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 Some U.S. lawmakers and other critics attacked the company that is
the home of the Whopper for deciding to move its tax base to Canada
from the U.S. through its proposed purchase of Oakville,
Ontario-based coffee and doughnut chain Tim Hortons. They say
it will allow Burger King to avoid paying some U.S. taxes.
That would be nothing new. A Reuters analysis of Burger King’s
regulatory filings in the U.S. and overseas, which was also reviewed
by accounting experts, shows that it has been making major efforts
to reduce its U.S. tax bill for some time.
By massaging down U.S. taxable profits while maximizing the profits
it reports in low-tax jurisdictions overseas, Burger King is able to
operate one of the most tax-efficient businesses in the U.S.
fast-food industry.
The chain’s effective tax rate of 26 percent over the past three
years compares with rates above 31 percent at McDonalds Corp,
Starbucks Corp and Dunkin Brands Group Inc. KFC and Pizza Hut owner
Yum Brands did have a similar tax rate to Burger King though this
reflects the 74 pct of its revenues that were generated outside the
U.S., in markets where tax rates are typically around 25 percent.
The Burger King rate is 30 percent lower than the average tax rate
it paid in the five years before it was bought in 2010 by private
equity group 3G, still the company’s majority shareholder.
The accounting experts say the Canadian move will allow Burger King
to double-down on those efforts as it will open up new tax-saving
opportunities for the company. It could, for example, apply the tax
structures it currently employs in major markets like Germany and
Britain, and which allow the group to operate almost tax free in
those places, to its business in the United States, they said.
And that could mean Uncle Sam will lose corporate tax income that
Burger King would have to pay under its current structure.
“I would be surprised if in five years’ time, their tax rate does
not come down reasonably dramatically,” said Professor Stephen Shay,
from Harvard Law School, who has testified to Congress on corporate
taxation.
Burger King declined to comment on its current U.S. tax
arrangements. But it has said the so-called "inversion" deal to buy
Tim Hortons for $11.5 billion, and move the headquarters to Canada,
was based on Canada being the combined company’s biggest market. It
said the deal was about international expansion – particularly of
the Tim Hortons' brand and not about tax savings.
“We don't expect our tax rate to change materially. As I said this
transaction is not really about tax, it's about growth,” Chief
Executive Daniel Schwartz said in a call with analysts last week.
It would be perfectly legal for Burger King to reduce its U.S. tax
bill through the Canadian move. Chas Roy-Chowdhury, Head of Taxation
at the Association of Chartered Certified Accountants in London,
said companies all over the world manage their tax bills so they
don’t have to pay more tax than necessary.
“If the U.S. doesn’t like inversion deals, it should change the law
to prevent them. The U.S. has a leaky corporation tax system which
encourages companies to park profits offshore,” he said.
U.S. MARGINS LOW
Finding ways to report less income to the Internal Revenue Service
(IRS) and more to overseas tax authorities is a particular focus for
companies with a headquarters or big operations in the U.S. because
of the headline federal corporate tax rate of 35 percent on profits.
It is the highest headline corporate tax rate in any major developed
country, and can be even higher once state and local taxes are added
on. There is an incentive for companies to shift U.S.-generated
profits overseas, where rates can be very low, the experts say.
Burger King generated almost 60 percent of its revenues in the
United States between 2011 and 2013, regulatory filings show, but
the chain reported just 20 percent of its profits in the country
over the period.
By contrast, the percentage of their profits that McDonalds,
Starbucks Corp, Dunkin Brands and Yum reported as being earned in
the United States was in line with the percentage of their total
revenues generated in the country.
Those companies all declined to comment.
Shay said Burger King’s large debt load could explain why it has
more ability to manage its U.S. tax bill than less leveraged peers.
Burger King’s low reported U.S. profit translates to domestic profit
margins of just an average 4 percent between 2011-2013 - a fifth of
the level it recorded in overseas markets in that time. The company
declined to say why its U.S. operation enjoyed such low margins over
the period – it reported a small U.S. loss in 2012 and a tiny profit
for 2011, though the profit was up to a much healthier level by
2013.
There could be explanations other than tax-driven moves for the low
margins. The U.S. fast food market is the most competitive in the
world, and prices for fast food offerings are lower than in some
other major markets as a result. However, a lot of the burden,
including increased labor costs as the minimum wages rises in some
states and spending on a refurbishment program for Burger King
restaurants, would be borne by the company’s franchisees. Burger
King operates very few of its own restaurants.
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Professor Daniel Shaviro from New York University Law School, who
was previously Legislation Attorney at the Joint Congressional
Committee on Taxation, said tax planning likely had a lot to do with
the low levels of income reported in the U.S.
The company’s accounts show the low reported U.S margins are due, at
least in part, to how hundreds of millions of dollars in group
overheads, such as head office and debt costs are spread across the
company each year.
Before such costs are applied, profit margins at Burger King’s
United States and Canada division (the U.S. produces 91 percent of
that unit's revenue) are in line with international operations, at
around 39 percent, its filings show. But after these costs are
applied, the North American unit ends up with its rock-bottom
margins.
Most of these costs are taken in the U.S. because it is where cash
is borrowed, and senior managers and product innovators are based.
But tax rules state that such costs should be evenly spread across
international divisions, said Kimberly Clausing, a Professor of
Economics at Reed University.
Clausing said the gap between Burger King’s gross and pre-tax profit
figures for the United States suggested such group-wide costs are
being disproportionately offset against U.S. income.
“That’s one way of shifting income abroad ... it’s a common
problem,” for the IRS, said Clausing.
TAX FREE IN GERMANY
Burger King also operates a tax-efficient operation overseas. By
channeling income through Switzerland it has managed to pay an
effective tax rate of 15 percent on foreign income over the past
three years, company filings and statements show.
Experts said this arrangement could become a template for how Burger
King, as a foreign company, could shave its U.S. tax rate further.
The impact in Germany shows how that could cost the U.S. Treasury.
Germany has historically been Burger King’s largest market outside
North America, generating over 10 percent of total sales. In 2011
and 2012, the last two years for which figures were available, the
German operation had combined sales of $501 million – over half the
total for the Europe, Middle East and Africa region, regulatory
filings show.
In 10 conference calls with analysts covering the two-year period,
transcripts of which Reuters reviewed, then-Chief Financial Officer
Schwartz mentioned the German market eight times, and each time
spoke of its “strong performance” or “positive” results.
EMEA operating profits for 2011 and 2012 totaled $356 million. Yet,
Burger King Beteilligung GmbH – the entity which consolidated
earnings for the group’s main German operating units - reported
losses in 2011 and 2012, totaling over $10 million and recorded a
net income tax credit of more than 200,000 euros.
Burger King Germany’s taxable income was reduced partly because
German stores pay around five percent of their turnover to an
affiliate in Switzerland, Burger King Europe GmbH, the company told
Reuters in 2012.
Burger King Europe GmbH owns brand rights for Europe, the Middle
East and Africa – which also allows profits from other places, not
just Germany, to be at least partly funneled through Switzerland.
Burger King declined to say why the group declared no profits in
Germany at the same time as it boasted to investors about the
market’s strength, but a spokeswoman said the tax structure in
Europe pre-dated New-York based 3G’s acquisition of the chain in
2010.
Almost all of Burger King’s restaurants are now run on a franchise
basis rather than directly by the company, and more than 80 percent
of the company’s revenue comes from franchise fees and property
revenue. At the end of last year, it had 7,384 franchised
restaurants in the U.S. and 52 company owned and run – the latter
are in the Miami area near the company’s current headquarters so it
can test new food offerings and other changes to the way it
operates.
Under U.S. tax rules, Burger King cannot currently cut its American
tax bill by routing franchise fees from its U.S. franchisees via
Switzerland. But these rules would not apply to a Canadian company.
The company spokeswoman said Burger King had no plans to shift
franchisees into contracts with offshore subsidiaries.
(This story corrects name in paragraphs 24 and 25)
(Reporting by Tom Bergin; Editing by Martin Howell)
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