McDonald’s Corporation (MCD) Gets a Go-Ahead from Rep Hollen

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US Representative Chris Van Hollen, being interviewed on CNBC‘s Squawk Box by Andrew Ross Sorkin and Joe Kernen, encouraged McDonald’s Corporation (NYSE:MCD) to capitalise on Burger King Worldwide Inc (NYSE:BKW)‘s negative publicity due to its merger talks with Tim Hortons Inc. (TSE:THI) which is being seen as a Tax-Inversion deal.

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“All I would say is that if I were McDonald’s Corporation (NYSE:MCD) I would start a big Buy-American campaign right here,” the Congressmen said.

Aside from Mr. Hollen’s pitch for McDonald’s Corporation (NYSE:MCD)’s publicity, the debate revolved around the government’s attempt to stop future mergers. While McDonald’s Corporation (NYSE:MCD) might be in Congressman’s good books right now, his stance will certainly change if in future the company tries to seek a merger deal in order to reduce the weight of taxes on its Income Statement.

Kernen raised an interesting point about a hypothetical situation in which for example a company based in Illinois moves its ownership to Florida or some other state, where the tax rate is lower. What would be the government’s course of action in that case. Kernen argued that instead of making business conditions more profitable for businesses to attract capital, the Congress is embarking on hindering mergers. If this continues, it wouldn’t be long before Mr. Hollen’s blue eyed boy so far, McDonald’s Corporation (NYSE:MCD) also takes a flight to the foreign lands.

Rep. Hollen who is a co-sponsor of a bill to stop corporate inversions responded by saying that although long term tax reform is needed but they are not on the table in the nearest future, as republicans can’t even among themselves agree on a reform. He further added that he doesn’t want the American tax payers to be holding the bill for these mergers in the mean time.

Moving on, Sorkin pointed out to Mr. Hollen that even if the Congress were to change the law such that at least 50% of the company should have foreign owners in order for it to change the tax home, the current merger deal between Burger King Worldwide Inc (NYSE:BKW) and Tim Hortons Inc.(TSE:THI) would be legitimate.

Congressman mentioned the words “earnings strippings” a number of times to answer that question. He explained that following the merger the Canadian Corp. would lend the money to the US counterpart which would in turn dramatically reduce their taxable income.

When asked about  his thoughts on the fact that Mr. Warren Buffet who is a democrat himself and has also argued for higher taxes is actually backing this deal, Mr. Hollen responded by saying that people will continue to play with the rules until they are changed. He cited the example of a  change in law in early 2000s to stop the flight of capital to Bermuda and Cayman Islands.

“[…] We should be very clear that we are not talking about blocking mergers, mergers are very important part of the market system. What we are talking about is mergers where the larger American Corp takes on the foreign flag in order to avoid US taxes […],” Hollen also said.

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