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Burger King's merger with Tim Hortons creates controversy in US

Burger King's merger with Tim Hortons creates controversy in US

Posted by Liliana Castaño on August 27, 2014

Burger King says its merger with Canadian donut-and-coffee chain Tim Hortons is about growth, not tax rates.

In fact, Burger King's CEO said he doesn't expect the merger to produce "meaningful" tax savings.

But tax experts aren't convinced.

"That's complete piffle," said Lee Sheppard, contributing editor at the publisher Tax Analysts.

Indeed, there are many ways to achieve tax savings when an American company decides to reincorporate in a foreign country through a process known as "inversion."

Here are three of the biggest:

Make hay of interest deductions: A U.S. company that inverts can greatly reduce thecorporate taxes it owes federal coffers through "earnings stripping."

For instance, Burger King's Canadian parent could make large loans to its U.S. subsidiary. And the interest payments made on those loans would be deductible. That deduction, in turn, could largely offset -- if not wipe out -- the taxes owed on its U.S. income, Sheppard said.

Sen. Charles Schumer is expected to introduce a bill soon that would limit inverted companies' ability to take such a deduction.

But political experts say it's unlikely that Congress will do much of anything to deterinversions this year except talk.

Get a lower overall tax rate: The United States has the highest tax rate among developed economies.

Most U.S. corporate income is subject to a 35% federal tax rate, although "effective" rates are often lower after accounting for credits, deductions and exemptions.

But effective corporate tax rates in the United States are still often higher than they are in many of the lowest tax countries.

Still, in Burger King's case, it has said the deal is not likely to offer it a much lower effective tax rate, which was 27.5% in 2013, after accounting for both federal and state corporate taxes.

Indeed, the combined statutory rate in Ontario, where Burger King (BKW) may be based, is 26.5%, according to Tax Analysts.

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