Burger King's recent decision to pursue a corporate inversion to Canada is the culmination of years of maneuvering to dodge paying its fair share in corporate taxes. In fact, Burger King was able to cut its average worldwide effective tax rate by more than 60 percent over the past few years likely through complex accounting maneuvers.
How did Burger King accomplish such a substantial tax cut? The first key point to know is that Burger King only owns a small percentage of its thousands of restaurants worldwide, with the overwhelming majority of its restaurants owned by franchisees who pay Burger King for use of its intellectual property. From the beginning of 2010 (when private equity firm 3G Capital purchased the company) through the end of 2013, Burger King went from owning about 12 percent of its worldwide restaurants (1,422), to owning less than half a single percent of its worldwide restaurants (52).
Unlike physical properties such as restaurants, stores or even factories, it's relatively easy to shift the location of income-generating intellectual property from one jurisdiction to a different low- or no-tax jurisdiction. This may explain why, after its purchase by 3G Capital, Burger King reorganized its business structure by shedding ownership of nearly all the individual restaurants that it owned.
Because a substantial portion of Burger King's income is generated through rents and fees that it charges these franchisees for use of its intellectual property, much of its business structure is akin to infamous tax-dodging companies like Apple and Google.
A 2012 investigation by Tom Bergin confirmed that Burger King had been following in Apple and Google's footsteps by shifting the income it generates across Europe to a low-tax subsidiary (in this case in Switzerland), instead of allowing it to flow back to the United States where its income-generating intellectual property was created in the first place. While the rest of its international tax structure has not been publicly disclosed, the company does admit to having subsidiaries not only in the infamous tax haven of Switzerland, but also in Singapore, Luxembourg, Hong Kong and the Netherlands.
Burger King's strategy of profit-shifting and relying more heavily on intellectual property came to fruition in 2013, when it was able to lower its worldwide effective tax rate to a mere 11 percent. For purpose of comparison, the company's average worldwide effective tax in the three years before it embarked on its aggressive tax dodging maneuvers was nearly 28 percent, meaning that company was able to lower its tax rate by 60 percent over just a few years.
The company’s decision to merge with Canadian coffee and donut chain Tim Hortons would allow the company to continue its tax avoidance strategy by never having to pay U.S. taxes on income that it has shifted to its offshore tax haven subsidiaries and providing it even more opportunities for profit shifting in the future because Canada has a territorial tax system, which does not require companies to pay taxes on their foreign earnings.
Burger King is one of several U.S.-based companies that is under scrutiny for announcing plans to undergo a corporate inversion. These plans have stoked public outrage and even prompted legislative fixes that so far have gone no where.
At a minimum, Congress needs to enact legislation proposed by Sen. Carl Levin and Rep. Sander Levin to stop Burger King and more than a dozen other companies with plans this year to take advantage of the corporate inversion loophole. In addition to the Levin legislation, several other proposals described in a recent CTJ report would ensure the tax code does not reward companies like Burger King for inverting.