McDonald’s (MCD) could be next in line for a big retroactive tax bill from the European Union, according to a report in today’s Financial Times.
The EU’s Competition directorate, which last month ordered Apple (AAPL) to repay $14 billion in back taxes to Ireland on the grounds that its tax arrangements with Dublin amounted to illegal state aid. It has been looking into the fast-food giant’s tax arrangements with the Grand Duchy of Luxembourg since 2014 and opened a formal probe at the end of last year, on similar grounds. The FT said the Commission could ask McDonald’s to repay up to $500 million in taxes to Luxembourg.
Competition Commissioner Margrethe Vestager said last week that her final ruling against McDonald’s was “in the pipeline,” along with a similar one against Amazon.com (AMZN). Vestager is meeting Monday in Washington with Treasury Secretary Jacob Lew, Federal Trade Commission Chair Edith Ramirez, and key lawmakers to discuss the various cases outstanding, according to Bloomberg. Lew has said he does not agree with the EU’s Apple ruling.
According to the FT‘s analysis, McDonald’s paid an average tax rate of 1.49% on $1.8 billion it earned in profits at a Luxembourg-based holding company, McDonald’s Europe Franchising. That holding company was set up “to receive royalty payments for know-how and branding from restaurants in Europe and Russia,” the FT said. In as much as those payments were received from other companies within the McDonald’s group, they would have depressed taxable profits elsewhere in Europe and concentrated the tax liability in Luxembourg.
Luxembourg’s statutory tax rate is 29.2%, but the Grand Duchy has signed hundreds of individual tax rulings with individual companies effectively blessing arrangements that enable them to pay less. Most, such as McDonald’s, are to avoid the double taxation of profits.
The original tax ruling—a letter that confirms that the arrangements are in compliance with Luxembourg law—exempted McDonald’s Europe Franchising from corporate income tax if it could show that the profits had been declared and subjected to tax in the U.S.. In 2009, McDonald’s requested a revision, arguing that it shouldn’t need to prove that it actually paid U.S. tax, and Luxembourg agreed.
As such, a (roughly) similar situation to that with Apple arose, whereby the company was able to avoid paying taxes in either Europe or the U.S. as long as it held off from repatriating them: in 2013, the IRS had examined the relevant McDonald’s entity in 2013 and had established that it didn’t have the competence to tax it.
The Commission argued when it opened its probe that “Luxembourg knew or should have known” about the IRS’s view.
McDonald’s denies receiving any unduly preferential terms and has said that it pays all taxes due.
