27 Sep, 2016

EU State Aid: European Commission Bitting More Than It Can Chew?

McDonald’s might be the next company facing the obligation to pay back taxes, only this time to Luxembourg, in the amount of approximately $500 million, according to Financial Times estimates.

In December 2015, the European Commission has opened a formal investigation of Luxembourg’s tax treatment in case of McDonald’s. It held a preliminary view that “a tax ruling granted by Luxembourg may have granted McDonald’s an advantageous tax treatment in breach of EU State aid rules.”1  The Commission is yet to render a decision that would conclude said formal investigation against American fast food giant and contain its final judgment in the matter.

Some would say: history is about to repeat itself. In light of the recent imposition by the Commission of a €13bn tax penalty on Apple in Ireland, all current and lurking investigations against multinationals in terms of the so-called “sweetheart tax deals” across Europe were placed and remain under the scrutiny of the both the public and the Commission.

In case of McDonald’s particularly, the Commission will assess “whether Luxembourg authorities selectively derogated from the provisions of their national tax law and the Luxembourg-US Double Taxation Treaty thereby giving McDonald’s an advantage not available to other companies in a comparable factual and legal situation.”2  Margrethe Vestager, the EU’s Commissioner for Competition, in charge of applying EU state aid and antitrust rules, stated that “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.”  (emphasis added)3

Allegedly, McDonald’s was granted a kind of tax treatment which permitted it to bypass corporate tax, both in the US and Luxembourg, on royalty income originating from Europe.  According to the Financial Times review of the Commission’s McDonald’s probe, “this multinational was facing an average tax rate of 1.49 per cent on the $1.8 billion profit earned by its Luxembourg-based European headquarters since its 2009 reorganization.”4  This percentage, when compared to standard Luxembourg tax rate of 29.2 per cent, indeed gives room for raised eyebrows.  Further on, a report published in January by a coalition of European and U.S. trade unions calculated that total tax evasion by McDonald’s might even amount to $1 billion.  “For too long, McDonald’s has stashed billions in tax havens and ducked contributing to state coffers while simultaneously imposing poverty wages on its workers,”5 said Scott Courtney, Organizing Director at the Service Employees International Union.  However, it is up to the Commission to perform a diligent inquiry in the case at hand and make a decision accordingly.

Before such decision is made, any discussion on the topic might as well take into consideration the broader context of the case.

The “Luxleaks” scandal which, among other circumstances, triggered the investigation against McDonald’s adds up to controversies surrounding the case at hand.  Namely, rumor has it that Luxembourg was, at the time the aforementioned investigation started, labelled as a “corporate catch” for multinationals to settle and run their businesses in Europe from this country.  Many of them embraced this opportunity and according to some, for such act they were rewarded beneficial tax deals from Luxembourgish authorities.

Another possible inconvenience stemming from the broader context of this case lies in the fact that, together with Apple, Amazon and Starbucks, this action might cost another American company a substantial amount of money, thereby being the fourth American multinational to defend itself before the Commission.  Minding a recent statement by 185 US chief executives that the penalty imposed on Apple was a “grievous self-inflicted wound”6 for Europe’s economy, analogous treatment of McDonald’s could only kindle the flames.  It is true that the pressure of the US in light of recent actions undertaken by the European authorities is constantly raising.  Notwithstanding this fact, Mrs. Vestager’s current visit to the US, as stated by the Financial Times, has the purpose to respond to such pressure and demonstrate that nothing will make the European Union to relinquish its mission.

Naturally, McDonald’s came out with an expected answer, somewhat alike to what Apple was claiming all along in its previous and current defense: “We pay the taxes that are owed and [we] have not received any preferential treatment.  From 2011-2015 McDonald’s Companies paid more than $2.5 billion just in corporate income taxes in the European Union, with an average tax rate approaching 27 per cent.”7  As it was the case with Apple, such statements appear to lack any substantial value if it is shown eventually that the facts speak to the contrary.

All things concerned, chances are that the European Commission is not going to back down in its declared intention to solve the crisis in the European tax system, which appears to allow illegal state aid to enter to the European market through the back door.  “We take it very seriously. This is not politics, gut feeling or anti-Americanism or whatever.  This is very old school Europe: we have been doing state aid control in the Commission since the beginning,”8 Margreth Vestager was very determined in its statement.  The question that’s on everyone’s mind is whether the European Commission bit off more than it can chew?

 

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1 European Commission – Press release, State aid: Commission opens formal investigation into Luxembourg’s tax treatment of McDonald’s, Brussels, 3 December 2015.
2 European Commission – Press release, State aid: Commission opens formal investigation into Luxembourg’s tax treatment of McDonald’s, Brussels, 3 December 2015.
3 Rochelle Toplensky, McDonald’s could face EU order to pay almost $500m in back taxes, Financial Times, September 18, 2016.
4 Rochelle Toplensky, McDonald’s could face EU order to pay almost $500m in back taxes, Financial Times, September 18, 2016.
5 Nicholas Hirst, Vestager opens probe into McDonald’s EU taxes, Politico, April 12, 2015.
6 Rochelle Toplensky, McDonald’s could face EU order to pay almost $500m in back taxes, Financial Times, September 18, 2016.
7 Rochelle Toplensky, McDonald’s could face EU order to pay almost $500m in back taxes, Financial Times, September 18, 2016.
8 CPI Journal, EU: Vestager: ‘We have Amazon and McDonald’s in the pipeline’, September 18, 2016.

 

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