A U.S. Treasury Department crackdown on tax inversion deals will be tested with Burger King’s proposed acquisition of Tim Hortons, but it will not likely prevent the deal, according to Fitch Ratings in a report this week.
On Monday, Treasury Department officials said the department plans to take action to reduce the economic benefits of corporate inversions and, when possible, to stop them altogether.
Treasury Secretary Jacob Lew also said that the department is urging Congress to pass anti-inversion legislation. However, he said, “Now that it is clear that Congress won’t act before the lame-duck session, we are taking initial steps that we believe will make companies think twice before undertaking an inversion to try to avoid U.S. taxes.”
The action goes into effect immediately and calls into question pending deals, including that of Miami-based Burger King Worldwide Inc., which in August said it would acquire Tim Hortons for $11.4 billion. The move will create a new global parent that would be based in Canada.
Burger King officials have insisted that the move is fundamentally about growth and that the result will not bring any meaningful tax savings.
Still, the quick-service burger chain is among a handful of companies involved in similar deals, which inversion opponents have criticized as a tax dodge. Most of the other companies are in the healthcare arena.
However, in a statement Tuesday, Fitch said, “We believe new rules won’t likely deter the Burger King/Tim Hortons transaction.”
The Treasury Department efforts to close loopholes include the strengthening of a requirement that former owners of the U.S. company own less than 80 percent of the new combined entity.
The new rules would also tax certain intercompany loans, known as “hopscotch loans,” and foreign undistributed earnings could be taxed, regardless of the new combined entity.
Fitch contends that the structure of the Burger King deal will help the company avoid challenges.
Burger King’s majority owner 3G Capital is expected to own 51 percent of the new Canada-based global parent that would be created under the deal, while Burger King shareholders will own a 27-percent stake, and Tim Hortons shareholders a 22-percent stake. That will comply with the Treasury Department’s less-than-80-percent rule.
In addition, cash flow from Tim Hortons’ operations should be able to sufficiently service the $9 billion of debt being issued to partially fund the transaction, potentially circumventing new rules on hopscotch loans between Burger King and its new Canadian parent, Fitch said.
The report concludes that the proposed merger “has good strategic merit and, though the near-term credit impact is negative, expects both parties to benefit from increased efficiencies of scale, brand diversification and multiple levers for future growth.”
And even though Burger King officials have downplayed the tax benefits, Fitch said, “Future potential tax benefits provided by the proposed structure should not be overlooked.”
During 2013, 41 percent of Burger King’s $743 million of operating income before unallocated expenses was from outside of North America, Fitch said. That percentage is expected to grow as the quick-service chain accelerates international expansion.
“Canada’s territorial tax system is likely to provide a more tax-efficient way to access this growing base of earnings,” Fitch said.
Last week, Fitch rated the new Canada-based entity issuing the debt to finance the Burger King transaction at “B/Stable.”
A spokeswoman for Burger King declined to respond to request for comment at press time.
Contact Lisa Jennings at [email protected].
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