The European Commission, on December 3, announced its fifth investigation into whether a private tax ruling granted by an EU State to a multinational corporation amounted to illegal State aid.
This time, a ruling granted to McDonald’s by Luxembourg is in the crosshairs. The Commission is questioning whether Luxembourg granted a selective advantage to the company by agreeing that it did not have a permanent establishment (PE) there.
According to the Commission, in 2009, Luxembourg confirmed in a tax ruling that McDonald’s Europe Franchising, owner of McDonald’s European intellectual property and franchising rights, did not have a PE in Luxembourg and was thus not subject to tax on profits it received from royalties paid by franchisees operating restaurants across Europe and Russia.
Luxembourg based its ruling on McDonald’s claim that the royalties — routinely transferred from Luxembourg to a US branch via a Swiss branch — were exempt from taxation in Luxembourg because they were attributable to a United States PE under the US-Luxembourg tax treaty.
Later that same year, McDonald’s told the Luxembourg tax authorities that the profit was not in fact subject to tax in the United States, as it had no PE in the United States. Luxembourg nonetheless granted the company a second private tax ruling in 2009 confirming again that McDonald’s had no PE in Luxembourg.
As a result, since 2009 McDonald’s paid virtually no tax in either country on the royalty payments, which were likely deductible in other jurisdictions, the Commission said. These untaxed profits amounted to €250 million (USD 273 million) in 2013 alone.
“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,” EU Competition Commissioner Margrethe Vestager said in announcing the investigation.
In a statement, Luxembourg’s Ministry of Finance denied any special tax treatment or selective advantage was granted to McDonald’s. The EU’s decision is only to open an investigation into possible State aid, which does not pre-judge the outcome, the Finance Ministry noted.
Commission spokesman Ricardo Cardoso said the issue is whether the Luxembourg authorities selectively derogated from the provisions of their national tax law, giving McDonald’s an advantage which would not be available to other companies in a comparable, factual, and legal situation.
Cardoso also dismissed charges, advanced by US lawmakers last week during tax hearings, that American multinationals were the target of EU State aid probes. Such allegations are “unfounded and untrue,” he said, noting that all companies must abide by EU law, including EU competition rules, when operating in Europe.
Cardoso said that the Commission is investigating over 300 tax rulings, including many involving European companies. Moreover, he said that many Belgian excess profits scheme rulings under investigation involve European companies.
The investigation was prompted by a report, prepared by coalition of European and American trade unions and joined by the anti-poverty campaign group War on Want, released February 24. The group claimed that through this mechanism, McDonald’s avoided over €1 billion (USD 1.1 billion) in European corporate taxes from 2009-2013.
In a statement, Owen Espley, Senior Economic Justice Campaigner at War on Want, said the Commission investigation was long overdue .”While public services are cut, the EU allows multinationals to pitch country against country in a race to the bottom on tax. European citizens want an EU that cooperates to make multinationals pay their fair share,” he said.
The move against the McDonald’s is the third EU Commission State aid investigation into a Luxembourg private tax ruling granted to a multinational. In October, the EU Commission concluded that an advance pricing agreement issued to Fiat by Luxembourg was illegal State aid. The Commission has also come to the preliminary conclusion that an advance pricing agreement Luxembourg granted to an Amazon subsidiary is State aid.
The EU Commission has also concluded that an advance pricing agreement issued to Starbucks by the Netherlands was illegal state aid. Further, it is conducting in-depth state aid investigations into a tax ruling granted to Apple by Ireland, and into Belgium’s excess profit ruling system.
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