Burger King's Tax Inversion: A "Whopper of a Deal" by @Gaius_Publius

Burger King's Tax Inversion: A "Whopper of a Deal"

by Gaius Publius

One of the reasons Elizabeth Warren and others oppose Wall Street millionaire Antonio Weiss, Obama's nominee for an under-secretary of the Treasury position, is his involvement as "global head of investment banking" with Lazard Ltd., a huge bank that specializes in corporate tax avoidance deals known as "inversions." (My coverage is here and here.) As Senator Warren said in a recent speech:

"In addition to his lack of basic qualifications, Mr. Weiss was part of the Burger King inversion deal that moved the U.S. company to Canada as part of a merger that would cut down on its tax obligations," Warren said.

Earlier she wrote in the pages of the Huffington Post:

Let’s speak plainly: This was a tax deal, plain and simple. It was designed to reduce Burger King’s tax burden, and Weiss was an important and highly paid part of the team.

Both Burger King and Mr. Weiss' defenders at the New York Times have tried to claim the tax deal wasn't really a tax deal, just sort-of a tax deal. Dealbook's Andrew Ross Sorkin came close to accusing Warren of lying about it. Referring to the Warren comment above that starts "Let's speak plainly," Sorkin wrote:

While it makes a nice sound bite, Ms. Warren is, to put it politely, mistaken.

Yet he maintains with a straight face and in the same article:

That’s not to say taxes were not a consideration. They were; they just weren’t a primary factor.

Let's see how "not a primary factor" the tax breaks could end up being.

Burger King Could Dodge Up To $1.2 Billion in U.S. Taxes Over the Next Four Years

A new report by the advocacy group Americans for Tax Fairness analyzes this inversion deal and its consequences. The report is brief and readable. Among its findings (my emphasis):

Burger King executives deny that they are motivated by tax reasons. However, this report demonstrates that the inversion will result in substantial U.S. tax avoidance, while Burger King continues to generate significant profits from U.S. consumers, taxpayers and the Armed Services.

This report estimates that Burger King and its largest shareholders could dodge between $400 million and $1.2 billion in U.S. taxes over the next four years. At the same time, U.S. taxpayers provide an estimated $356 million a year – $1.4 billion over four years – subsidizing Burger King’s low pay and meager benefits through public assistance programs.

These benefits could be claimed by the company. In addition, the structure of the deal offers additional benefits to its shareholders (italics and paragraphing mine):

Burger King’s Owners Could Avoid up to $820 Million in U.S. Capital Gains Taxes

Burger King has proposed a unique structure for its merger with Tim Hortons that could allow Burger King shareholders to avoid substantial capital gains taxes. The report describes two scenarios under which shareholders could avoid as little as $10 million of capital gains taxes – an extremely conservative estimate – to at least $820 million, or some amount in between.

These estimates vary widely, in part, because it is not possible to identify everyone who owns Burger King shares, the percentage of shares that they own and their country of residence. One scenario assumes that any shareholder who is a U.S. resident will be able to avoid paying capital gains taxes. Another scenario assumes that the top three entities that own 81 percent of Burger King shares would be exempt from capital gains in the merger.

Burger King Is Not a U.S. Company — It Just Makes Money Here
 
There's more, hiding in plain sight. About Burger King itself, the report notes:

Burger King, one of America’s iconic hamburger chains, was founded in 1954 in Miami, Florida, where it remains headquartered today.[4] There are 7,155 Burger King restaurants currently operating in the United States,[5] generating an estimated $8.5 billion in annual sales.[6] America is the chain’s largest market, responsible for an estimated 52 percent of global sales.[7]

Since 2010 Burger King has been owned primarily by 3G Capital, a private equity firm founded by three Brazilian billionaires, including the richest man in Brazil.[8] It owns 69 percent of Burger King,[9] and it is incorporated in the Cayman Islands, a tax haven.[10]

Under the Burger King–Tim Hortons deal, both companies would become subsidiaries of a new Canadian entity, New Red Canada Partnership, relocating Burger King’s ultimate ownership from the United States to Canada.[11]

The report itself contains links and footnotes to each of these statements. For a quick summary of all of its findings, open the report at page 5 and read "Key Findings".

Four Takeaways

This is a lot to digest, and the report contains even more; for example, the fact that Burger King is the predominant hamburger chain on U.S. military bases. So let's look at a few takeaways:

▪ This is a tax deal. Warren is right and even her critics admit it. They just don't want you to know how much of a tax deal it is, so no one at the company is talking dollars, nor are Mr. Weiss' defenders, under the principle that if you can't see something clearly, it may not exist.

▪ Burger King is no longer a U.S. company. It just makes money here, through domestic sales, through government subsidies for its low wage workers, and through its dominant presence on U.S. military bases. Its majority owner is 3G Capital, a South American private equity firm. From the report (my paragraphing and emphasis):

3G Capital, the private equity firm controlled by three Brazilian billionaires ... owns 69 percent of Burger King[.]

[3G Capital] already uses aggressive tax planning to reduce the burger chain’s tax bill in some of its largest markets, including the United States. As a result, Burger King has one of the lowest effective worldwide tax rates of any major American fast food company ...

It has structured its international operations around subsidiaries located in tax havens and it dodges taxes by loading costs onto its U.S. operations to minimize its U.S. taxable income.

Over the last three years, Burger Kings’ “permanently reinvested” offshore profits on which it currently avoids paying U.S. taxes have more than doubled to $499 million in 2013, while the company’s capital expenditures outside North America plummeted to just $2.4 million in 2013.

Those three Brazilian billionaires are part of the "1% of the 1%" — the tribe of the very very rich. When you buy at Burger King, you keep them in unnecessary pride and luxury, help them buy that unneeded 20th house in France, for example, or that nice-to-have 13th polo pony.

▪ Antonio Weiss, the Obama nominee who put the Burger King deal on the front pages, is not only big at Lazard Ltd., which specializes in these deals. He's an Obama bundler as well, to the tune of at least $200,000 in the last cycle, if not more. Is this appointment Obama's "thank you" gift, both to Weiss and Lazard?

We'll likely never know, but the last Obama bundler who made the news will be ambassador to Hungary. As John McCain put it on the floor of the Senate:

[Colleen Bradley Bell] contributed 800,000 [dollars] to Obama in the last election and bundled more than $2.1 million for President Obama's re-election effort.

Then McCain added: 

I am not against political appointees ... I understand how the game is played ...

So do we, Mr. McCain. Ambassadorships are pricey. Jobs at Treasury, less so. In addition, jobs at Treasury can come with their own rewards. For example ...

▪ Antonio Weiss will get bonuses of $6–30 million on leaving Lazard, if he takes a high-level job in government. Payment in advance for services not-yet-rendered? You decide.

When You See "Burger King" — Remember the "King"

The Weiss "deal" will play out over the next weeks or months. But the Burger King deal is over and done as of Friday, December 13, 2014. If you're reading before that date, there is no way to stop it. If you're reading after that date, there was no way to stop it. So I'll leave you with one thought, good any time.

When you see this logo:

Think of this man, Jorge Paulo Lemann, net worth $23 billion, and his friends at 3G Capital. These are the Kings of Burger King. Jorge Paulo Lemann, the "richest man in Brazil." Think of him as one half of one Koch brother — in dollars that's roughly right.

And like the American service personnel Burger King sells to, he thanks you for your support.You can thank those service personnel by withholding support ... from Burger King and Antonio Weiss.

GP

.