Burger King's Move North Isn't So Great for Canada
The King’s sudden interest in taking up Canadian citizenship has a lot to do with avoiding taxes through a process of “tax inversion,” and moving the fast-food giant north to Canada doesn’t mean more money for the country.
Canada's newest monarch. Image via
Burger King’s bid to buy Canadian coffee and doughnut shop Tim Hortons and merge the companies into a global fast-food monster is good news for shareholders, who stand to make a lot of money from the deal—but not everyone is psyched about the burger giant’s decision to move its headquarters up north.
First, the King’s sudden interest in taking up Canadian citizenship has a lot to do with avoiding taxes through a process of “tax inversion,” essentially an accounting gimmick that will let the company move its headquarters to Canada, where it will pay a 26.5 percent corporate tax rate compared to the 40 percent rate in the US. The whole thing is just smoke and mirrors, though. The BK executives will continue to work out of their offices in Miami, and Tim Hortons brass will stay put where they are in Oakville, Ontario. The only real change will be the address on the letterhead. As a result, the already-broke US government is going to lose tens of millions of dollars over the coming years.
Jon Stewart mocked tax inversion recently on The Daily Show as “a liberating procedure for companies that have been raised American, but know in their hearts they’re really Irish.” Well, in this case, Burger King seems to have always known it was Canadian.
Moving the fast-food giant north doesn’t mean more money for Canada, though. The way Canada's system works, corporations only pay taxes on their actual operations in the country, and since they’re probably not going to sell billions more burgers and doughnuts to Canadians, nothing much will change.
"The Americans are going to have the most downside out of this because it allows Burger King to lower their taxes paid in the US, but they won't be paying any more taxes in Canada,” Dennis Howlett, executive director of the non-profit group Canadians for Tax Fairness, told VICE in a phone interview this week. “So really we're not gaining any jobs, we're not gaining any taxes, there's really nothing in it for Canada."
Basically, Canadians should expect their tax bill to get knocked down courtesy of the King.
Canada’s federal corporate tax rate has been slashed nearly in half since 2000, from 28 percent to the current 15 percent (the provinces charge separate corporate taxes on top of that). It’s been a bipartisan effort between the Liberal Party and the Harper Conservatives, and it’s made Canada the lowest-tax jurisdiction in the G7, but at what cost?
According to a 2012 report by the Canadian Labor Congress, Canada is losing out on some $13 billion a year it could make up by raising the corporate tax rate back up to a modest 21 percent. That’s all money that could be invested into infrastructure, education, health care, science and technology research—things that are often much more important to businesses than just how much they’re shelling out in taxes.
“The fact that Canada’s corporate tax rate is significantly lower than America’s may enhance the motivation for tax-avoiding restructuring initiatives like the Tim Horton’s deal,” Jim Stanford, an economist at Unifor, Canada’s largest private-sector union, told VICE in an email. “Supporters of tax cuts will argue that this is good for Canada, but that is debatable. Other countries will cut their tax rates too (as has occurred), leading Canadian companies to do exactly the same thing... This is a drain on the fiscal base of all countries.”
Howlett of Canadians for Tax Fairness said he accepts “that you can't raise corporate tax rates too high,” but Canada is nowhere near the limit of what it can ask the biggest corporations to contribute.
“You want to keep things competitive... but there's a fair bit of room to raise corporate tax rates and still keep them under the US rate and maintain a competitive advantage," said Howlett.
Given the current government’s track record, that’s not really going to happen, and if anything, Canada’s budding reputation as a tax haven could become a political talking point on the campaign trail in 2015.
“Canada has moved to a highly competitive tax regime,” Finance Minister Joe Oliver said of the Burger Tim deal. “We believe this has been a constructive move that is designed to retain capital in this country, which results in more business expansion and more employment.”
As it happens, more employment might not be what comes out of the merger. Burger King is majority-owned by the Brazilian investment fund 3G Capital, known for its cost-cutting ways. When 3G took over Burger King in 2010 it fired some 450 top brass, and it shut down a century-old ketchup plant in Ontario last year that cost more than 700 people their jobs.
Although the new King Hortons won’t be able to fire staff at independent franchises, the two companies did refer to possible “synergies” in announcing the merger. Hopefully this means a Whopper with two Boston cream doughnuts as buns.
The deal still has to be approved by the Canadian government, who will “determine whether it’s a net benefit to the country,” but that’s simply a formality before Burger King becomes yet another Canadian monarch who lives in another country and doesn’t contribute anything.
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