The investors in Tim Hortons Inc (NYSE: THI) and Burger King Worldwide Inc (NYSE: BKW) seemed to be very happy with the announcement of the coming together of the two popular fast food companies, viewing benefits of both planned rationale and tax savings.
This morning, both chains confirmed that there would be a cash-and-stock deal valued at roughly $11.4 billion. Tim Hortons, is a doughnut and coffee chain based in Canada. The merger entity would have its headquarters in Canada itself. On Monday, the stocks of Tim Hortons climbed by 18.9 percent reaching $74.72 on the NYSE. At the same time, Burger King’s shares increased by 19.5 percent reaching $32.40.
Avoiding double taxation
According to various tax experts and investors, the primary reason behind Burger King shifting its base to Canada is to escape paying double taxation with regards to income earned from abroad.
This component of Canada’s tax rules is viewed as a major draw, bigger than its 15 percent central corporate tax rate. Still it is quite low as compared to the tax rate in the United States which is almost 35 percent. Under the regional taxes applicable in Canada, the tax rate firms come to paying almost 26 percent. At the same time, it is possible for several American companies to seek exemptions to cut down their taxes and bring them to a similar level.
The applicable tax rate for Burger King was 27.5 percent in the year 2013, whereas for Tim Hortons it was 26.8 percent. The foreign revenue of Burger King, prior to the application of tax was only some hundred million dollars in the previous year. However the advantages of the Canadian base will increase when the companies plan to develop and expand in the overseas market.
Mutually beneficial deal
According to Bret Walls, law professor, University of Houston, the merger has a significant ability to considerably bring down the corporate revenue taxes for Burger King in the United States. The company would receive the benefits in the form of “earnings stripping” the American tax base in a manner which is not yet available.
Apart from tax savings, industry experts are of the opinion that the coffee products of Tim Hortons could enable Burger King to bite away a chunk of McDonald’s Corp’s (NYSE: MCD) profits in the fast service breakfast industry. At the same time, Tim Hortons can expand its operations in the American and overseas market with the aid of Burger King.