WASHINGTON – 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 United States has dented Obama's effort to stamp out corporate inversions.
Buffett's financing of Burger King Worldwide Inc.'s $11.4 billion purchase of the Canadian fast-food chain Tim Hortons Inc. 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.
Burger King Chief Executive Officer Daniel Schwartz framed the tax effect as peripheral – not central – to his company's decision to merge and put the combined company's address in Canada.
“We don't expect our tax rate to change materially,” Schwartz said on a call with investors Tuesday. “This transaction is not really about tax. It's about growth.”
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.
When Walgreen Co. decided 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.
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.
Berkshire Hathaway Inc., where Buffett is chairman, CEO and the largest shareholder, committed $3 billion of preferred equity financing, according to a statement.
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 this year with Graham Holdings Co.
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.'s bid for London-based AstraZeneca, 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.”