McDonald’s could face an order to pay nearly $500m in back taxes to Luxembourg, according to a Financial Times analysis of an investigation by Brussels into state-supported tax avoidance.
Last month the European Commission imposed a €13bn tax penalty on Apple in Ireland, triggering a storm of protest from Washington and corporate America. As the commission steps up its crackdown on so-called sweetheart tax deals, two US multinationals — McDonald’s and Amazon — are potentially next in line.
According to an FT review of the commission’s McDonald’s probe, it paid an average tax rate of 1.49 per cent on the $1.8bn profit earned by its Luxembourg-based European headquarters since its 2009 reorganisation.
The fast-food chain is under investigation by Brussels over a tax ruling underpinning its European structure, which permitted McDonald’s to pay no corporation tax — either in the US or Luxembourg — on royalty income from restaurant franchises across Europe. Luxembourg and McDonald’s deny any wrongdoing.
If the standard Luxembourg tax rate of 29.2 per cent applied to those earnings — following the broad principles the commission applied in the Apple case — McDonald’s would owe the Grand Duchy nearly half a billion dollars.
McDonald’s said: “We pay the taxes that are owed and have not received any preferential treatment.” Of the tax paid by its European network, it said: “From 2011-2015 McDonald’s Companies paid more than $2.5bn just in corporate income taxes in the European Union, with an average tax rate approaching 27 per cent.”
Margrethe Vestager, the EU’s competition commissioner, has yet to take a decision in the McDonald’s case. But she begins a tour of the US this week showing no sign of yielding to the political outcry over the Apple tax penalty by reining in her probes.
Apple insists it has paid all the taxes required and that it will pay US tax on some of its offshore cash pile. Tim Cook, chief executive, dismissed the case as “political crap”; the US warned Brussels against acting like a ““supranational tax authority”. Last week, 185 US chief executives said the penalty was a “grievous self-inflicted wound” for Europe’s economy.
Multinational companies have come under fire in the past decade for shifting profits between subsidiaries to use the gaps between countries to minimise taxes. US corporations hold an estimated $1.1tn offshore cash pile, according to rating agency Moody’s.
The commission’s probes developed a legal framework that casts advantageous tax rulings as state support to a company. This is illegal under EU law if it grants an unfair competitive advantage.
The commission launched its investigation into McDonald’s last December, soon after the “Luxleaks” scandal revealed secret tax deals in Luxembourg of hundreds of multinational companies.
The commission states that McDonald’s obtained two tax rulings — letters clarifying tax obligations — from Luxembourg in 2009 that ensured that it paid no corporate tax on the profits of McDonald’s Europe Franchising. This entity received royalty payments for know-how and branding from restaurants in Europe and Russia.
In the first tax ruling, Luxembourg granted a tax exemption to McDonald’s provided that it demonstrated on a yearly basis that its “profits have been declared and are subject to tax in . . . the US”.
McDonald’s returned to request a revision to the ruling, claiming that the US- Luxembourg tax treaty did not require it to prove it actually paid US tax. The Grand Duchy agreed and granted the exemption.
When Ms Vestager launched the investigation, she said: “A tax ruling that agrees to McDonald’s paying no tax on their European royalties either in Luxembourg or in the US has to be looked at very carefully under EU state aid rules. The purpose of double taxation treaties between countries is to avoid double taxation — not to justify double non-taxation.”
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