Nassim Khadem -May 20, 2015
In 2013 McDonald's Australia reported that it earned $A154.5 million in service fees from franchisees. Photo: Bloomberg
International fast-food giant McDonald's avoided paying half a billion dollars of tax in Australia over a five-year period by shifting profits through the low-tax nation of Singapore, a new report by a global coalition of trade unions says.
The report, which has been funded and commissioned by a coalition of global trade unions including the Public Services International (PSI) – of which the Community and Public Sector Union is a member - the International Union of Foodworkers (IUF) and the Service Employees International Union (SEIU) – looks at how McDonald's has used "aggressive" tax strategies to avoid billions of dollars in taxes every year.
The report, Golden Dodges: How McDonald's Avoids Paying Its Fair Share of Tax . does not allege illegal behaviour by the company, which is among several multinationals that have been taking advantage of loopholes in current laws.
It analysed McDonald's financial accounts and said the company was "well-positioned to take advantage of the international loopholes and mismatched tax regimes that allow companies to pay very low tax rates on royalty income".
"McDonald's uses royalty payments from franchisees and foreign subsidiaries in major markets to route profits to tax havens," the report states. "These strategies may have allowed it to avoid up to $US1.8 billion in tax in those markets in the years between 2009 and 2013, including €1 billion across Europe and $A497 million in Australia."
A spokeswoman for McDonald's said: "We have always been committed to paying our fair share of tax in Australia. In fact, over the past five years, McDonald's Australia has paid in excess of $500 million in tax."
But the report suggests the company's Australian operations show an "unusually high level of inter-company payments over the five years" had gone to the low-tax nation of Singapore.
"These payments may shift profits out of Australia to a subsidiary in Singapore, thereby reducing McDonald's tax bill significantly," the report said.
In Australia, where McDonald's has 943 stores and employs 90,000 workers, the report said 80 per cent of these stores were operated by franchisees.
In 2013 McDonald's Australia reported that it earned $A154.5 million in service fees from franchisees.
That same year, the Australian Tax Office investigated McDonald's and its franchisees regarding the tax treatment of the sale of franchises.
The report said that McDonald's charges its Australian subsidiary a royalty of above five per cent of sales from its own corporate stores.
The five per cent rate is McDonald's standard royalty payment globally. But the report said McDonald's Australia reported paying service fees of $A376.6 million to McDonald's Asia-Pacific in 2013, which is equivalent to more than nine per cent of "system-wide sales".
"In fact in each of the past five years, McDonald's Australia Ltd has reported nearly twice as much in outgoing service fee payments as would be explained by the royalties the company receives from franchisees plus any royalty paid on behalf of corporate stores."
It said since rent was a separate line item in its reports, "there is no known explanation for these payments other than an inflated service fee that serves as a distribution of profit out of Australia."
It said given that it was above the standard five per cent rate, "it is appropriate to question
whether these fees may not be based on appropriate 'arms length' conditions and breached Australia's anti-avoidance laws. In the federal budget Treasurer Joe Hockey announced he was beefing up these laws to go after 30 companies with more than $1 billion or more annual turnover.
"The payment of these service fees significantly reduces McDonald's Australia's taxable income," the report said. "In 2013 alone, this strategy may have reduced McDonald's Australia's tax bill by more than half."
"As such, the tax owed by McDonald's Australia on all service fees paid offshore in the years between 2009 and 2013 could be as high as $A497.1 million." In addition to collecting unpaid tax, the ATO could hit the company with millions more in penalties.
Through its franchising model McDonald's generates much of its revenue from royalty payments from franchisees rather than through direct operation of stores, the report said.
McDonald's franchisees pay royalties to the company – generally through a country-level subsidiary – in exchange for the right to use McDonald's intellectual property, including both the brand itself and the business methods used to establish the brand and sell its products.
The report said globally, more than 80 percent of McDonald's stores are operated by franchisees and the company's profit margin on franchise revenues was 81.7 per cent - more than five times as high as its 15.9 per cent margin for corporate store operations.
"From the perspective of franchisees, tax strategies which siphon profits from McDonald's operating markets to tax havens may limit the ability of the company to reinvest in its stores and support franchisee success," the report said.
"McDonald's workers, who are paid such low wages that they must rely on public benefits to make ends meet, might reasonably ask whether the money that the company holds in tax havens might be better used to invest in its employees."
The report said McDonald's has 36,000 stores serving approximately 69 million customers a day globally. In 2014, it had $US87.8 billion in system-wide sales, nearly twice the sales of its largest competitor. It is not only the world's largest fast food company but also the largest franchiser.
CPSU Assistant National Secretary Michael Tull said: "Companies such as McDonald's are mocking their workforce when they argue low wages are needed to be competitive but cream off billions in profits in tax havens".
Public Service International General Secretary, Rosa Pavanelli said: "Something is wrong when we can put a man on the moon but 40 years later can't tax a hamburger. With inequality rising working people will no longer accept cuts to services when politicians allow scandalous levels of tax avoidance by the wealthiest on the planet."
Tax Justice Network spokesman Mark Zirnsak said while the Abbott government was making progress by signing up to the OECD's country-by-country reporting plan. there should be laws that state if one country gives sweetheart tax deals, then it has to immediately notify the other.
The report said McDonald's owns 42 subsidiaries and branches in "tax havens" or low-tax nations, above the 11 tax haven subsidiaries the company publicly disclosed in 2014.
"More importantly, McDonald's has large cash holdings in these subsidiaries, including over $US1.9 billion in the tiny state of Luxembourg," the report said.
Between 2009 and 2013, its Luxembourg-based structure, which employs 13 people, registered a cumulative revenue of €3.7 billion, on which it reported a meagre €16 million in tax.