The fast food giant's tax move offers minimal gains to the UK
McDonald’s has announced that it will change its tax base by creating a new holding company in the UK ‘with responsibility for the majority of the royalties received from licensing the company’s global intellectual property rights outside the United States’. Currently, royalties from its intellectual properties, including £123 million for franchise rights in the UK, are booked in Luxembourg.
The royalty payments are part of intragroup transactions that enable McDonald’s to shift profits from one country to another and arbitrage the international tax system. Campaigners have argued that such strategies enabled the company to avoid over €1 billion in corporate taxes in Europe over the five year period, 2009-2013. Between 2009 and 2013, the Luxembourg-based structure booked revenues of €3.7 billion, on which it reported a mere €16 million in tax.
So why has the company announced a possible move of its tax base to the UK? It does not specify any timetable or reasons, but could say that the UK is attractive because of its low corporation tax rate, which is 20 per cent now and set to decline to 17 per cent in 2020. The UK is also attractive because it has a dismal record for going after big corporations for tax avoidance.
The McDonald’s announcement is part of the new tax wars, which will become more evident in coming days. A skirmish with corporations is already evident. In August 2016, the EU declared the special tax benefits given to Apple by Ireland to be unfair state-aid and the company was ordered to repay €13 billion to Ireland. However, since December 2015 McDonald’s special tax deals with Luxembourg have also been under scrutiny and a report is expected soon.
In view of the principles used in the Apple ruling, McDonald’s may well face a large tax bill. So McDonald’s threat to move its tax base to the UK, which is exiting the EU, is likely a warning shot across the bows of the EU.
Major companies do not shift their tax base without detailed consultations with tax authorities. So it would be helpful to know what assurances and/or sweeteners have been offered by HMRC.
With the UK coming out of the EU, companies may decamp to the UK, but they still need access to the EU which is one of the largest markets. Of course, companies based in the UK will be looking for all kind of passporting rights for access to the EU and tax issues will be central to such discussions. The EU will not stand by and see its tax base eroded. The Brexit negotiations have just got more complicated.
The McDonald’s announcement will also draw a response from the US because it will affect its tax revenues too. In general, the US taxes companies on their worldwide profits. Credit is given for taxes already paid in other countries. If US companies pay little/no tax in the EU, then the US can levy higher taxes. If companies pay higher tax in the US or the UK, that reduces the amount that the US can collect.
Many of the patents, trademarks and copyrights may not eventually be registered in the UK. The royalties might be booked in the UK but that will not result in large amount of cash, because that can be sucked out through numerous management fees and other intragroup charges to tax havens with even lower rates of tax. Management will not be keen to pay higher taxes and announce reduced profits because that will not endear them to shareholders and markets. Directors will not be keen to report higher taxes either because this reduces profits and their performance related pay. So we will need to wait and see McDonald’s eventually does.
Even if the UK makes some tax gains they are likely to be temporary because the EU is working at a new system for levying corporate taxes. This is known as the Common Consolidated Corporate Tax Base (CCCTB) and will levy taxes on the basis of revenues and profits generated at the place of trade rather than where a company is resident for tax purposes.
A key feature of CCCTB is that it can negate the tax effects of intragroup transactions within the companies operating within EU member states. Of course, companies can shuffle their royalty payments and management fees through companies registered outside the EU and thus bypass the EU laws. Nation states are already alert to that and can restrict the amount of tax relief they permit on intragroup interest payments, royalties and management fees.
The above is mere conjecture but McDonald’s announcement is part of the new politics of taxation where corporations and regulators are engaged in a tussle over collection of taxes. The UK has become a willing participant in this race-to-the-bottom which might ultimately encourage others states to also lower their tax rates and weaken their tax base.
The biggest losers from this will be ordinary people who will end up paying higher taxes for lower welfare rights or lose hard won social rights altogether.
Prem Sikka is Professor of Accounting at Essex Business School’s Centre for Global Accountability
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