EU Commission launches tax probe into McDonald’s

3 Dec 15

The European Commission is to investigate a suspected ‘sweetheart’ tax deal between Luxembourg and the fast-food multinational.

Under the deal being investigated by the EC, a subsidiary of McDonald’s has paid virtually no corporate tax in Luxembourg or in the US on profits arising from royalties since 2009.

Margrethe Vestager, the commissioner in charge of European competition policy, said a tax ruling that allows this to occur “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,” she added.

The subsidiary, McDonald’s Europe Franchising, recorded profits of €250m in 2013 alone, according to the commission, which arise from royalties paid by franchisees running restaurants in Europe and Russia.

The company’s head office in Luxembourg is designated as responsible for the company’s strategic decision-making, but the company also has two branches, a Swiss branch, which has a limited activity related to the franchising rights, and a US branch, which the commission stated does not have any real activities. The royalties received by the company in Luxembourg are then shifted internally to this US subsidiary.

The commission highlighted that a tax ruling made by the Luxembourg authorities confirmed that McDonald’s Europe Franchising was not due to pay corporate tax in Luxembourg on the grounds that the profits were to be subject to taxation in the US.

McDonald’s was required to submit proof annually that the royalties transferred to the US, via its Swiss subsidiary, were declared and subject to taxation in both the US and Switzerland.

However, the commission said the firm seemed to have played the authorities of both countries off against each another, claiming in Luxembourg that its US branch constituted a real presence in the country while arguing to the US authorities that it did not.

In 2009, Luxembourg issued a second ruling stating that McDonald’s no longer needed to provide proof that the firm’s profits were subject to taxation in the US and exempted its profits almost entirely from tax, the commission said.

In a statement the company said: “McDonald’s complies with all tax laws and rules in Europe and pays a significant amount of corporate income tax. In fact, from 2010-14, the McDonald’s companies paid more than $2.1bn just in corporate taxes in the European Union, with an average tax rate of almost 27%.

“Additionally, we pay social, real estate and other taxes. Our independent franchisees, who own and operate approximately 75% of our restaurants in Europe, also pay corporate tax and many other taxes. We are confident that the inquiry will be resolved favourably.”

Luxembourg has already been found guilty of granting illegal state aid this year by the commission, resulting in it ordering Fiat Finance and Starbucks to repay millions of euros to Luxembourg and the Netherlands respectively. Vestager is also continuing to pursue a probe into the country’s tax deal with online retailer Amazon.

The investigations signal a wider crackdown on corporate tax avoidance by the commission.

MEPs have also recently voted to adopt a host of reforms to ensure companies operating in the EU cannot shirk their tax dues, and an international initiative by the OECD has outlined a number of reforms to ensure multinational companies pay tax where real business activities take place.  

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