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Tim Hortons deal may help Burger King lower tax bill on non-U.S. operations

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TORONTO - If Burger King ends up moving its head office to Canada as part of a deal with Tim Hortons, there could be tax savings for the multinational restaurant chain, tax experts say.

Not only does Canada have a lower rate of corporate income tax than the United States, it generally doesn't charge any tax on income generated by foreign subsidiaries if they pay taxes in a country covered by a treaty with Ottawa.

The United States, on the other hand, does impose taxes on the foreign subsidiaries of American multinational corporations and, on top of that, charges a rate that's higher than many other advanced countries.

KPMG, a multinational accounting and tax advisory firm, recently ranked Canada as the most tax-competitive of 10 advanced economy countries studied, including the United States, which ranked fifth in overall tax burden.

"Their tax system is really out of step with much of the rest of the world in much of what is good tax policy," said Tim Wach, a partner and expert on international taxation at Gowlings, a Toronto-based law firm.

He says most other advanced countries, including Canada, don't impose tax on foreign subsidiaries if they've already paid taxes to another jurisdiction covered by a tax treaty.

"The U.S. taxes their multinationals on all of their foreign income on a remittance basis," Wach says.

Jamie Golombek, managing director for tax and estate planning at CIBC, says that if Burger King moves its head office to Ontario, where Tim Hortons is based, U.S. federal and state income taxes wouldn't apply to profit earned outside the Unite States.

"It would be tax neutral for Canada because they don't have this double tax system where they tax you beyond what you paid in the foreign jurisdiction."

But Golombek adds that it's unlikely that a Burger King-Tim Hortons deal, which is still at the negotiation stage, would be done solely for tax reasons.

He points out that Burger King Worldwide's most recent financial report says its effective tax rate in the first half of 2014 was about 27.7 per cent, because it included not just U.S. taxes but the rates it paid in multiple jurisdictions.

By comparison, Tim Hortons effective tax rate for the first half of this year was about 28.5 per cent — up from 26.7 per cent last year — due to the unfavourable impact of higher long-term debt accumulated over the past year.

"It's not a big difference," Golombek says.

The KPMG study, released in June, looked at the total tax burden faced by companies in each country including corporate income taxes as well as property, capital, sales and local taxes and payroll-based taxes that contribute to statutory labour costs.

KPMG said Canada's total tax index was 53.6 — or 46.4 per cent below the United States, which is the benchmark at 100 and ranked fifth.

The other countries (and their index rating) are: United Kingdom (66.6), Mexico (70.2), Netherlands (74.5), Australia (112.9), Germany (116.3), Japan (118.6), Italy (135.8) and France (163.3).

Some U.S. political leaders, including President Barack Obama, have proposed making it more difficult for American companies to relocate to other jurisdictions in order to reduce how much tax they pay. However, it's unclear whether Republicans and Democrats can find sufficient common ground to change the current law.

In general, Democrats in Congress have pushed to make it harder for U.S. firms to reincorporate in foreign jurisdictions to avoid U.S. taxes. Republicans have been advocating changes to U.S. tax laws to attract more companies.

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