We have had more than one post recently on the increasingly fashionable trend of inversion as a productive (many say questionable!) mechanism for tax evasion, but the focus of the discussion was pretty firmly on the biopharma sector, i.e. Medtronic+Covidien, AbbVie+Shire, Pfizer+Astra or Auxilium+QLT. Little did I suspect that we were about to get hit at the heart of something as inherently Canadian as Tim Hortons - where many of us across the country stop in each morning for some liquid therapy to help get the day started!
Yep, it finally happened, a big-old-bad-old American fast food giant, none other than Burger King, has crept North of the border and will acquire quaint old Tim Hortons for a substantial price of some $12-13B CDN - a whopping amount from the home of the Whopper! It's a very good deal for Burger King as it will simultaneously make them the third-biggest fast food restaurant chain in the world, while lowering their corporate tax rate due to their likely establishing headquarters in friendly old Canada. As solid a business move as it no doubt is, it seems that both Americans and Canadians alike are not exactly in love with the idea.
Why? Well, there has been much in the news recently about this whole process of inversion, and previously well-buried actions of several household names in American (global) business have risen to the surface, perhaps less like the cream on top of milk but more like surface scum on a stagnant pond, if you listen to typical reactions. Corporate technology giants such as Apple, Microsoft, IBM, GE, Google and even Facebook have all been spotlighted for how they maintain fantastic sums of profits offshore from the USA - all as a mechanism to severely reduce their tax burdens.
What kind of amounts are we talking about? Well, according to a recent report by Bloomberg, various US companies added an additional $206B collectively to their stash offshore, which is so whopping it makes the Whopper look like a petit four by comparison! It's no shock either that the pharma world figures very well in the top ten with no less than three players "making the grade".
I honestly don't think that this comes as too much of a surprise to anyone, but perhaps things have simply come to a head given the still-struggling economy in the US (let's not talk about the staggering national debt!) with Obama et al. considering military action in yet another country in the middle east. Things are not going well back home, but we will spend billions we don't have helping yet another country sort itself out, while by so doing taking even more food out of the refrigerators of Americans still suffering from the fallout of the nuclear-like mortgage and credit default swap meltdown.
Both Congress and the Senate have been on the case for a while now, and there has been mounting pressure on the companies taking advantage of legal means to fill their pockets seemingly at the taxpayer's expense. Anger has simmered over the top of the pot, with certain parties going as far as to actually accuse these companies of being "Un-American" by sheltering their profits abroad in tax havens. Their patriotism itself is in question. Perhaps the extent to which they go to avoid taxes is what really irks the man on the street - using means such as the "Double Irish" or even the "Double Irish and Dutch Sandwich" - which shelters them even from Irish corporate taxes and offloads the hundreds of millions to glamorous tax haven islands such as the Caymans or Bermuda, respectively. As much as I am behind their right to do it if it's legal, there has just got to be something wrong with Google having an effective tax rate of a laughable 2.4%! It's insulting to any hardworking person in any normal job who is forced to pay as much as 40-50% and be happy about it.
But at the same time, I don't really understand all the bleating from Congress and even Obama - these companies all have top notch financial and legal eagles on board to ensure that any means they use to avoid an inordinate tax burden is legal. So if it's legal, then that means it is underwritten by the law, in which case companies can state with no irony that they are actually following the letter of that law. If Congress or the current administration has a problem with that, maybe they should spend less time bleating and more time getting new legislation passed through the house and the system, and close the loopholes. But getting things done is something that this dysfunctional house has not been good at effectively since the mid-terms in 2010, and the entire nation has suffered because of it.
But moaning is always easier than getting off one's backside and doing some work to correct what one is moaning about. While I don't really have a problem with these incredibly remunerated and wealthy CEOs being hauled before Congress to explain their actions, as a business person I understand their actions completely! Such people are in fact under enormous pressure to "perform" in order to keep their glamorous jobs, and as far as their boards and shareholders are concerned, "performance" generally comes down to one dirty little word - profits. So if your CFO comes to you with a very safe way to shelter several billion dollars from taxes, and your legal eagle confirms that it's entirely lawful, then what else are you expected to do, as a hot CEO?
Now don't get me wrong, I am not saying that I like it, nor do I do necessarily condone it, but if my job was primarily to increase profits, and inversion or the use of tax-sheltering instruments was the most effective way of doing so, then I either need to take a deep breath and do it or else begin looking for a new job that suits my ethics better. We all know that GE, Apple, Microsoft, Google, Facebook and big pharma are all money-printing machines who perform that task very nicely, and none of them got to their elevated status today by playing Mr. (or Miss!) Nice Guy - it's business. If governments, various committees, lobbying agencies etc. have issues with corporate taxes being "stolen" from the nation's pot, then the solution is crystal clear - change the law. End of.
All this talk of inversion and tax evasion has gotten us away from the Canadian player at the heart of the story - Tim Hortons! It's a fantastic deal for BK for reasons other than the obvious inversion play, because TH has some 4,500 outlets in Canada that generated over $3B in turnover last year, and this dwarfs BK even though it has around three times as many restaurants! Our Tim's is an inherently more profitable model, and that is not due to tax rate differences. The merge of TH into BK will create the third-largest fast food chain on the planet, and this gets BK closer to nailing their biggest rival, the ubiquitous McDonald's. It's a bold move; one quite fitting with the panache of BK's 33-year-old wunderkinde CEO, Daniel Schwartz, who came in as a partner in private equity giant, 3G Capital.
There's a definite sadness to see something as historically Canadian as TH being swallowed by the Whopper, but we've had it since 1964 and it's been a pretty great 50-year run - this sale and the price of this sale are testament to that fact. We'll have to wait and see what happens next but in the meantime, if like me you are getting hungry thinking about all these biscuits and burgers, then why not race out to your local Tim's and grab a maple biscuit bacon and egg breakfast sandwich - while you still can!
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