The European Union has ordered probe into American fast food major McDonald’s tax dealings with Luxembourg to find out whether the generous tax breaks earned by the company had led to tax evasion.

The EU, in recent months, has stepped up crack down on corporate tax avoidance and instituted enquiries on a number of multinational companies. They include companies having operations in Luxembourg, such as Amazon and Fiat.

In the case of McDonald’s, the competition regulators of European Commission are examining whether the tax relief offered by Luxembourg has been used for cutting down tax pay out by the restaurant chain. The European Commission has not specified how much unpaid tax McDonald’s would be asked to pay up if it rules against Luxembourg, reported New York Times.

Tax concessions

In 2009, Luxembourg reportedly granted a tax waiver to McDonald’s Europe Franchising, enabling non-payment of taxes in Luxembourg on the condition that profits should be taxed in the United States. That followed the pan Europe franchiser setting up of franchisees for operating restaurants across Europe and Russia after taking payments for using McDonald’s brand and support services.

In a second tax ruling, Luxembourg granted one more exemption whereby the unit was relieved of the responsibility to prove that its income had been taxed in the United States. According to the EU commission, the McDonald’s unit earned substantial profits of more than 250 million euros (AU$360 million) in 2013.

Serious matter

“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 E.U. state aid rules,” said Competition Commissioner Margrethe Vestager.

“The purpose of double taxation treaties between countries is to avoid double taxation — not to justify double non-taxation,” Vestager added.

McDonald’s on its part, said it “complies with all tax laws and rules in Europe, and pays a significant amount of corporate income tax.”

“From 2010-14, the McDonald’s companies paid more than $2.1 billion (AU$2.86) just in corporate taxes in the European Union,” the company statement said. It further added that all its independent franchisees do pay corporate and other taxes.

Meanwhile, The Wall Street Journal reported that the probe on Mc Donald’s will finally lead to fresh assessments, the same as what happened with FiatChrysler and Starbucks, which were assessed for 20 million-30 million euros (AU$29 million-AU$39 million). The EC has also investigated Amazon and Apple.

Under tax laws, intercompany transactions are to be conducted on a “market price”. But actual market prices are a matter of dispute as the exchange is happening within the companies not outside.

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