Mandel Ngan, AFP/Getty Images
By Tom Bergin

Burger King (BKW) 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 (THI). 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 percent over the past three years compares with rates above 31 percent at McDonalds (MCD), Starbucks (SBUX) and Dunkin' Brands Group (DNKN). KFC and Pizza Hut owner Yum Brands (YUM) 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 percent.

The Burger King rate is 30 percent 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.

I would be surprised if in five years' time, their tax rate does not come down reasonably dramatically.

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 Officer 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 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 percent 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 percent of its revenues in the United States between 2011 and 2013, regulatory filings show, but the chain reported just 20 percent of its profits in the country over the period.

By contrast, the percentage of their profits that McDonalds, Starbucks, 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 percent 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 percent of that unit's revenue) are in line with international operations, at around 39 percent, 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 channeling income through Switzerland it has managed to pay an effective tax rate of 15 percent 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 percent 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 -- the entity which consolidated earnings for the group's main German operating units -- reported losses in 2011 and 2012, totaling 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, the company told Reuters in 2012.

Burger King Europe 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 percent 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 can't currently cut its American tax bill by routing franchise fees from its U.S. franchisees via Switzerland. But these rules wouldn't apply to a Canadian company. The company spokeswoman said Burger King had no plans to shift franchisees into contracts with offshore subsidiaries.

Sen. Bernie Sanders: Burger King Tax Dodge Shows 'Contempt' For Americans

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Sterling Lieb

I drive by Burger king every day and have no desire to stop. Have no desire to stop at Macs either and it has nothing to do with the tax-structure. Almost empty parking lots send a strong signal. Fix that and the tax structure will take care of itself. Maybe some creative advertising would help lure in a new generation of fast-food diners.

September 04 2014 at 6:22 AM Report abuse rate up rate down Reply

The world wide detriment to business is over taxation and burdensome regulation that stifles business creativity. The US is apparently the leader in this regard as our corporations are fleeing the country at a record pace. Business would flock to America if the taxes and regulations weren't so onerous and we would see growing properity for all. However, I don't believe that will happen as government in general is anti business and dumber than a box of rocks when it comes to running one.

September 03 2014 at 11:38 AM Report abuse +1 rate up rate down Reply

It is legal. Get over it. The corporation answers to its shareholders. If the U.S. doesn't like it then change the laws and get rid of the loop holes.

September 03 2014 at 11:01 AM Report abuse rate up rate down Reply
2 replies to mielkele's comment

move to canada

September 03 2014 at 1:07 PM Report abuse rate up rate down Reply
1 reply to patdelaparra's comment

Why would I want to move to Canada? I have written to my congressional representatives re: corporate tax loopholes. Have you?

September 03 2014 at 5:32 PM Report abuse rate up rate down

We'll get over it and not support them anymore.

September 03 2014 at 1:13 PM Report abuse -1 rate up rate down Reply
1 reply to tmachine2's comment

And they'll breathe a sigh fo relief knowing a slobbering zombie like you will no longer be visiting their stores scaring away paying customers.

September 03 2014 at 4:19 PM Report abuse +1 rate up rate down

Gains for Canada, loss for US Treasury. If the reporter were writing for Canada, it would be put in a much more positive light. It should come as no surprise, especially if you're setting yourself up to lose through onerous taxation polices. In order to court businesses that are profitable, the US needs to court them through lowering their tax rate. I can hear the liberals now, "It's not fair, it's not fair, it' not fair!" And fair would be to lose these companies to countries that welcome them with open arms? This is a SURE loss that can be prevented, but as long as liberals in charge want to punish success, EVERYONE loses.

September 03 2014 at 11:00 AM Report abuse -2 rate up rate down Reply

I'd wager that 98% of everyone who is 'incensed' about this and blathering on about how un-American it is .... have all cheated on their taxes. Bunch of whiny hippocrates. Don't throw stones while living in a glass house??? Maybe if the US Government went back to it's tax-base for corporate like they had about 15 years ago, more companies would be willing to stay based in the U.S.? Ask not scream about why GE (allegedly) held $108 BILLION in profits overseas without paying any U.S. taxes in 2010? Or , what about Merck and Johnson & Johnson both saving roughly $2 billion each in 2012 by doing the same thing? Everyone is still buying Band-Aids and BAIN DE SOLEIL ... but not yapping about THEM! Bunch of sheep. Two words from some info-source and off they go. Sickening.

September 03 2014 at 9:29 AM Report abuse +2 rate up rate down Reply
1 reply to captwaxer's comment

The corporate tax rate before deductions used to be 75%. If you made more than million dollars as an individual it was 50%. Most of the tax laws have been written at the behest of large corporate donors. The cuurent rate of 35% is not being paid by corporations the average corp is paying 18% with 20 of the largest paying almost nothing and getting subsidies which gives them a negative tax rate. It used to be illewgal to offshore income.

September 03 2014 at 11:33 AM Report abuse +1 rate up rate down Reply
1 reply to tjdnorco's comment

No, dunce.

The highest ever top corporate tax bracket was 52%

Of course, previously, for well over 100 years the top corporate rate was 0%

September 03 2014 at 4:24 PM Report abuse rate up rate down

Why all the hate for Burger King? Because they found a way to save money? Why not blame the real culprits? The American Tax System. They charger more to corporations than any other country on Earth. I would do it in a second if I could save our company money. Good going BK!

September 03 2014 at 5:46 AM Report abuse +1 rate up rate down Reply

Who needs Burger King anyway? I rarely went there and now I don't go at all. Corporations want to shift the tax burden to ordinary Americans. Ordinary Americans can fight back by refusing to do business with them. America will still be here without Burger King. I hope that they fold up and blow away. Good riddance BK... put your Whopper where the sun don't shine!

September 03 2014 at 5:31 AM Report abuse -1 rate up rate down Reply
1 reply to Joe's comment

Up next to your head?

September 03 2014 at 8:42 AM Report abuse +2 rate up rate down Reply


September 03 2014 at 5:14 AM Report abuse -1 rate up rate down Reply

I don't care if they do move.
As long as they take that fagot looking king with them, I don't eat there anyway.

September 03 2014 at 4:18 AM Report abuse -3 rate up rate down Reply

I can actually see why they are doing this, America has the highest corporate tax rates in the world. I mean you have to factor in the fact that the corporate offices pay for buildings, pay the workers, pay for the shipment of food to each store. All of that is not cheap and adds up over time, business is for making money and if they can save a bit of money to renovate stores and possibly pay their workers more (since the government is pushing for that) and they need to move their offices to another country to be able to do so then so be it.

September 03 2014 at 3:46 AM Report abuse +3 rate up rate down Reply
1 reply to tarlzaralka's comment

You can't pay the workers more AND pay higher taxes at the same time. Why would you if you could avoid it?

September 03 2014 at 11:47 AM Report abuse rate up rate down Reply