Billionaire investor Warren Buffett is usually held in the highest regard, from the trading floors of Wall Street to the Oval Office of the White House.
But the octogenarian famed for his homespun philosophy on ethical capitalism, his rants against casino banking and his relatively humble lifestyle, could see his halo slip after it emerged yesterday that his investment firm has spent $3bn (£1.81bn) helping finance Burger King’s takeover of Canadian fast food chain Tim Hortons.
The problem is, critics say, this is a deal largely being done to save US tax dollars by moving the chain’s domicile to low tax Canada.
Mr Buffet’s Berkshire Hathaway investment group has said it is merely one of those providing the dollars for the deal and is not involved in management decisions, but critics say it is still inherently backing a tax dodge.
Such moves, known as tax inversions, have become increasingly controversial in Congress since Pfizer’s tax-motivated assault on Britain’s AstraZeneca erupted in the headlines earlier this year, with Democrats in particular railing against such unpatriotic deals.
Just three months ago Mr Buffett himself spoke out against such moves, telling an interviewer corporate taxes relative to GDP were falling fast in the US, and adding: “We [Berkshire Hathaway] do not feel we are unduly burdened by federal income taxes. It does get a little annoying to us when we see other people paying far lower tax rates while engaging in the same sort of businesses we are engaged in.”
So it is no surprise the funding of Burger King’s $11.4bn takeover of Tim Hortons, with Mr Buffett’s funding, has seen him suffer calls of hypocrisy.
Video: Is Warren Buffet's reputation is at risk?
President Barack Obama has previously said companies that leave US shores are “basically renouncing their citizenship and declaring that they’re based somewhere else, just to avoid paying their fair share [of tax]”.
He has even used Mr Buffett – who earned his nickname, “the Sage of Omaha” from his decades of smart investments – as an example of good corporate governance and named a proposed bill after him. The Buffett Rule, which failed to get Congress’s approval, aimed to tax all millionaires at a minimum 30 per cent after Mr Buffett said it was unfair that Americans earning less money were paying a higher percentage in tax than some of the US’s richest men and women.
Although it did not pass, Mr Obama continues to refer to it and has upped his calls for a major tax reform to stop future inversions, which is estimated to cost the US treasury $17bn in revenue over the next decade.
Yesterday senators lined up to criticise Burger King’s decision, while the company’s Facebook page was flooded with angry customers vowing to boycott the stores.
Influential senator Carl Levin said: “Reports that Burger King may receive a tax break for renouncing its US citizenship is another example of why Congress can’t afford to wait any longer to put a stop to tax dodging through this kind of merger.
“If this merger goes through, there could well be a strong public reaction against Burger King that could more than offset any tax benefit it receives from a tax-avoidance move.”
And senator Sherrod Brown also called for a boycott. He said: “Burger King’s decision to abandon the US means consumers should turn to Wendy’s Old Fashioned Hamburgers or White Castle sliders.
“Burger King has always said ‘Have it Your Way’; well my way is to support two Ohio companies that haven’t abandoned their country or customers.”
The White House would not comment directly on the deal, but a spokesman did say the President generally believes it is unfair for companies to pursue a tax inversion merely to pay less in taxes.
However, Burger King and Tim Hortons executives claimed the deal was not about tax rates – Canada’s corporation tax is 15 per cent versus 35 per cent in the US – but was a natural move because Canada generated the most revenues for the combined group.
Burger King president Daniel Schwartz said: “Our tax rate today is in the mid to high 20s [per cent] and we don’t expect our tax rate to change materially. This transaction isn’t about tax, it’s about growth.”
Sources close to the deal emphasised that the move was actually about appeasing Canadian officials who take a dim view of US takeovers of its biggest businesses, rather than tax.
Perhaps scenting a stain on his good name, Mr Buffett also came out fighting, claiming Tim Hortons’s strong Canadian roots were the key reason behind the move.
“Tim Hortons earns more money than Burger King does,” he told the Financial Times.
“I just don’t know how the Canadians would feel about Tim Hortons moving to Florida [Burger King’s current headquarters]. The main thing here is to make the Canadians happy.”
The new company will see current Burger King’s majority shareholder and private equity giant 3G Capital Management hold a 51 per cent stake.
Will US consumers buy these arguments, or vote with their feet over a Burger King move north of the border? The US retailer Walgreens clearly didn’t want to take that risk when it decided its merger with Boots should see the company stay in the US. A well-orchestrated lobbying campaign could be enough to cause Burger King big problems.
Steve Wamhoff, of Citizens for Tax Justice, could be just such a lobbyist. He says Burger King and its backers’ claims their deal is not about tax “is one of the biggest whoppers we’ve heard about corporate inversions”. He adds: “The bottom line is this: it’s insulting that the company intends to continue profiting by selling a quintessentially American product to US consumers but then pretend to be Canadian when the time comes to pay taxes.”
Pretty soon, Mr Buffett could prove to be a rather awkward ally for Mr Obama.
Canny investor: Ackman makes $200m
One young pretender to Warren Buffett’s investor “sage” status, Bill Ackman, is unlikely to be troubled by the rights and wrongs of tax inversion this week.
The activist hedge-fund manager bought a stake in Burger King as part of its flotation in 2012, 10 years after it was sold to private-equity firms by Britain’s Diageo for $1.5bn (£905.2m).
Mr Ackman did the deal through his Pershing Square Capital Management and, since news broke on Monday of the likely sale, Pershing’s stake shot up in value by $203m to $1.24bn.
That means his investment has more than doubled since the float. Mr Ackman has spent much of this year attacking a US diet shakes firm, Herbalife, which he has described as a “pyramid scheme”, taking aggressive bets against its share price.Reuse content