Buffett Burger King Funds Flip Obama’s Inversion Calculus

Aug. 26 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway is providing financing for Burger King’s planned takeover of Tim Hortons, the latest deal being backed by a commitment from the billionaire. Sullivan & Cromwell partner Frank Aquila and Bloomberg’s Noah Buhayar speak on “Market Makers.” (Source: Bloomberg)

Billionaire Warren Buffett was an ally of President Barack Obama during the 2008 presidential campaign and the force behind Obama’s “Buffett Rule,” designed to increase tax bills for the wealthiest Americans.

Now, the second-richest man in the U.S. has dented Obama’s effort to stamp out corporate inversions.

Buffett’s financing of Burger King Worldwide Inc. (BKW)’s $11.4 billion purchase of the Canadian fast-food chain Tim Hortons Inc. (THI) challenges Obama’s argument that inversions are unpatriotic and gives defenders of the practice leverage to make their case.

“Warren Buffett has nothing to be defensive about -- this looks like a smart investment that should benefit his shareholders,” said Tony Fratto, a Treasury Department and White House official in President George W. Bush’s administration. “As for the White House and Treasury, I hope they learn something here.”

The lesson, business advocates say, is twofold: Such deals that move companies’ addresses out of the U.S. are often about bigger long-term profits, not just the tax benefits Washington focuses on, and attempts to pressure markets by shaming companies are misguided.

Related: Buffett's 76-Year Junk Food Quest

Burger King Chief Executive Officer Daniel Schwartz framed the tax effect as minimal and peripheral -- not central -- to his company’s decision to merge and put the combined company’s address in Canada.

Photographer: Andrew Harrer/Bloomberg

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., left, is introduced before receiving the Presidential Medal of Freedom from U.S. President Barack Obama at the White House in Washington, D.C., U.S., on Tuesday, Feb. 15, 2011. Close

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., left,... Read More

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Photographer: Andrew Harrer/Bloomberg

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., left, is introduced before receiving the Presidential Medal of Freedom from U.S. President Barack Obama at the White House in Washington, D.C., U.S., on Tuesday, Feb. 15, 2011.

“We don’t expect our tax rate to change materially,” Schwartz said on a call with investors yesterday. “This transaction is not really about tax. It’s about growth.”

Assumptions Tested

A White House official, who requested anonymity to discuss policy still being formulated, said the administration won’t comment on specific deals and remains committed to its proposal for a revamp of the tax code and a crackdown on inversions.

The Burger King deal tests the long-held assumption of anti-inversion activists that the American public and politicians wouldn’t stand for a name-brand, consumer-facing company moving its headquarters across the U.S. border to pay a lower tax rate.

How U.S. Companies Buy Tax Breaks

When Walgreen Co. (WAG) decided earlier this month not to enter a deal that would have inverted its corporate structure, Democrats touted the move as evidence that companies wouldn’t risk the wrath of consumers.

The danger for Democrats is that Buffett’s investment in the burger-fries-and-a-Coke company’s inversion might flip that calculation and make it politically easier for other corporations to follow suit without suffering repudiation from the public or the White House.

Unofficial Adviser

That’s because Buffett in the past has served as a sort of unofficial adviser to Obama on business and financial matters, someone whose stamp of approval has offered political cover when the president has been accused of being anti-business or of unfairly targeting the wealthy. It was Buffett, after all, who supported Obama’s call for tax code changes by saying that he paid a lower tax rate than his secretary.

If Obama were to question the Burger King deal publicly now, it would mean putting himself at odds with Buffett.

Berkshire Hathaway Inc. (BRK/A), where Buffett is chairman, CEO and the largest shareholder, committed $3 billion of preferred equity financing, according to a statement. Omaha, Nebraska-based Berkshire, which also owns the Dairy Queen restaurant chain, won’t participate in managing the restaurant business under the deal. It will get a 9 percent annual dividend, which would be taxable income for Berkshire.

Reducing Taxes

As an investor, Berkshire wouldn’t benefit directly from any tax savings at Burger King. Even so, Buffett has a long track record of working to reduce corporate taxes at his company, including a transaction earlier this year with Graham Holdings Co. (GHC) He said at the company’s annual meeting in May that Berkshire doesn’t “add a tip” when it pays its tax bill.

Later that month, Buffett addressed drugmaker Pfizer Inc.’s bid for London-based AstraZeneca Plc, an offer that was subsequently abandoned.

“I’m not saying they’re doing anything illegal at all in following the rules on inversion,” Buffett told CNBC, according to a transcript on the business news network’s website. “I would personally change that part of the law. And other people might change the part of the law about wind tax credits, but I’m not attacking Pfizer for following the U.S. tax law.”

Buffett didn’t respond yesterday to a request for comment sent to an assistant.

‘Berkshire’s Money’

Burger King pays less than the U.S. corporate tax rate because it operates in many jurisdictions. Its effective rate in 2013 was 27.5 percent, one percentage point higher than the Canadian corporate tax rate of 26.5 percent.

Buffett “tends to do what’s best for his money,” Jeff Matthews, a Berkshire shareholder and author of books about the company said yesterday on Bloomberg Radio. “And, in this case, what’s best for Berkshire’s money is getting involved in this deal.”

The White House response to the Burger King deal has been muted compared to Obama’s aggressive rhetoric on inversions in general.

“I proposed closing this unpatriotic tax loophole for good,” Obama said in his weekly address on July 26. “Rather than double-down on the top-down economics that let a fortunate few play by their own rules, let’s embrace an economic patriotism that says we rise or fall together, as one nation, and as one people. Let’s reward the hard work of ordinary Americans who play by the rules.”

‘Bermuda Loophole’

White House Press Secretary Josh Earnest said Aug. 25 that Obama wants Congress to act and that the administration is looking for ways to discourage inversions. He said he wouldn’t comment any specific deals, including Burger King.

Democratic National Committee Vice Chair Donna Brazile wasn’t so restrained.

“Sellouts! Now Burger King abandons USA to avoid paying taxes like the rest of us. A Whopper of a scam,” Brazile wrote on Twitter. Her post linked to an online petition opposing the inversion.

For more than a decade, advocates for closing what was once called the “Bermuda loophole” made little progress. The political terrain began to shift this year, with mainstream Democrats and a handful of Republicans picking up on a populist issue that had once been a hobby horse for a few U.S. lawmakers, including Senator Charles Grassley, an Iowa Republican, and a pair of Michigan Democrats, Senator Carl Levin and his brother Representative Sander Levin.

‘Perverse Effect’

On July 10, Representative Rosa DeLauro, a Connecticut Democrat, won a House roll-call vote on an amendment that would ban some inverted companies from securing U.S. government contracts. Thirty-four Republicans, including Michigan Representative Dave Camp, the pro-business chairman of the tax-writing Ways and Means Committee, voted with her, while only six of her fellow Democrats voted “no.”

In a July 27 Washington Post op-ed, Treasury Secretary Jacob J. Lew called on Congress to pass a law requiring that foreign shareholders account for 50 percent of the ownership of a new merger between a U.S. company and a foreign one -- up from the existing 20 percent threshold. The administration wants that change made retroactive to May.

“The alternative -- legislation taking effect after the president signs it into law -- could have the perverse effect of encouraging corporations to act more quickly, negotiate new deals and rush to close those transactions before the bill is enacted,” Lew wrote. “It would be a mistake for Congress to pass anti-inversion legislation that creates a race against the clock and encourages more, not fewer, inversions.”

To contact the reporters on this story: Jonathan Allen in Washington at jallen149@bloomberg.net; Richard Rubin in Washington at rrubin12@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editors responsible for this story: Craig Gordon at cgordon39@bloomberg.net Justin Blum

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