McDonald's UK tax base decision 'first sign' of global rules taking effect, says expert

Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that the current corporate structure faced "a range of risks", as demonstrated by the European Commission's on going state aid investigation into the tax arrangements of McDonald's in Luxembourg. The company already has a base in the UK, meaning it will be spared set-up and hiring costs, she said.

"This is the BEPS [OECD base erosion and profit shifting] project starting to bite," Self said. "US companies with complicated structures that paid very little tax on their European operations are finding that the game is becoming too difficult."

The UK was a "good jurisdiction" to set up a holding company due to its relatively low corporate tax rate, flexible labour market and strong network of double tax treaties, she said.

In a statement, McDonald's said that it would establish a new holding company in the UK from January 2017. This company will have responsibility for "the majority of royalties received from licensing the company's global intellectual property rights outside the US", it said.

McDonald's has chosen the UK "because of the significant number of staff based in London working on our international business, language, and connections to other markets". Its business in Luxembourg will retain responsibility for restaurants based in the state, it said.

The European Commission opened a formal investigation into the tax arrangements of McDonald's European franchising operation in Luxembourg in December 2015. It has alleged that the effect of two 'tax rulings' granted by authorities in Luxembourg to McDonald's Europe Franchising enabled it to pay no corporate tax despite recording large profits from royalties paid by franchisees operating restaurants throughout Europe and Russia for use of the chain's brand and services.

McDonald's Europe Franchising is currently headquartered in Luxembourg, with branches in Switzerland and the US.

The global Organisation for Economic Cooperation and Development (OECD) has been cracking down on the ability of multinational corporate groups to exploit mismatches between different tax systems so that little or no tax is paid, as the Commission has alleged has happened in the case of McDonald's. Its BEPS project is producing a set of coordinated international rules designed to end the practice, and to prevent companies from artificially shifting their profits to low or no tax environments where they have little or no economic activity.

Self said that as the BEPS project progressed, it would become increasingly difficult for multinational businesses to maintain the kind of tax advantaged structures criticised by the European Commission during its various state aid investigations.

"In particular, much of the income consists of royalty payments, and in my view it is much more likely that those payments will be subject to withholding taxes in future if the receipts benefit from a low-tax structure," she said.

She added that it was irrelevant for the purposes of McDonald's whether or not the UK maintained access to the EU's single market following the Brexit negotiations.

"The income flows which will now come into the UK are royalty flows, and do not result from cross-border sales of goods or services," she said.