Burger King-Tim Hortons: Is Canada becoming a corporate tax haven?

Potential inversion deal highlights dropping corporate taxes in Canada, now the lowest among 10 countries, with the U.S. in 5th place.

Fast-food giant Burger King faced anger from both Washington and average Americans Monday, a day after it announced that it was in talks to buy Tim Hortons and relocate its head offices to Canada. The move would create the world’s third-largest fast-food retailer, while also helping Burger King save on corporate tax payments.

“Burger King’s decision to abandon the United States means consumers should turn to Wendy’s Old Fashioned Hamburgers or White Castle sliders. Burger King has always said ‘Have it Your Way’; well, my way is to support two Ohio companies that haven’t abandoned their country or customers,” said Ohio State Senator Sherrod Brown in a release issued Monday.

U.S. President Barack Obama has called companies moving to escape taxes “corporate deserters” and pledged to curtail the practice of tax inversion, in which companies move their headquarters to a more favourable tax jurisdiction. It is typically done during a merger or acquisition of a company in the other country.

At issue are the jobs that companies take with them when they relocate and the taxes they end up paying to a foreign nation when they move.

The possible Burger King relocation highlights that Canada has become, relatively speaking, something of a corporate tax haven when compared with the U.S. and some European countries.

“The American corporate tax rates are extremely uncompetitive; they are among the highest corporate tax rates in the world,” said John Wonfor, FCPA, FCA and global head of tax for BDO International Limited.

“Canada’s tax rates are very competitive. When you look at OECD countries, we’re about the middle of the pack.”

The federal tax rate in Canada is 15 per cent, plus whatever provincial taxes are levied, according to Wonfor. The federal corporate tax rate has been dropping steadily since former finance minister Paul Martin introduced corporate tax rate reductions in the 2000 federal budget.

Before the rate reductions started, the effective corporate tax rate in Canada, including surtaxes, was 29.12 per cent, according to Wonfor.

Now that the federal corporate tax rate is at 15 per cent, the government wants all the provinces to get to 10 per cent, for a combined 25 per cent tax rate, said Wonfor.

Alberta is already there, while in Ontario corporate taxes stand at 11.5 per cent, resulting in a combined rate of 26.5, which is not likely to change any time soon, said Wonfor, pointing out that the provincial government has other priorities at the moment.

“We are not a corporate tax haven around the world, but if you compare us to the U.S. these days, we’re looking pretty good,” according to Wonfor.

Having a company headquartered in Canada also pays off when it comes to taxes on dividends, Wonfor pointed out.

Canada doesn’t tax dividends if taxes on the dividend have already been paid in another jurisdiction. For example, a dividend earned by a U.S. company operating in France is taxed by France and also by the U.S. The same dividend earned by a Canadian company operating in France is taxed only once, in France. Canada does not collect additional tax.

Reducing costs by reducing taxes also means more profits for investors.

Candice Malcolm, Ontario director of the Canadian Taxpayers Federation, says the trend is a testament to the best kind of job creation — lower taxes attract more business.

“By creating a low-tax jurisdiction, you’re creating more opportunity to tax,” she said.

Senator Brown, a member of the Senate Finance Committee and a senior member of the Senate Banking Committee, called for an immediate fix to stop so-called “tax runaways” from moving out of the U.S.

His fixes include a lower corporate tax rate.

“This kind of common-sense reform will close down tax havens that cost our country revenue and cost American jobs. Lowering the statutory corporate tax rate would put companies on a level playing field with foreign competitors and reduce the incentive for them to shift jobs and profits overseas.”

Currently, U.S. multinational corporations book more than 40 per cent of their profits in so-called tax havens, according to the senator.

Customers south of the border were already voicing their discontent with Burger King for the move. By Monday afternoon, the chain’s Facebook page had more than 1,000 mostly negative comments about the potential deal.

Shawn Simpson, who hadn’t heard of the talks until approached by a reporter while he was at a Burger King in New York City on Monday afternoon, said he didn’t like the idea of the company paying its taxes to another country.

“For them to take their headquarters and move it across the border is a negative for me,” said Simpson, 44, who was ordering a Double Whopper and onion rings. “It’s an American brand.”

A representative for Burger King, Miguel Piedra, said the comments on Burger King’s Facebook page represent a small fraction of the company’s more than 7 million followers on the social media site.

Anger in the U.S. over inversion has made companies skittish about making the move, according to Bloomberg News.

It reported that Walgreen Co., the largest U.S. drugstore chain, passed on the opportunity to move to low-tax Switzerland when it bought Alliance Boots GmbH. Pfizer Inc. because of Obama’s denunciation of overseas mergers.

The merger between the two fast-food chains isn’t being done solely to benefit from lower tax rates — Tim Hortons has been ramping up its lunchtime menu and an acquisition like Burger King would presumably help on that front.

A company like Burger King, with operations worldwide, could also help Tim Hortons achieve the kind of U.S. and global presence it has been struggling with for decades.

A 2014 KPMG guide to location costs for international businesses concluded that total tax costs in Canada were 46.4 per cent lower than in the U.S.

According to the study, Canada had the lowest total tax costs among 10 countries, including Mexico, the United Kingdom, the Netherlands, Australia, Germany, Japan, Italy and France. The U.S. was in fifth place.

The comparison did not include longtime well-known tax havens such as Bermuda, Switzerland and Ireland