IRS, Eh? Tim Hortons Deal Could Lower Burger King’s Tax Bill

Burger King (BKW) could lower its tax bill through a merger with Canadian coffee and doughnut chain Tim Hortons (THI), though analysts say there’s more to the deal than the IRS.

Burger King and Tim Hortons, comparable in size by market value, confirmed their merger discussions late on Sunday, saying the new company would be the world’s third-largest quick service restaurant. It would be based in Canada, which has lower overall corporate taxes than the United States, especially for entities that have large amounts of earnings from overseas.

The proposed deal would be structured as a so-called tax inversion transaction to move Burger King’s domicile out of the United States, and could come as soon as in the next few days, according to Reuters sources familiar with the discussions.

Shares of Burger King leapt 21.3% to $32.88 in recent trading. Tim Hortons was up 21.4% at $76.26.

Several inversion deals have developed just this year. U.S.-based AbbVie secured an agreement to buy Irish drug maker Shire. Covidien, another company domiciled in Ireland, recently agreed to sell itself to Medtronic.

The wave of tax inversions prompted calls from Capitol Hill and the White House to stop American companies from moving their tax homes to countries with lower corporate rates. President Barack Obama said companies looking at tax inversions reflect a “herd mentality.”

Earlier this month, Walgreen (WAG) said it will forgo a tax inversion when it completes a buyout of European drugstore chain Alliance Boots.

“Burger King’s pursuit of an inversion only further underscores the arcane, anti-competitive nature of the U.S. tax code,” a Republican Senate Finance Committee spokesman said.

The spokesman added that until a tax overhaul makes it easier for American firms to invest in their businesses, Senator Orrin Hatch (R-UT) has advocated for an interim proposal that would “address the disturbing recent uptick in inversions.”

A Treasury Department official said that while the best way to address inversions is through comprehensive business tax reform, “we cannot wait to act while inversions erode our corporate tax base.” Secretary Jacob Lew has asked Congress to pass legislation that would retroactively scrap inversion moves.

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