(Bloomberg) -- Burger King Worldwide Inc., the second-largest U.S. burger chain, is in talks to buy Tim Hortons Inc. and move its headquarters to Canada, becoming the latest American company seeking to relocate to a lower-tax country.
Burger King would create the world’s third-largest fast- food chain by merging with Canada’s biggest seller of coffee and doughnuts, the companies said in a statement. The Canadian corporate tax rate is typically 26.5 percent, compared with 40 percent in the U.S., according to Big Four firm KPMG.
The deal renews debate over American companies shifting their headquarters internationally in search of lower corporate tax bills. The trend drew criticism last month from President Barack Obama, and his aides vowed that the administration would take action to curtail the practice and the rhetoric alone seemed to have had some effect. (See “Obama’s Comments Chill Inversion Deals.”)
“There’s some modest political risk to the deal, but it’s difficult to say because we haven’t seen the administration move to block one of these yet,” said Will Slabaugh, an analyst at Stephens Inc. in Little Rock, Arkansas.
The merger talks sent shares of both companies soaring. Burger King rose 20 percent to $32.40, the biggest jump since the stock debuted on the New York Stock Exchange two years ago. Tim Hortons climbed 19 percent to C$82.03, reaching a record high. The stock gains propelled the market value of Burger King past $11 billion and Tim Hortons to C$10.9 billion ($9.9 billion).
The deal is subject to negotiation, and Burger King and Tim Hortons don’t plan to comment further until an agreement is reached or discussions are discontinued, according to the statement.
Between mid-June and late July, when Obama began criticizing deals that cut taxes by relocating outside the U.S., at least five large American companies have announced plans to make such a move -- known as an “inversion.” That includes AbbVie Inc. and Medtronic Inc.
Since the start of 2012, at least 21 U.S. companies have announced or completed the deals, comprising almost half the total of 51 such transactions in the past three decades.
Burger King already pays a rate below 40 percent, the result of operating in a mix of tax jurisdictions. Its effective tax rate in 2013 was 27.5 percent, the company said in a filing. Still, the rate may eventually creep up toward 35 percent without the inversion, Slabaugh said.
White House spokesman Josh Earnest said today he wouldn’t comment on specific actions by any company. He repeated previous administration statements that the Treasury Department is looking at potential changes in rules to make tax inversion deals “less appealing.”
“Companies that consider actions like an inversion continue to benefit from all of the resources of the United States,” Earnest said at a briefing in Washington. “It’s not fair for them to just fill out some paperwork that would allow them to just renounce their citizenship” to lower their tax rate.
Earnest said Obama’s goal remains getting Congress to pass legislation to rework business taxes. Saying that getting that done will “take some time,” he said Congress in the interim should approve stand-alone legislation closing the loophole that allows inversions.
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