Is McDonald’s New Zealand a tax cheat?

By Mike Treen, National Director, Unite Union

(Reprinted from The Daily Blog)

It looks like McDonald’s NZ has been using accounting tricks to avoid paying tax in New Zealand.

In 2011 there was a special payment of $154 million that was paid for by borrowing the money from the Bank Mendes Gans NV, which manages a lot of the company’s international finance. The total loan was actually for $278m to both pay the dividend to the US and repay a “loan” from McDonald’s Australia of $123.567m.

The dividend payment more than doubles McDonald’s NZ liabilities to $301.9m and “will similarly boost its tax deductible interest expense in coming years.”

In the last three years McDonald’s NZ has averaged around $200 million a year income. This is income from the 30 stores it owns directly and the fees from the 131 stores owned by franchisees.

The before tax profit declared for the 3 years was $146.562m. Tax paid was $46.95m – which would seem to be the correct company tax rate. The problem is that a huge amount of revenue is excluded from the profit by accounting mechanisms.

The most important is payment for trademarks etc. This equals $51.247m – more than the tax paid. The fees equal 8.5% of income which is significantly more that the 4-5% paid as trademark fees in the UK. In addition there was the $10.9m in accountancy fees and the over $20m in finance costs to related companies they had borrowed from.

Internationally McDonald’s has been accused of tax avoidance in Europe and other countries. In the UK the company claims not to have made a profit for the last 10 years. They relocated their European headquarters to Switzerland in 2009 because of what a McDonald’s spokesperson called Geneva’s “business friendly environment.”

The principal way multinationals avoid tax is by paying substantial royalties for use of the brand name to parent entities located in tax havens. A report last year calculated that “The companies’ tax rates differed: Starbucks paid 31 percent in the U.S. but just 13 percent overseas; Burger King also paid 13 percent on overseas income, while McDonalds paid 20 percent.”

Tax experts say the use of intellectual property or royalty fees has existed for decades “but spread after a US loophole opened up in the 1990s. The fees first appeared in McDonald’s UK accounts in 2007. The UK unit paid in 2011 paid 62 million pounds, 4-5% of its turnover, in such fees.”

McDonald’s overseas subsidiaries generate over $US17 billion a year in revenues. In Europe the fees are paid to their Swiss office where the effective tax rate is 2-12%.

By using “loans” that are ultimately from themselves, as well as paying exorbinant trademark fees for the intellectual property of making a hamburger McDonald’s is transferring income made in New Zealand to their US masters without paying tax on it here . If it is legal it should be outlawed. If its not legal they should be prosecuted.

McDonald’s NZ Accounts 2010-12.

2010: Revenue was $197.6m. Declared before tax profit was $53.367m. Tax paid was $17.483m Net profit was $35.884m. Trademark fees paid to McDonald’s Asia Pacific LLC of $16.386m. $4.643m in interest on McDonald’s Australia loan. Accounting fees to McDonald’s Australia of $3.148m

2011: Revenue was $199.213m. Profit before tax was $47.683m. Tax paid $15.838m. Net profit $31.845m. Interest bearing loans and borrowings $278m. Dividend paid $154m. Repaid loan from Australia $119m. Interest on McD’s Australia loan $7.163m. Trademark fees paid to McDonald’s Asia Pacific LLC $17.372m. Accounting fees to McD’s Australia $3.3.206m.

2012: Revenue was $204.743m. Before tax profit $45.512m Income tax paid $13.629m. Net profit (“attributable to members of the parent”) $31.883m. Interest bearing debt reduced from $278m to $265.86m. Trademark fees $17.489m. Accounting Service fees to McDonald’s Australia of $1.386m. Finance costs $8.442m.

(Unite National Director Mike Treen has a blog hosted on the TheDailyBlog website. The site is sponsored by several unions and hosts some of New Zealand’s leading progressive commentators. Mike’s blog will be covering union news and general political comment but the views expressed are his own and not necessarily those of Unite Union.)