20 percent or more of its shares to the foreign firm, it can switch its official tax jurisdiction. It doesn’t matter that the vast majority of the shareholders are still American. Or that the management and control of the company remains in the U.S. Or that in making the deal, nothing about the company actually changes. You would still be able to grab a Whopper for lunch. Its thousands of American workers will all still have their jobs. But Burger King will have opted out of the U.S. corporate tax system.
One really should not do that:
These deals have infuriated many members of the Democratic Party, including President Barack Obama who condemned them in an interview with CNBC’s Steve Liesman in July. “For you to continue to benefit from that entire architecture that helps you thrive,” he said, “but move your technical address simply to avoid paying taxes is neither fair, nor is it something that’s going to be good for the country over the long term.” Treasury Secretary Jack Lew has also called on Congress to close the loophole.
Vinik doesn’t see that happening:
Republicans want to address tax inversions through comprehensive tax reform, not through an individual bill. Both parties agree that the corporate tax system needs to be reformed. In fact, they both want to lower the 35 percent rate. But that’s all they agree upon. Democrats want to increase revenues through reform while Republicans want any changes to be revenue neutral. In years past, the fact that both sides want to lower the official rate could allow them to compromise. Now, increased polarization and Congressional gridlock almost ensure that won’t happen.
Does that mean more and more firms will be able to use inversions to avoid U.S. taxes? Not necessarily. Obama has asked his staff to look into ways that he can take unilateral action to discourage firms from using the loophole. It’s unclear what exactly he could do. One possibility would be to ban any firm that uses an inversion from receiving a federal contract.
None of that may do any good. If corporations are people, as seems to be the case now, these “people” have figured out they can now simply turn in their citizenship, but stay here, using the roads and bridges, protected by the police and firemen, selling what they will, to make a ton of money, but not pay our taxes here, because they’re not really citizens any longer. They’ll pay the Canadian taxes in this case. That’s pretty cool, and quite good for Canada.
Some do, however, sense that this sort of opting out just isn’t right:
Sen. Sherrod Brown (D-Ohio) called for Americans to boycott Miami-based Burger King for the so-called inversion move to reduce its corporate taxes. And consumers posted negative comments on the company’s Facebook page.
“I’ve eaten my last whopper,” Oscar G. Echeverría wrote on Burger King’s Facebook page.
Laurel Hutch wrote: “Another American Company that doesn’t want to pay its fair share of taxes. Bye-Bye Burger King. BOYCOTT!!!”
There’s also the politics of this:
Buffett, who has backed an Obama administration plan named after him to force millionaires to pay the same share of their income in taxes as middle-class families, also came under fire.
In announcing the $11.4-billion deal Tuesday to buy Tim Hortons, the companies said Berkshire Hathaway would receive preferred shares in the new firm for its $3-billion investment.
“‘Tax Me More’ Warren Buffett to Finance Burger King’s Tax Inversion Deal,” was a headline on the economics and political website Zero Hedge.
“It has to be twisting the White House in messaging and political knots,” said Chris Krueger, a Washington policy analyst with Guggenheim Securities.
Of course it is, but there’s one’s patriotic duty, and one’s fiduciary responsibly:
Buffett said Tuesday that it made sense for the combined company’s headquarters to be in Canada.
“Tim Hortons earns more money than Burger King does,” he said told the Financial Times. “I just don’t know how the Canadians would feel about Tim Hortons moving to Florida. The main thing here is to make the Canadians happy.”
Matt Levine, however, says this isn’t about taxes:
Tim Hortons and Burger King’s effective tax rates are basically the same.
Tim Hortons, I am given to understand, sells a lot of coffee and donuts, most of them in Canada. (Out of 4,485 stores at the end of 2013, 3,588 were in Canada.) I don’t know, you could probably sell the coffee in the burger stores, or the burgers in the coffee stores, or good lord you could put a burger on a donut, that will probably win you cool points with millennials; millennials love things that are part donut and part thing that is not a donut. So there are business reasons for the deal. But if Burger King acquired Tim Hortons, the tax rate on all those Tim Hortons stores would go up: Instead of the regular 15 percent Canadian rate that they’re currently paying, they’d have to pay 35 percent combined to U.S. and Canadian authorities. From a Canadian company’s perspective, that hardly seems fair…
One more thing: This inversion is not all that inverted. Tim Hortons is actually bigger than Burger King, on revenue and net income though not on stock market capitalization. This is not just an aesthetic point.
So no one “saves” money here. This is all marketing strategy. Fine, but Daniel Gross isn’t so sure about that:
Sure, there may be valid business reasons for a combination. Tim Horton’s has a huge breakfast business, which Burger King lacks. But it’s easy to suspect that tax avoidance is a driving factor. (Burger King isn’t pursuing a U.S. doughnut chain like Dunkin’ Donuts.) That hedge fund sharpie William Ackman, who is backing Canada-based Valeant’s effort to acquire Allergan – another potential giant inversion – is one of Burger King’s biggest shareholders doesn’t help matters.
Gross puts it this way:
Patriotism may be the last refuge of a scoundrel, as Samuel Johnson put it, but a lack of it may be the last refuge of corporate executives who have run out of ideas on how to improve their business.
Many other companies have done this, but this is different:
It’s one thing for a fairly anonymous company that sells pumps or valves or industrial products to other businesses to renounce its citizenship for the sake of saving a few bucks on taxes. It’s quite another when you’re an iconic American consumer-facing company that relies on fickle American consumers for a large share of its business.
No, throngs of American consumers won’t stop going to Burger King just because its formal corporate address moves from Miami to Oakville, Ontario. But a few might, and in a business of razor-thin margins, that makes a difference.
More significantly, companies like Burger King spend hundreds of millions of dollars – and lots of time – trying to encourage consumers to think about them in favorable ways, from quirky ad campaigns to trying to make fries more healthful. By the same token, any measure that can detract from or damage your public image can be very harmful – especially when you’re already losing market, stomach, and wallet share to competitors. It’s hard to think of any entity that has burnished its brand by moving to Canada.
Ah hell, maybe we should just get rid of the corporate income tax. In Forbes, Yevgeniy Feyman thinks we could:
Long-term tax reform should focus as much as possible on not just lowering, but replacing the corporate income tax (and perhaps the individual income tax as well) – with a progressive consumption tax. Short-run “fixes” that predicated on economic nationalism are likely to do more harm than good, and ultimately fail to actually address the problems with our tax system.
In the New York Times, Greg Mankiw had suggested that:
Let’s repeal the corporate income tax entirely, and scale back the personal income tax as well. We can replace them with a broad-based tax on consumption. The consumption tax could take the form of a value-added tax, which in other countries has proved to be a remarkably efficient way to raise government revenue.
Only the unlucky, the losers, living on little, paycheck to paycheck, would find that burdensome, but Jared Bernstein is not impressed with that idea:
Those who would get rid of the corporate tax basically argue that the smart move is to go with this flow: As long as so many more businesses are setting themselves up to avoid the corporate tax, don’t fight ′em – join ′em. The problem is that to do so risks turning the corporate structure itself into a big tax shelter: If income generated and retained by incorporated businesses should become tax-free, then guess what type of income everybody will suddenly start making? Taxes delayed are taxes saved, and with no corporate tax, anyone who could do so would structure their earnings and investments to be “corporate earnings,” untaxed until they’re distributed.
Yeah, there’s always a way to get around paying into the common pool of funds that keeps the country up and running – and we should have known that Burger King would be the first iconic American consumer-facing company to walk away from its citizenship, and then stay here, doing business as usual, making lots of money, supported and protected by the infrastructure everyone else is paying for, everyone but them. What did they say back in the seventies? Have it your way? They’re having it their way. Perhaps we should cheer. Americans love freedom. Hold the pickles.