Firstly, I think it is worth noting that compared to many
recent deals, this one makes the most business sense as Burger King is looking
for a way to grow their breakfast offerings; especifically coffee, and compete
with the likes of McDonald’s and Dunkin Donuts. Both of these companies have
recently initiated anti-Starbucks ad campaigns as they begin to realize the
importance of the breakfast and coffee business to their bottom line. Those of
us in Canada know how synonymous the “Timmy’s” name is with coffee.
That being said, this is primarily a tax-inversion strategy.
The acquisition of a stable and growing business is secondary. However, with
the substantial media coverage that this deal is generating, I cannot help but
wonder if this will be the deal that pushes the U.S. Government to find a way
to close this loophole and limit its use by major corporations.
If this were to happen it would be reminiscent of a number
of North American corporations attempting to take advantage of a tax structure
only to have the government change the rules.
Many of us in Canada will remember the Halloween Massacre of
2006 when Finance Minister Jim Flaherty announced that income trusts would be
taxed in a similar manner to corporations at a rate of 30%. The previous
structure allowed corporations to flow their distributions to their unit
holders on a pretax basis thus dramatically reducing their corporate taxes
payable.
The new law saw valuations of many of these companies drop
dramatically. The energy sector was perhaps the hardest hit, with estimated
losses of $35 billion overnight. Although the new rules were instituted to
reduce a perceived loss of tax revenue, it was done in a rather dramatic
fashion when it became apparent that a number of major Canadian corporations
were looking to convert to income trusts to further reduce their tax liability.
On October 11th,2006, a mere 20 days before Finance Minister
Flaherty announced the changes, BCE Inc., one of Canada’s largest publicly
traded companies, announced plans to convert from a corporation to an income
trust. The forecasted loss for the government by allowing BCE and fellow
telecom giant Telus to convert would have been in the neighborhood of $1.5
billion annually. There is no doubt that the threat of more companies
converting forced the government to act swiftly and decisively to limit the
potential tax loss.
Master Limited Partnerships (MLPs) in the U.S. have a very
similar story. MLPs in the U.S. started in quite the same way with the first
MLP in 1981. The goal was to distribute
income in a pretax manner and thus dramatically reduce their tax burden. While a
structure like this did, and does, continue to make sense for companies in the
business of production, processing, and transportation of oil, natural gas, and
coal (energy sector); a number of major corporations started to convert as
well. Interestingly, the Boston Celtics, once a publicly traded company, even
converted to an MLP during the height of its popularity.
In 1987, amid concerns of substantial losses in tax revenue,
the U.S. government passed a law limiting the actions of MLPs. Primarily
speaking, MLPs could no longer run an operating business. This effectively
stopped the practice of converting to MLPs for tax savings. The U.S. Internal Revenue Service did grandfather all
current MLPs for 10 years and allowed them to manage their conversion back to
traditional corporations (much like the Canadian government did for income
trusts, but only over a 5 year period). Today the majority of MLPs are in the
energy sector and have specific requirements that must be met in order to
maintain their tax status.
As implausible as it may seem, there may come a day where we
could be talking about Tim Horton’s, BCE, and the Boston Celtics in the same
sentence.
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