McDonald's taking the piss on corporation tax; HMRC falling for it.

From The Telegraph:

The British arm of McDonald’s paid £123m for “franchise rights” last year, as part of a controversial structure that is under investigation for enabling unfair tax avoidance.

The European Commission launched a probe last year into whether Luxembourg’s tax arrangements for McDonald’s amounted to illegal state aid, as part of a broad crackdown on companies that route money through subsidiaries to cut their global tax bills.

The point being that such royalty payments are an allowable deduction for UK corporation tax purposes and there is only 5% withholding tax on payments of ‘royalties’ to an entity in Luxembourg under Article XII of the UK-Luxembourg double tax treaty (I thought it was 0% but it says 5%). That money then gets shuffled out of Luxembourg tax-free to heck knows where.

Now, let’s have a proper read of that Article:

(1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However such royalties may also be taxed in the Contracting State in which they arise and according to the law of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 5 per cent of the gross amount of the royalties.

(3) The provisions of paragraph (1) shall not apply if the recipient of the royalties, being a resident of a Contracting State, has in the other Contracting State in which the royalties arise a permanent establishment with which the right or property giving rise to the royalties is effectively connected. In such a case, the provisions of Article VII shall apply.

How on earth does McDonald’s get away with claiming that the royalties don’t relate to ‘permanent establishments’ which they have in the UK? Some McDonald’s restaurants are owned and operated by McDonald’s corporation itself and some are franchises, but given the level of control which McDonald’s has over its franchises, I’d still count them as permanent establishments.

Ergo, on a sane reading of the treaty, those royalty payments are liable to perfectly ordinary UK corporation tax.

(Clearly, McDonald’s is paying vast amounts of VAT, so overall it might well be paying ‘too much’ tax in total, I’m just saying.)