Burger King may have taken a lot of flack in the past week for a deal that should curb its U.S. tax bill but in many ways it is consistent with the burger chain's aggressive tax-reduction strategies in recent years.
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% over the past three years compares with rates above 31% 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%.
The Burger King rate is 30% 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% 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% of its revenues in the United States between 2011 and 2013, regulatory filings show, but the chain reported just 20% 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% 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.
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% of that unit's revenue) are in line with international operations, at around 39%, 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 channelling income through Switzerland it has managed to pay an effective tax rate of 15% 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% 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, totalling 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% 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.