EU antitrust regulators will investigate McDonald's tax deals with Luxembourg which enabled the U.S. fastfood chain to escape paying taxes on European franchise royalties from 2009, in a move which could lead to hefty back taxes for the company.
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The action by the European Commission comes two months after it ordered Luxembourg to recover up to 30 million euros ($32 million) from Fiat Chrysler Automobiles and the Dutch to do the same for Starbucks because their tax deals were seen as unlawful aid.
The EU competition enforcer said McDonald's had not paid any corporate taxes in Luxembourg or the United States on royalties paid by franchisees in Europe and Russia since 2009 as a result of two tax rulings by the Luxembourg authorities.
"A tax ruling that agrees to McDonald's paying no tax on their European royalties either in Luxembourg or in the U.S. has to be looked at very carefully under EU state aid rules," European Competition Commissioner Margrethe Vestager said.
"The purpose of double taxation treaties between countries is to avoid double taxation - not to justify double non-taxation."
Luxembourg's finance ministry said the country had granted no special tax treatment nor selective advantage to McDonald's and that it would cooperate fully with the investigation.
McDonald's said it complied with all tax rules in Europe and that its companies had paid more than 2.1 billion euros in corporate taxes in the European Union from 2010 to 2014, with an average tax rate of almost 27 percent.
It also paid social, real estate and other taxes, while its independent franchises, operators of about 75 percent of its outlets, paid corporate and other taxes.
"We are confident that the inquiry will be resolved favourably," it said in a statement.
TWIN RULINGS, NO TAX
The Commission said McDonald's Europe Franchising was exempted from paying taxes on this income in Luxembourg on the grounds that the profits were subject to taxation in the United States. However, when the ruling was granted in 2009, these profits were not subjected to tax in the United States.
In a second ruling, Luxembourg agreed that McDonald's did not have to prove that this income was subject to U.S. tax, the Commission said.
Luxembourg, the Commission said, exempted the profits from taxation there despite knowing that they were in fact not subject to tax in the United States.
The case presents yet another headache for Commission President Jean-Claude Juncker as Luxembourg developed its favourable tax system during the near quarter-century that he served as the Grand Duchy's finance minister or prime minister.
Vestager's move against McDonald's came following critical media reports and evidence from trade unions.
"For too long, McDonald's has stashed billions in tax havens and ducked contributing to state coffers ... and it's time that the company be held accountable" Scott Courtney, organising director at SEIU, said in a statement.
SEIU represents 2 million healthcare, public sector and property service workers in the United States, Canada and Puerto Rico.
(Reporting by Foo Yun Chee; Editing by Philip Blenkinsop and Mark Potter)