Tax inversion, the practice by which a US company reincorporates in a foreign country with lower corporate taxes through M&A, is facing unprecedented media and public scrutiny this week after Burger King’s move to acquire Canadian chain Tim Hortons.
Companies considering such a move need to have a carefully explained and transparent response to media attention, say financial communications pros. Otherwise, charges of being unpatriotic and un-American can damage their corporate reputations – and potentially scuttle the money-saving move.
Burger King is the latest in the hot seat after The Wall Street Journal broke news on Sunday that the company was close to a $11.4 billion deal for Canadian coffee and doughnut chain Tim Hortons. Most media attention in the days that followed focused on the fact that the combined company would be headquartered in Canada, where it would enjoy lower corporate taxes. Prominent politicians criticized the deal as well.
The financial PR and investor relations pros who spoke to PRWeek about the topic applauded Burger King’s response to anger from customers on social media and boycott threats over its planned relocation. On Tuesday, the fast-food restaurant chain posted a statement on its Facebook page stating that rather than being tax-focused, the goal of the $11.4 billion deal is "global growth for both brands."
"Burger King has been very visible about what they are doing, what their savings will be, and explaining that [the savings] isn’t the key thing driving this deal," says Bob Zito, senior partner of Ketchum Zito Financial and founder of Zito Partners. "To me, its explanation felt very believable."
Yet Zito believes tax inversion will become a hot-button issue for other US companies.
"It is a global economy. Companies are dealing in multiple countries, currencies, and tax districts. What makes business sense will drive deals, though not necessarily what may make best tax sense," he explains. "But in an increasingly competitive world, every CEO, management team, and board has to look at what makes business sense, and a tax equation is obviously part of it."
Tax inversion is not just a controversial topic for US companies. Amazon is facing the ire of British politicians for relocating its European headquarters to Luxembourg. Starbucks and Google have also been questioned by a UK government committee for basing their headquarters in low-tax havens in the Netherlands and Ireland.
Sean Neary, EVP of financial communications in Edelman’s Washington, DC, office, warns that it has become such a contentious topic that "brands even considering tax inversion need to be prepared for the news leaking."
"They need to get ahead of the story – be ready to highlight how the move really benefits shareholders and customers at large," he explains. "They could talk about how it could provide more efficient capital, greater structure, opportunities for growth, and how it will save or create jobs."
He agrees that Burger King has done "a fairly good job of explaining that this merger wasn’t done strictly for tax reasons," noting that in its press release, the companies went to great lengths to highlight that Burger King would be based in Miami and Tim Hortons in Canada.
"They are pushing it as a merged company but with independent brands," he says. "They probably learned lessons from previous inversions and tried to improve on the response with their communication strategies."
Burger King did not respond to requests for comment. Brunswick Group, which is working with the company on the deal, declined comment on the comms strategy.
The other side of the coin is Walgreens. The pharmacy chain had an opportunity to move its headquarters overseas after acquiring the remainder of European-based drugstore operator Alliance Boots earlier this month.
According to a June Deutsche Bank report, tax inversion could have saved the pharmacy retailer about $1 billion in taxes by 2018. However, faced with political pressure and a potential consumer boycott, Walgreens opted to keep its headquarters in the US. That decision didn’t thrill investors; its stock is down 15% since the announcement.
Financial comms experts say it may be tempting for corporations to consider making the point that the US tax structure is simply not competitive enough with those in other parts of the world. However, financial PR and public affairs pros interviewed by PRWeek cautioned against such a stance.
"It is an argument, that while valid, may only resonate with shareholders and not consumers," adds Neary. "That message would need to be conveyed to a specific audience."
Consultant Wendy Grover, former VP and CCO at T-Mobile and previously a member of Microsoft’s communications team, says any response needs to show an understanding of why consumers might react angrily to such a move.
"Principle-wise, it is important that companies show empathy with the common man and woman on the street," she says. "They pay taxes – they might not like it – but they do."
The Business Roundtable is taking up that argument on behalf of its member CEOs. Association president John Engler has sat for interviews with The Washington Post and Fox News Sunday advocating for comprehensive tax reform, arguing tax inversion is a symptom of unreasonably high corporate taxation.
Pitney Bowes CCO Bill Hughes, who has also held senior communications roles at CA Technologies and IBM, says there are communications risks whether a company decides to keep its tax base stateside or not. For instance, a tax inversion may be well received by investors, but perhaps not the public or the federal government.
The Treasury Department estimates that US companies relocating their headquarters internationally could eventually take a $20 billion bite out of corporate tax coffers, according to CNBC.
"Any decision a company makes should balance the business benefits with the prospect of a potential public, employee, government, and reputation backlash," he explains.
Hughes adds that "a CCO needs to approach communicating about tax inversion like they would any corporate decision."
"Specifically, transparency matters. Resolve matters," he explains. "And a clear, concise, easy-to-understand rationale for making the decision is not only table stakes – it is essential."