U.S. Tax Policy, Obama Agenda Chase Burger King North of the Border

NEW YORK (TheStreet) -- Burger King's (BKW) effort to acquire Tim Horton's (THI) , a Canadian purveyor of coffee and doughnuts, reflects a good business decision, but its choice to locate corporate headquarters north of the border would be the direct result of high U.S. corporate taxes and President Obama's antibusiness agenda.

Burger King is a well-managed global enterprise with stores in nearly 100 countries and half its profits earned abroad. Like rival McDonald's (MCD) , its sales are declining as millennials turn away from hamburgers, and it is seeking other avenues to expand.

McDonald's is getting into coffee, a high-margin business, in a big way, and Tim Horton's java knowledge offers Burger King the opportunity to do the same.

Also, Burger King could apply its knowledge of foreign franchising and restaurant regulations to expand Tim Horton's limited global footprint, as rival Dunkin' Brands (DNKN) is doing in Asia.

Simply, the U.S. federal corporate tax rate is 35% and applies to both Burger King's domestic and overseas profits, whereas Canada's federal rate is 15% and only applies to Tim Horton's domestic sales.

In the second quarter of this year, Burger King's federal and state income taxes were 24% of its operating costs and 34% of its profits. Locating in Canada would cut those figures by up to 25%.

No responsible CEO or corporate board could reasonably ignore those figures, and that's why about 60 U.S. companies have completed or plan so-called "tax inversions," acquisitions or mergers with foreign companies that permit them to locate their tax address in a friendlier jurisdiction.

What American businesses actually pay in federal and state income taxes varies a lot, thanks to many exemptions, deductions and provisions to delay taxes on foreign earnings; however, the average combined U.S. and foreign tax burden on profits is about 30%, whereas the average for foreign rivals is about 23%.

Ohio Democratic Sen. Sherrod Brown is calling for a boycott of Burger King, and Treasury Secretary Jack Lew is busy crafting legislation for Congress to make tax inversions more difficult if not impossible.

If Congress doesn't act, Lew is threatening to bypass legislators and make tax inversions illegal by "reinterpreting" tax laws -- likely as suits the convenience of Obama's political agenda.

And that's the more fundamental point. The U.S. tax system has become both burdensome and quite arbitrary, a political tool that presidents of both parties may use to reward friends and punish enemies.

A 2013 study undertaken by a European think tank ranked the U.S. 94th out of 100, right after Zimbabwe, for its impact on business competitiveness. No wonder the U.S. economy is not creating enough jobs.

In a recent example, the Treasury Department determined that telecommunications company copper and fiber optic transmission lines -- think the wires on poles outside your home -- are real estate, and may be placed in a special real estate investment trust that receives privileged tax treatment.

It's no accident that telecom companies, which are highly regulated entities, are big donors to the Democratic Party. In fact, the home of Comcast's (CCV) CEO is one of the president's favorite fund raising venues.

Democrats and Republicans alike say they want corporate tax reform including the elimination of loopholes and deductions and lower rates, but President Obama has made clear he wants more revenue overall out of the exercise.

As Lew's recent actions demonstrate, that will come down to burdening firms led by Republicans paying even higher taxes and doling out advantages to industries that have leaders who support the Democratic Party.

House Republicans will never go for that.

Nothing will change until we get a president with some understanding of business and a Treasury secretary with some sense of shame.

At the time of publication, the author held no positions in any of the stocks mentioned.

Follow @PMorici1

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates BURGER KING WORLDWIDE INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate BURGER KING WORLDWIDE INC (BKW) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, expanding profit margins and good cash flow from operations. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

You can view the full analysis from the report here: BKW Ratings Report


TheStreet Ratings team rates TIM HORTONS INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate TIM HORTONS INC (THI) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, reasonable valuation levels, increase in stock price during the past year and increase in net income. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

You can view the full analysis from the report here: THI Ratings Report

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