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McDonald's lowers its tax bill as profit soars

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by June 26, 2016 General

Fast food giant McDonald’s Australia cut its tax bill by more than half in 2015 by routing payments via the low-tax nation of Singapore.

McDonald’s reduces its profit, and thus its local tax bill, by using a legal loophole that allows it to pay McDonald’s Asia Pacific based in Singapore, and registered in Delaware, a “service fee” amounting to hundreds of millions of dollars.

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McDonald’s underpaying employees

McDonald’s employees are being underpaid tens of millions of dollars per year thanks to an agreement struck between the fast food giant and the food workers’ union.

McDonald’s financial accounts, obtained by Fairfax Media, show that McDonald’s Australia reported paying $400.4 million in 2015  to McDonald’s Asia Pacific (up from $392.6 million in 2014).

This meant its overall income tax bill, totalling $111.5 million, was more than halved. Its income tax bill dropped from $194.7 million in 2014.

Demonstrators dressed as Ronald McDonald protest for better wages for McDonald's employees in Sao Paulo, Brazil. Demonstrators dressed as Ronald McDonald protest for better wages for McDonald’s employees in Sao Paulo, Brazil.  Photo: Andre Penner

At the same time as McDonald’s local tax bill reduced, the company’s profit after income tax increased to $572.1 million from $130.5 million in 2014.

McDonald’s 2015 tax bill would have been even less had it not back paid $109.8 million in tax in 2015. Known in its financial accounts as an “adjustment for prior tax years”, this figure is similar to 2014 when McDonald’s back paid $78 million in tax.

A confidential company source has told Fairfax Media that some years ago the Australian Taxation Office cut a deal with McDonalds that allowed it to reduce its original tax assessment by about $300 million. 

But McDonald’s Australia spokeswoman Laura Keith said that was incorrect.

Prime Minister Malcolm Turnbull and Treasurer Scott Morrison say they have introduced laws to make multinationals pay ... Prime Minister Malcolm Turnbull and Treasurer Scott Morrison say they have introduced laws to make multinationals pay more tax. Photo: Andrew Meares

She told Fairfax Media: “McDonald’s pays its fair share of tax in Australia and conducts its business within all standards and regulations.”

“There are numerous reasons for fluctuations in our accounts in any given year, however if you look at the past five years McDonald’s Australia has paid more than $560 million in income tax at an average effective company tax rate of 29.98 per cent.”

Independent federal senator Nick Xenophon says the government needs to seriously consider a turnover tax as a backstop ... Independent federal senator Nick Xenophon says the government needs to seriously consider a turnover tax as a backstop to prevent revenue leaking overseas. Photo: Paul Jeffers

Independent South Australian senator Nick Xenophon said:  “It’s as though Australia has ordered a burger and fries from McDonald’s and all we’re getting is the pickles.”

An ‘inflated’ fee

Tax advocacy groups say the “service fee” that McDonald’s pays its related parties is not a genuine fee because it is inflated.

It’s as though Australia has ordered a burger and fries from McDonald’s and all we’re getting is the pickles.

Independent senator Nick Xenophon

“It’s outrageous,” Tax Justice Network spokesman Mark Zirnsak said. “It would appear to be a highly inflated charge to itself just for using the brand. It’s frustrating that the ATO doesn’t have ability to tackle this kind of behaviour.”

He said recent legislation introduced in Australia to stop multinationals using such legal loopholes in tax law was not working.

Shadow assistant treasurer Andrew Leigh says: "How much longer will the government give large companies a free ride on ... Shadow assistant treasurer Andrew Leigh says: “How much longer will the government give large companies a free ride on debt deduction loopholes?” Photo: Louise Kennerley

To stop companies exploiting loopholes, “the only way to deal with it would be to treat McDonald’s as single entity”, Dr Zirnsak said.

Treasurer Scott Morrison told Fairfax Media: “Multinational corporations that deliberately book profit offshore and avoid paying Australian tax are exactly the taxpayers the Coalition Government is going after, and exactly the sort of conduct that we are stamping out. 

McDonald's burgers in Australia don't get taxed all that much. McDonald’s burgers in Australia don’t get taxed all that much. 

“Two pieces of legislation in particular that the government enacted will target this conduct of booking profits offshore – the Multinational Anti Avoidance Law (MAAL) and the Diverted Profits Tax (DPT). …The DPT will be introduced in the second half of 2016 and will apply from 1 July 2017.

“We have also doubled basic penalties for basic tax avoidance and increased penalties one hundred fold for non-disclosure of tax affairs, including revealing what profit is earned overseas and what tax is paid.”

"It would appear to be a highly inflated charge to itself just for using the brand," says Tax Justice Network spokesman ... “It would appear to be a highly inflated charge to itself just for using the brand,” says Tax Justice Network spokesman Mark Zirnsak. 

Labor shadow assistant treasurer Andrew Leigh said the Turnbull government’s tougher anti-avoidance measures and more recent May budget announcement of the Diverted Profits Tax would, in the end, only raise $200 million. 

“Whether it’s Panama Papers or allegations levelled at specific large multinational companies, Australians are questioning why the government has been a laggard on multinational tax avoidance.”

The Greens and  Senator Xenophon have called for a public register of settlements that allows the public to know the variance between tax bills companies originally get, and how much they end up paying after cutting deals with the ATO.

The ATO’s own data shows that in 2013-14 the ATO accepted about half the $5.6 billion it originally demanded from 81 large companies.

Getting ‘pickles’

Senator Xenophon said: “If multinationals don’t pay their fair share of tax we need to seriously consider a turnover tax as a backstop to prevent revenue leaking overseas. The litmus test for tax policy should be that whether McDonald’s is competing fairly in terms of its tax paid compared to family-owned Australian businesses.”

Greens leader Richard Di Natale said multinationals were still avoiding paying their fair share: “There is clearly so much more that needs to be done to ensure Australia isn’t being cheated out of the tax dollars that help pay for our schools, hospitals, and other services the community wants and deserves.”

The tax bill revelations come after a Fairfax Media investigation found McDonald’s is underpaying its Australian workers tens of millions of dollars a year under a cosy deal struck with Labor’s largest union affiliate that excludes weekend penalty rates.

The European Union has previously investigated trade union claims that the company exploits a royalties loophole through Luxembourg.

A 2013 report by a global coalition of trade unions called Golden Dodges: How McDonald’s Avoids Paying Its Fair Share of Tax, found that the company avoided paying half a billion dollars of tax in Australia over a five-year period.

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