McDonald’s probe raises stakes in EU tax battles amid spirited objections

3rd Dec 2015. Lewis Crofts and Matthew Newman

In a week when a senior US official slammed the European Commission for investigating tax agreements with the likes of Starbucks and Apple, EU antitrust chief Margrethe Vestager has upped the stakes.

Today, she announced a new probe into a deal between McDonald's and Luxembourg, taking a step that will cause more acrimony and deepen the legal, commercial and political fights.

The probe looks into allegations McDonald's has ended up avoiding tax in both the US and Luxembourg since 2009. This was down to two comfort letters from Luxembourg to the restaurant chain that allowed McDonald's profits to be exempt from tax in the Grand Duchy even though they were also exempt in the US.

The case differs from probes into the arrangements of Apple, Starbucks and others, and could be more straightforward for investigators to pursue. It's not about whether the tax paid was at a fair or appropriate level: it's about the absence of any payment at all.

But it brings with it familiar risks.

The commission must prove that McDonald's benefitted from a "selective advantage." To do this it measures the restaurant's treatment against "other companies in a comparable factual and legal situation," according to the EU's announcement.

"Selectivity" is at the heart of determining whether a tax break is state aid: that's to say did one company get a deal another couldn't have.

In the other cases, the issue of selectivity is heavily disputed, with accusations that officials have taken the wrong measuring stick. In the McDonald's case, the EU believes McDonald's should be compared to any other company paying its taxes in Luxembourg.

It won't look at other multinationals making similar use of the Luxembourg-US Double Taxation Treaty. It will determine if the conditions that made McDonald's exempt in Luxembourg were a selective advantage over other economic operators in the country.

As in other cases, this will face fierce opposition.

"Selectivity" is also at the core of litigation before the EU's top court in a series of appeals involving Spanish tax breaks. The commission believes those cases are different to the current spate of tax probes.

But lawyers say the Spanish litigation as well as appeals by governments including Luxembourg and the Netherlands against tax decisions in October mean judges will have the final say. It's not clear-cut for the commission and there is a lot riding on how selectivity will be judged.

Politics

Robert Stack, the US Treasury Department's deputy assistant secretary for international tax affairs, told a senate hearing on Tuesday that the commission was "disproportionately" targeting American companies.

In September, he said the investigations risked diminishing the bilateral treaties reached between the US and European countries.

Targeting America's largest restaurant chain over derogations from Luxembourg's bilateral "Double Taxation Treaty" is unlikely to help quell those concerns. On the contrary, it will inflame them.

That said, the commission is keen to stress that it's not the bilateral treaty and taxes due in America that are the target.

It's the special treatment in Luxembourg that confirmed the profits of the European franchising subsidiary would be exempt "despite knowing that they in fact were not subject to tax in the US."

That means it's a Luxembourg issue and it allegedly saw McDonald's benefiting compared with other companies paying tax in Luxembourg.

But it's unlikely to be seen that way in Washington. The McDonald's probe will pour oil on the political fire that shows no signs of abating. More decisions likely early next year against Apple and Amazon.com.

Nevertheless, the commission has support from beyond normal citizens who pay their way. Politicians in countries including Germany and France are fed up with tax competition by small member states, and they want to ensure multinationals are taxed where they operate rather than funneling profits through low-tax jurisdictions.

But as more of the commission's reasoning becomes known in published decisions and court appeals, the legal debate will sharpen.

On Nov. 30, the Dutch government - ordered by the EU to recoup up to 30 million euros ($32.7 million) from Starbucks - struck out at the commission, saying the decision caused "confusion and uncertainty" for companies and tax authorities.

Like others, the Dutch warn that the commission is calling into question international agreements over how to approach and calculate taxes.

While the legal battle is still to be fought, government officials warn commercial damage is already being done in the meantime. A court ruling in five years' time will make no difference if corporations are already rethinking their European structures and potentially setting up elsewhere, they warn.

But Vestager and many European politicians aren't phased.

They believe they have the moral high ground and the backing of swathes of the population who want large corporations - many of which happen to be American - to pay their way, just like any other company.

Despite the clarion calls, US companies are unlikely to pack up and leave Europe. And the EU decisions are simply trying to make sure they pay their way.

While pressure is mounting on all sides - legal, political and commercial - Vestager's move today shows the commission isn't budging.

	Eliot Gao

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