The US Treasury issued new rules effective immediately that address US companies seeking to relocate their headquarters in countries with lower corporate tax rates. But a preliminary review of the changes involve taxing certain intercompany loans, taxing foreign undistributed earnings and strengthening the less-than-80 percent ownership requirement to avoid the new parent from being treated as a US corporation, Fitch noted. The structure of the Burger King-Tim Hortons merger will help Burger King avoid the impact of some of the regulations.
"Burger King's majority owner, 3G Capital, is expected to own 51 percent of the new Canadian-based company, while Burger King and Tim Hortons shareholders will own 27 percent and 22 percent, respectively, allowing the firm to meet the less-than-80 percent ownership requirement," Fitch said. "Moreover, cash flow from Tim Hortons operations should be able to sufficiently service the $9 billion of dollar-denominated debt being issued to partially fund the transaction, potentially circumventing new rules on hopscotch loans between Burger King and its new Canadian-parent."
In August, Miami-based Burger King Worldwide Inc. and Oakville, Ont.-based Tim Hortons Inc. combined to create the world’s third-largest quick-service restaurant company. The combined company will be based in Canada and will have approximately $23 billion in system sales, with more than 18,000 restaurants in 100 countries.
Fitch added that Burger King has downplayed the tax benefits of its plan, stating that the firm's mid-to-high 20 percent effective tax rate is largely consistent with Canadian tax rates.
"Fitch agrees that the combination of Burger King and Tim Hortons has good strategic merit and, though the near-term credit impact is negative, expects both parties to benefit from increased efficiencies of scale, brand diversification and multiple levers for future growth," Fitch said. "Nonetheless, future potential tax benefits provided by the proposed structure should not be overlooked, even if the firm's effective tax rate remains unchanged."
Fitch placed Burger King's ratings on "negative watch" because the company's significantly higher debt could lead to a downgrade of the company’s Issuer Default Rating.