Tax Analysts Blog

McDonald’s Serves Up a Whopper in Luxembourg

Posted on Jun 15, 2016

On the streets of many major cities, you can often find small groups of people huddled around a card table while a charming young man quickly explains the game he is about to play to separate some unsuspecting suckers from their money. Called the shell game, the venture involves a wager in which the sucker must pick under which of three walnut shells a small pea is sitting. A variant, three-card monte, involves the same con, but with playing cards instead of shells.

The hustler prominently displays the pea to everyone in the crowd. He then begins to swap the shells, making sure to move just slowly enough that everyone can follow the pea. Then the hustler shows the crowd where the object really is. And on the first few tries – often played sans wager – the mark always find the pea.

Then the real game begins. For after the dupe puts down his money, often $10 or $20, the object is never where he or the crowd thinks it is. This is because the hustler has made at least one false move – either deftly shifting the pea to another shell or removing it altogether.

I don’t know whether one can find the French version of the shell game played on the streets of Luxembourg City. But I do know that the game is being played in the office of the Luxembourg treasury. And the stakes are not just pocket change, they are millions of euros in taxes avoided by the chicanery of one of the world’s most recognizable companies, McDonald’s.

Back in 2009 some enterprising McDonald’s tax planners came up with a clever variation on the shell game: park our European IP in Luxembourg, and then run the profits through a Swiss subsidiary and a U.S. storefront operation whose only function is to keep track of the cash flows. Just as the shell game requires the sucker to pay close attention to what is going on, the details of Mickey D’s structure require graphs and charts to explain. And just as with our shell game hustle, the end result is the same:  the profits that McDonald’s earned from licensing its name and other valuable IP assets in Europe managed to slip through the tax man’s fingers, escaping taxation not just in the U.S. but in Luxembourg as well.

The fast-food giant’s game got off to a rocky start. The first time it asked Luxembourg for a ruling, the tax authority OK’d the deal, but on the condition that McDonald’s prove every year that it had paid the tax in the U.S. When McDonald’s realized that that was not going to happen, it asked for a second ruling, explaining that the income was not taxable in the U.S. either. Luxembourg, a country that apparently never met a tax play it didn’t like, readily agreed, relying on a stilted reading of one word in the Luxembourg-U.S. tax treaty.

To get that ruling, McDonald’s had to serve up a big Whopper (® Burger King Corp.). It had to convince Luxembourg that a treaty titled, “Convention . . . for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital,” empowered Luxembourg to exempt McDonald’s from single taxation, and engage in fiscal evasion of taxes on its European profits. And Luxembourg had to gobble it up. Even though McDonald’s may serve a tasty Whopper in Luxembourg, the French (with their more refined palate) are not biting.

Right now the European Commission has made a preliminary finding that the second ruling constituted illegal state aid. Whether right or wrong, the commission should be commended for trying to keep McDonald’s from making suckers out of the taxpayers of the U.S. and Europe.

Read Comments (1)

Mike55Jun 16, 2016

"Whether right or wrong, the commission should be commended for trying to keep McDonald’s from making suckers out of the taxpayers of the U.S. and Europe."

The EC should not be commended, it should be scorned. Assuming credit is due anywhere here, it belongs to the French tax authorities. There are three important things the French are doing that the EC is not: (1) they are aggressively pursuing a facts/substance based enforcement approach, as opposed to creating novel legal theories;* (2) they are basing their prosecutions on a well-defined body of law that has actually been reduced to writing; and (3) they are doing the job that they are supposed to be doing, rather than trying to expand their scope into a hot-button policy area through use of strained logic.

*Not only is this the right thing to do (i.e., enforcing the laws that ACTUALLY exist rather than the laws that SHOULD exist), it's also smart: the best laid tax plans are undermined by someone in Ops breaking protocol more often than convention wisdom would suggest. MNCs inevitably end up with telecommuters in countries where they are claiming no nexus, CFCs making sales into another CFC's territory, secondments no one told the tax department about, etc. France has recently begun to aggressively challenge the factual assumptions underpinning aggressive MNC tax structures, even going so far as to raid Google's offices in France trying to discover evidence that sales approvals really happen there (rather than Ireland). This is exactly how tax enforcement is supposed to work.

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