Beware The Tax Whistleblower Unions

SAN FRANCISCO – FEBRUARY 09: A sign stands outside of a McDonald’s restaurant February 9, 2009 in … (+) San Francisco, California. Fast food chain restaurant McDonald’s reported a 7.1 percent increase in same store sales for January as people look towards cheaper food alternatives in the weakening economy. (Photo by Justin Sullivan/Getty Images)

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Now that McDonald’s has agreed to pay France a blockbuster €1.25 billion in back taxes and fines, labor unions are calling the settlement a success for union activism in the corporate tax space.

The story dates back to 2015, when a coalition of European and U.S. labor organizations (the European Federation of Public Service Unions; the European Federation of Food, Agriculture, and Tourism Trade Unions; and the Service Employees International Union) and the U.K.-based antipoverty organization War on Want accused McDonald’s of avoiding over €1 billion in taxes in Europe by purposefully restructuring its European operations to take advantage of favorable tax rates in specific countries.

The groups were concerned about some restructurings McDonald’s undertook in 2009 to move its European headquarters from the United Kingdom to Switzerland and route its intellectual property to a new IP holding company based in Luxembourg.

At the time, Luxembourg had just implemented an attractive IP box regime that substantially reduced tax rates on IP income. Those moves allegedly helped McDonald’s evade €1 billion in taxes between 2009 and 2013, the coalition said in a 2015 report titled “Unhappy Meal.”

The report alleged that the Luxembourg subsidiary — McDonald’s Europe Franchising S.à.r.l. — received more than €3.7 billion in royalties during that five-year period but paid only €16 million in taxes. By 2013 the subsidiary’s effective tax rate was a meager 1.4%, according to the coalition.

Those allegations put considerable scrutiny on McDonald’s over the years. Shortly after the report went public, the European Commission announced that it would investigate a set of Luxembourg tax rulings the subsidiary received exempting it from paying tax in that country. Because the subsidiary was also not taxable in the United States, the rulings created a situation of double nontaxation.

However, the commission closed the investigation after finding that the double nontaxation occurred because of a mismatch between Luxembourg and U.S. tax law, not because Luxembourg authorities purposefully misapplied the tax treaty between the two countries to benefit McDonald’s.

Meanwhile, McDonald’s allegedly went on to change its corporate structure again, according to a May 2018 update from the unions titled “Unhappier Meal.”

SAN FRANCISCO, CA – NOVEMBER 03: A photo illustration of a Happy Meal at McDonald’s on November 3, … (+) 2010 in San Francisco, California. San Francisco became the first city in the nation to pass a law to control giving away free toys with unhealthy meals for children. The law requires that any restaurant kid’s meals meet nutritional standards before they can be sold with toys. (Photo by David Paul Morris/Getty Images)

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The report alleged that McDonald’s continued to play tax hopscotch by moving its international tax base from Luxembourg to the United Kingdom in 2015 and then moving the headquarters of McDonald’s Europe Franchising S.à.r.l. from Luxembourg to Delaware. The unions alleged that McDonald’s made those moves to obscure its corporate activity and potentially remove its activity from scrutiny by the European Commission following Brexit.

French authorities got involved and started investigating the company’s French subsidiary. Now McDonald’s will pay €737 million in back taxes and €508 million in fines after years of investigation.

But the entire case begs the question: Why would labor unions get involved in multinational tax affairs, potentially undercutting their members’ own interests by pursuing large, complex litigation that could expose member companies to hefty fines and reputational damage?

Some financial and accounting academics have suggested that labor unions are heavily invested in curbing aggressive tax behavior because ongoing government investigations and penalties generated by a culture of tax avoidance threaten their members’ stability.

It remains to be seen whether the McDonald’s case will create copycats; over the years, unions have become vocal on topics like corporate tax responsibility principles, but McDonald’s is seemingly the first company to see ramifications of this scale.

In that light, the McDonald’s settlement sets an interesting precedent, especially as the public takes greater interest in corporate tax affairs.