McDonald’s UK pays £123m in royalties to Luxembourg
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.
Luxembourg-based McD Franchising Europe, which employs 14 people, reported turnover of $1bn and profits of $540.6m last year from royalty payments generated around the region. The European Commission has said that it has “virtually not paid any corporate tax in Luxembourg nor in the US on its profits since 2009”.
The UK business paid out “franchise rights fees” amounting to a third of its overall operating profits for last year. It is thought the fees were paid to the Luxembourg firm. It then reported pre-tax profits of £270.8m, resulting in a UK tax bill of £55.9m. The franchise fee has risen from £114m during 2014.
McDonald’s is also under investigation by HMRC for its tax arrangements. In its most recent accounts, it booked an £11.5m provision to cover a probe into transfer pricing deals with related companies for abstract services such as the right to use the brand name.
The firm said the royalty payment is “given careful consideration, based on arm’s lengths principles and is benchmarked externally against OECD approved methods. We have a constructive relationship with HMRC and are in discussion with them on this matter.
“McDonald’s complies with all applicable tax laws including the timely and accurate payment of taxes that are owed in the UK,” it said.
Several companies including Google, Starbucks and Amazon have caught the attention of the European authorities for their royalty arrangements. In August, the EC told Apple to pay taxes of €13bn after it ruled that the firm was sheltering profits in Ireland, where the corporate tax rate is 12.5pc, in a set-up that amounted to unlawful state aid.
The chief executive of Apple, Tim Cook, described the ruling as “total political crap” and the Irish government is considering a legal challenge.
The day-to-day McDonald’s business grew steadily in the UK last year, with revenues rising 7pc to £1.53bn, as the restaurant chain rolled out new menu options and transformed more of its branches into franchises. By the end of the year, McDonald’s Restaurants Limited had cut its headcount by about 3,000 to 35,879 as more staff moved over to franchises.
McDonald’s also shelled out £778,000 for carrier bag levies in Scotland and Wales during last year, a sum that will rise as the same duty in England enters its first full year.
The company also declared a dividend of £243m to another connected company, McDonald’s Real Estate LLP.