Wednesday, 2 November 2016

McDonald's taking the piss on corporation tax; HMRC falling for it.

From The Telegraph:

The British arm of McDonald’s paid £123m for “franchise rights” last year, as part of a controversial structure that is under investigation for enabling unfair tax avoidance.

The European Commission launched a probe last year into whether Luxembourg’s tax arrangements for McDonald’s amounted to illegal state aid, as part of a broad crackdown on companies that route money through subsidiaries to cut their global tax bills.

The point being that such royalty payments are an allowable deduction for UK corporation tax purposes and there is only 5% withholding tax on payments of 'royalties' to an entity in Luxembourg under Article XII of the UK-Luxembourg double tax treaty (I thought it was 0% but it says 5%). That money then gets shuffled out of Luxembourg tax-free to heck knows where.

Now, let's have a proper read of that Article:

(1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However such royalties may also be taxed in the Contracting State in which they arise and according to the law of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 5 per cent of the gross amount of the royalties.

(2) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

(3) The provisions of paragraph (1) shall not apply if the recipient of the royalties, being a resident of a Contracting State, has in the other Contracting State in which the royalties arise a permanent establishment with which the right or property giving rise to the royalties is effectively connected. In such a case, the provisions of Article VII shall apply.

How on earth does McDonald's get away with claiming that the royalties don't relate to 'permanent establishments' which they have in the UK? Some McDonald's restaurants are owned and operated by McDonald's corporation itself and some are franchises, but given the level of control which McDonald's has over its franchises, I'd still count them as permanent establishments.

Ergo, on a sane reading of the treaty, those royalty payments are liable to perfectly ordinary UK corporation tax.

(Clearly, McDonald's is paying vast amounts of VAT, so overall it might well be paying 'too much' tax in total, I'm just saying.)


KJP said...

"Some McDonald's restaurants are owned and operated by McDonald's corporation itself"

I don’t think that is the set up. McDs have set up two separate legal entities: McDonald’s Restaurants Limited with 35,879 employees which operates the owned restaurants in the UK and McD Franchising Europe, based in Luxembourg with 14 employees. I guess the whole UK operation is a franchise of the Luxembourg company. I don’t know which company franchises the actual franchised restaurants but I don’t think it matters.

The Luxembourg company almost certainly doesn’t have any permanent establishments in the UK. The test then is the phrase “effectively connected”. Is McDonald’s Restaurants Ltd effectively connected with McD Franchising Europe? That seems a question for some very expensive lawyers to thrash out but the situation is more complicated than it would first appear.

What is interesting is that McD Franchising Europe reported turnover of $1bn and profits of $540.6m last year from royalty payments generated around the region. Where did $460m go? It would seem they are paying royalties to somewhere.

PS McDs are not paying a lot of VAT, their customers are. McDs are just unpaid tax collectors passing it on. They, and their employees are, however, paying quite a bit in income tax and NI.

Mark Wadsworth said...

KJP "Is McDonald’s Restaurants Ltd effectively connected with McD Franchising Europe?"


"McDs are not paying a lot of VAT, their customers are."

VAT is largely borne by the supplier.

"They, and their employees are, however, paying quite a bit in income tax and NI."

Their employees are low paid, so not much in income tax and NIC.

Physiocrat said...

This serves only to illustrate what a mess the tax system has got into.

In the case of premises owned by Macdonalds, the incidence of the UBR is on them.

The incidence of VAT is on the retailer. VAT reductions are only partially passed on in lower prices, if at all. However, in the absence of VAT, competition may bring prices down.

The incidence of PAYE income tax and NI is also on the employer, regardless of who is nominally responsible for paying it.

If tax incidence is taken into account, the "avoiders" are paying a decent whack. Whether is is more or less than they ought to pay is another question.

Tax systems which can be given the run-around by company accountants and lawyers are not fit for purpose and should be scrapped.

Tim Worstall said...

The double taxation treaty is over ridden by EU law. It is illegal to tax royalty payments flowing from a corporation in one EU country to a corporation in another EU country. Flat out illegal.

Kj said...

Clearly, as MW demonstrates, not only does McD have permanent establishment here, the value of the brand arise from trade done in the UK, trademark protection in the UK, whether or not the IP-value has been created elsewhere originally, or the company is HQed somewhere else. One of the more sensible income tax jurisdictions around, HK, charges witholding tax on royalties, as well as it does on interest, paid to foreign entities - as any logical system of territorial taxation would do, and solve the faff with double taxation treaties. I don't think there is anything wrong with legal tax avoidance, but the EU's special treatment of IP is just weird and unnecessary.

Mark Wadsworth said...

TW, not necessarily. The "permanent establishment" override also applies here, see Directive 2003/49/EC article 1 clause 8.

Kj thanks.

Mark Wadsworth said...

TW oops I meant art 1 clause 5 of course.

James Higham said...

They could make the outlets prefab.