Beware of tax whistleblower syndicates
Now that McDonald’s has agreed to pay France 1.25 billion euros in back taxes and fines, unions are calling the settlement a success for union activism in corporate tax space.
The story dates back to 2015, when a coalition of European and American trade union organizations (the European Federation of Public Service Unions; the European Federation of Food, Agriculture and Tourism Unions; and Service Employees International Union) and UK-based anti-poverty organization War on Want have accused McDonald’s of avoiding more than a billion euros in taxes in Europe by deliberately restructuring its European operations to take advantage of lower rates. favorable taxation in some countries.
The groups were concerned about some restructuring undertaken by McDonald’s in 2009 to move its European headquarters from the UK to Switzerland and route its intellectual property to a new intellectual property holding company based in Luxembourg.
At the time, Luxembourg had just introduced an attractive IP box regime that significantly reduced tax rates on intellectual property income. These measures would have helped McDonald’s avoid 1 billion euros in taxes between 2009 and 2013, the coalition said in a 2015 report entitled “Unhappy Meal”.
The report alleged that the Luxembourg subsidiary – McDonald’s Europe Franchising S.à.rl – received more than €3.7 billion in royalties during that five-year period, but only paid €16 million. of taxes. In 2013, the subsidiary’s effective tax rate was just 1.4%, according to the coalition.
These allegations have tested McDonald’s over the years. Shortly after the report was published, the European Commission announced that it would investigate a series of Luxembourg tax rulings received by the subsidiary exempting it from paying tax in that country. Since the subsidiary was also not taxable in the United States, the rulings created a situation of double non-taxation.
However, the commission closed the investigation after concluding that the double non-taxation occurred because of a mismatch between Luxembourg and US tax law, not because the Luxembourg authorities deliberately misapplied the tax treaty. between the two countries for the benefit of McDonald’s.
Meanwhile, McDonald’s has reportedly changed its corporate structure again, according to a May 2018 update from unions titled “Unhappier Meal”.
The report alleged that McDonald’s continued to play hopscotch by moving its international tax base from Luxembourg to the United Kingdom in 2015 and then moving the headquarters of McDonald’s Europe Franchising S.à.rl from Luxembourg to Delaware. Unions have alleged that McDonald’s took these steps to mask its corporate activity and potentially shield its business from scrutiny by the European Commission post-Brexit.
French authorities got involved and began investigating the company’s French subsidiary. From now on, McDonald’s will pay 737 million euros in back taxes and 508 million euros in fines after years of investigation.
But the whole affair begs the question: why would unions get involved in the tax affairs of multinational corporations, potentially harming the interests of their members by pursuing large and complex litigation that could expose member companies to heavy fines and damage to their reputation?
Some finance and accounting scholars have suggested that unions are heavily invested in combating aggressive tax behavior as ongoing government investigations and sanctions generated by a culture of tax avoidance threaten the stability of their members.
It remains to be seen whether the McDonald’s affair will create imitators; Over the years, unions have been vocal on issues such as corporate tax responsibility principles, but McDonald’s is apparently the first company to see ramifications of this magnitude.
In this regard, the McDonald’s rule sets an interesting precedent, especially as the public becomes increasingly interested in corporate tax matters.