Fast-food giant McDonald's has again defended its long-standing practice of paying hundreds of millions of dollars of royalties offshore, which reduces its local tax bill.
The American company's latest financial accounts for the year ending December 31, 2020, obtained by ABC News, show McDonald's paid its head entity – previously based in Singapore but now based in Britain – a "service fee" amounting to hundreds of millions of dollars.
Payment of the fee reduced McDonald's Australia's tax bill because it lowered its taxable profit.
McDonald's Australia reported paying a service fee of $558.5 million to related entity McDonald's Asia Pacific (up from $432.8 million in 2019). In previous years the company has indicated this is a royalty fee.
By paying that fee offshore, the company's Australian income tax bill was reduced to $120.4 million (slightly down from $132.7 million in 2019).
Profit after income tax was $206.4 million (down from $302.8 million in 2019).
That decline was not driven by a decline in revenue from its customers, which hit $1.16 billion (up slightly from $1.15 billion in 2019).
The Australian entity also received another $555 million in rental revenue.
The company accounts noted that the group did not apply for JobKeeper support.
A spokeswoman for McDonald's Australia told ABC News that the company "continues to comply with and pay all tax".
"We have a long history of cooperating openly and transparently with the ATO [Australian Taxation Office] in the performance of their regulatory functions," she said.
How the service fee reduces McDonald's local tax bill
The accounts also show the company used retained earnings to return $120 million in dividends to its US parent (down from $412.8 million in 2016).
As part of a global restructure announced in 2017, McDonald's head entity is still registered in Delaware, but tax residency is now in Britain, rather than Singapore.
This means the service fees (royalty fee) would be taxed at Britain's 19 per cent corporate tax rate, which prior to COVID had been scheduled to drop to 17 per cent in line with Singapore's tax rate. But it is currently still at 19 per cent.
The address of the McDonald's subsidiary that is head of the Australian tax group noted in its public accounts — 2711 Centerville Road, Suite 4000, Delaware — is the same as that named for many other entities contained in the ICIJ database of offshore leaks, the Paradise Papers.
NGO report raises questions about McDonald's tax practices
The practice of its Australian entity paying its Asia-Pacific entity a service fee was called out in a report released in Britain on Thursday.
The report, Secrets and Fries, by NGOs War on Want and the Centre for International Corporate Tax Accountability (CICTAR), suggests McDonald's created "paper, circular transactions" that moved franchising rights from Singapore to London, enabling it to "shield global franchise income from being taxed in the UK".
It also suggests McDonald's received an estimated £872 million in UK Covid-19 subsidies and tax breaks in 2020, while paying out a record $3.75 billion (£2.9 billion) to shareholders.
Owen Espley, senior economic justice campaigner at War on Want, said the group was calling on the UK's tax authority, HMRC, to investigate McDonald's.
McDonald's increased its use of UK subsidiaries after its previous Luxembourg tax arrangements were highlighted in a report by War on Want and others in 2015.
The European Commission's subsequent investigation in 2018 found that McDonald's tax arrangements were unfair, but not illegal.
The McDonald’s spokeswoman said the company "complies fully with the laws of each jurisdiction in which we operate and pays all taxes owed".
Why the ATO took McDonald's to court
In January this year the ATO issued a media release stating that McDonald's Australia had been convicted and fined for not providing records to the agency.
On July 26, 2019, the ATO issued a formal notice requiring McDonald's Australia to produce documents with a compliance date of August 30, 2019.
The documents were not provided by the compliance date, and the matter was subsequently referred for prosecution by the Commonwealth Director of Public Prosecutions.
In January McDonald's Australia pleaded guilty at the Downing Centre Local Court in Sydney to one count of failing to comply with an information-gathering notice.
The McDonald's spokeswoman said the matter "does not relate to McDonald’s Australia’s tax affairs, but to a request for documentation from McDonald’s Australia relating to third parties".
"McDonald’s Australia accepted the decision and remains committed to working with the ATO on future requests for information."
ATO deputy commissioner Will Day said in a statement issued on January 14, after the conviction, that it served as a reminder to all taxpayers to be "open and transparent in their dealings with the ATO".
"The vast majority of taxpayers willingly engage with us and voluntarily provide the information we need to undertake reviews and audits," he said.
"We only issue formal notices to taxpayers to obtain information as a last resort; where a cooperative approach is no longer productive or where a taxpayers' circumstances, history or behaviour warrant the use of our formal powers.
"As such, we expect the taxpayer to treat them seriously and respond in a timely way.
He said instances where taxpayers failed to comply with requests for information rarely resulted in criminal convictions, "as most will work with us to meet their obligations".
"However, where taxpayers hold back necessary information or documents, the ATO will initiate prosecution action," Mr Day said.
"We have a duty to hold to account those who have disengaged from us and take action to secure an outcome for the benefit of all taxpayers."
