FYI.

This story is over 5 years old.

News

Unhappy Meal: How McDonald’s Is Using Luxembourg's Tax Laws to Supersize Its Profits in Europe

The fast food giant has shaved off 1 billion euros in corporate EU taxes by routing profits through its lightly-taxed Luxembourg subsidiary, according to a new report.
Pierre Longeray
Paris, FR
Image via War on Want

A coalition of European and US trade unions collaborating with anti-poverty charity War on Want have accused McDonald's of dodging a 1 billion euro ($1.12bn) tax bill in Europe between 2009 and 2013.

According to the damning report, which was unveiled in Brussels on Wednesday, the fast food giant routed 3.7 billion euros ($4.14bn) in revenue through its lightly taxed Luxembourg subsidiary, the McD Europe Franchising SARL.

Advertisement

France, the Golden Arches' biggest market in Europe, is also the biggest loser in the dodge, with up to 713 million euros ($800m) slipping through the fingers of French tax authorities. The report, titled Unhappy Meal, claims that the UK, Italy and Spain each lost out on 75 million euros ($84m) in tax revenues over the course of five years.

A spokeswoman for McDonald's quoted by Reuters said the company had complied with all applicable EU tax rules, and that "in addition to paying taxes on profits, we pay significant taxes for employee social contributions, property taxes on real estate, and other taxes as required by law."

Tax avoidance — the practice of minimizing taxes — is different from the illegal practice of outright tax evasion, and from a legal point of view, the fast food chain is not doing anything wrong. Instead it is taking advantage of international tax laws to show profits in countries where the tax rate is extremely low — otherwise known as "tax havens."

Faced with the rampant proliferation of this practice across Europe, many EU politicians have called for tighter regulation of tax policy.

In November 2014, the International Consortium of International Journalists (ICIJ) poured over leaked 28,000 pages of evidence suggesting the practice of aggressive tax avoidance is rife among multinational companies. The so-called LuxLeaks scandal revealed that major companies, including IKEA, FedEx, Pepsi, Burberry, Amazon, successfully slashed their tax bills by funneling hundreds of billions of dollars through tax havens like Luxembourg.

Advertisement

Luxembourg, one of the smallest nations in Europe and the world's only remaining grand duchy, has one of the most flexible and attractive tax regimes within the EU. Between 2009 and 2013, says the report, McDonalds paid 16 million euros ($18m) in taxes to Luxembourg, an amount that seems meagre in light of the company's 3.7 billion Euro ($4.14 billion) earnings in those years.

Mcdonalds is — War on Want (@WarOnWant)25 Février 2015

McDonald's is one of the world's premier franchising companies. In Europe alone, 73 percent of its 7,850 restaurants are franchises. In exchange for "the right to use the franchisor's concept, trade name, know-how, and other industrial or intellectual property," McDonald's takes 5 percent of the franchisee's restaurant sales in royalties.

The workings of a franchise — in particular, the concept of "intellectual property" — are central to McDonald's money-saving scheme, because it allows the fast food giant to maximize Luxembourg's tax policies.

Many fiscal paradises provide attractive tax breaks for royalties that are derived from intellectual property. Luxembourg, the report explains, "provides significant tax breaks on investment in intellectual property and royalties derived from intellectual property." A tax feature known as "an intellectual property box" reduces the normal corporate tax rate on royalties from 29.2 percent to a generous 5.8 percent.

Established in 2008, McD Europe Franchising SARL — McDonald's Luxembourg intellectual property holding company — soon became one of the chain's largest subsidiaries in Europe. In 2013, the branch took in 833 million euros ($933m) in royalties from its European franchises, somehow getting away with a lean 3.3 million euro ($3.7bn) tax bill.

In an effort to crack down on tax optimization schemes, the European Commission is currently investigating several countries, including Luxembourg, Ireland, the Netherlands and Belgium, for making it overly easy for companies such as Apple, the Italian automaker FIAT, Amazon and Starbucks to shave millions off their tax bills.

Related: Disney and Koch Industries Are the Latest Implicated in 'LuxLeaks' Tax Haven Scandal

Follow Pierre Longeray on Twitter @PLongeray

Image via War on Want