McDonald’s faces European Commission tax probe

The European Commission is poised to launch a formal probe into alleged tax avoidance by fast food group McDonald's in Luxembourg as Europe steps up its fight against aggressive corporate tax planning.

The investigation could come as soon as Thursday, according to several people involved in the case.

McDonald’s came to the attention of the commission in February during the “Luxleaks” scandal, which revealed that hundreds of companies had agreed secret deals in Luxembourg saving them billions of dollars in taxes. The charity War on Want and three unions, which trawled through the leaked revelations, accused the company of avoiding €1bn in tax payments across Europe.

Brussels issued its first verdicts in October by ordering Luxembourg and the Netherlands to claw back tens of millions of euros of unpaid taxes from Fiat, the Italian carmaker, and Starbucks, the coffee shop chain.

Further verdicts in relation to online retailer Amazon and technology group Apple are expected early next year.

Bias

The McDonald’s case is especially sensitive as US officials accuse EU competition authorities of picking on American companies rather than their European rivals. Brussels denies allegations of bias.

Washington is also concerned that big back-tax bills on companies such as Apple could ultimately be footed by the US, because companies can claim credits for tax paid abroad.

The report by War on Want and the unions focused on tax payments between 2009 and 2013, when McDonald’s relocated its European headquarters from London to Switzerland and set up a holding company for intellectual property in Luxembourg.

The authors of the report allege that the holding company was used to receive royalties and work down taxable profit. They said that McDonald’s paid tax of €16m on €3.7bn of royalties.

Royalties

Royalties and intellectual property are a focal point of many of the EU investigations into tax. Many companies argue that their international operations are bread-and-butter businesses that owe their profits mainly to branding, recipes and know-how generated outside of the EU.

The creation of McDonald’s Luxembourg division came a year after the Grand Duchy introduced a generous tax regime allowing companies to benefit from a tax rate of 5.8 per cent on income generated from intellectual property. But, according to the report, McDonald’s paid a €3.3m tax bill from revenue of €833.8m in 2013.

This was seen as a sign by the charity and unions that Luxembourg had given a preferential deal to McDonald’s beyond the 5.8 per cent, meaning that it could have been offering the company unfair state support.

Subsidies

The case would officially be levelled against the government of Luxembourg to determine whether it was in effect giving illegal state subsidies to McDonald’s by offering a sweetheart tax deal. If it is found to have given illegal state aid, the commission can order Luxembourg to claw back any underpaid taxes.

McDonald’s denied any wrongdoing.

“McDonald’s pays significant amounts of corporate income tax across Europe. Additionally, we pay social, real estate and other taxes. Our independent franchisees, who own and operate approximately three-quarters of our restaurants in Europe, also pay corporate and many other taxes,” the company said.

“In the period from 2010-2014, the McDonald’s companies paid more than $2.1bn just in corporate taxes in the EU. The average tax rate was almost 27 per cent.”

The European Commission and Luxembourg government declined to comment.

- The Financial Times