McDonald's (NYSE:MCD) results are out, things are looking good and those interested can read the earnings call transcript here. My interest is in something a little different, something which might be thought to have an effect on future earnings. There's a claim going around from a grouping of unions, including the SEIU from the US, that McDonald's is tax dodging here in Europe.
It's the usual set of claims, royalties being moved around and escaping tax, comfort letters from Luxembourg and so on. And what we'd all like to know as investors is, well, is there any truth to this?
Rather more importantly than any truth about tax dodging or rapidly moving royalties we'd like to know whether there is ever going to be an impact on the bottom line. That $17 billion demand in back taxes from Apple (NASDAQ:AAPL) was an unwelcome surprise after all. The answer here, concerning McDonald's, is no. Even if they are moving money around Europe in order to lower European tax bills it's not going to impact the accounts of the whole organization even if they're told to stop that moving the stuff around.
The reason is that it is impossible for a US company to avoid taxes and also pay out the profits to investors. It's possible to move a tax bill around - that can be done. Taxes in Italy can be lowered, say, at the expense of higher tax bills elsewhere. And tax payments can be delayed. If the profits can be stuck into a nice offshore account then perhaps they might not be coughed up for decades. But to get the money to investors the money must be repatriated to the US and there it will pay the US corporate income tax before distribution.
Further, given that the US corporate income tax is higher than those of just about everywhere else, and given that the amount due to Uncle Sam is the full amount minus foreign taxes already paid, you can't get the money to investors without paying the tax.
All of which means that if McDonald's were reducing its total tax bill by whatever it is being accused of in Europe then it must also be stashing untaxed profits offshore somewhere. And it isn't, not in increasing amounts. Thus the total tax bill isn't being minimised through that delay. And a reversal of whatever schemes they're using won't lead to an increase in the total tax bill.
The accusation comes from that grouping of unions:
As Parliamentarians from across Europe gather to discuss corporate tax avoidance by multinationals at the Interparliamentary Conference in Bratislava this week, an international coalition of major trade unions from the EU and US has released new information detailing how McDonald's aggressively avoided taxes on both sides of the Atlantic.
The observations complement the Unhappy Meal report first released by the unions in February 2015, which showed that McDonald's may have avoided over €1bn in EU taxes between 2009-2013. The findings feed into the European Commission's ongoing state aid investigation into the tax rulings sought by McDonald's in Luxembourg, and raise concerns about the application of General Anti-Abuse Rules under national laws, including in Luxembourg itself.
· McDonald's tax dodge is growing each year, and has reached a total of €1.5 billion. In the 2013 report 'Unhappy Meal', the coalition found McDonald's dodged €1 billion from 2009 to 2013. Since then, its effective tax rate was cut even further, first to 1% in 2014, then to just 0.7% in 2015.
· McDonald's created a branch in Luxembourg that carries out no economic activity whatsoever. Despite being the "Head Office", the Luxembourg branch neither manages the company, the franchise rights or their royalties. These are all carried out in the company's Swiss branch.
Whether or not McDonald's is doing these things isn't my point. It's whether it impacts the total tax bill of the whole company, in a manner which would make having to unwind these arrangements an unhappy time, a la Apple, for investors. The answer is almost certainly no.
A quick look at the annual report shows that tax provisions are in the 30-35% range of profits. But of course, tax provisions aren't quite the thing. Cash taxes paid when compared to the provisions tell us rather more. But as long as we remember to step the cash taxes paid back a year, to compare with tax provisions as we should (corporate income tax is, not quite exactly but roughly, paid in arrears) they don't look out of line either.
But the true test is that if McDonald's is stacking up untaxed profits offshore - by not paying European tax and not repatriating them so that they don't pay US tax - then that stash of untaxed profits must be growing. And it must be growing over the period of time that the unions are alleging the taxes are being dodged.
This is something we can check because the accounts tell us the amount of profit stashed outside the US that the company has accumulated.
2015 accounts: $14.9 billion in offshore profits not as yet subjected to US tax because not repatriated.
2014 accounts: $15.4 billion.
2013 accounts: $16.1 billion.
2012 accounts: $14.8 billion.
That looks a lot more like tweaks for valuations and currency movements than it does a continual piling up of untaxed profits. The conclusion from which is that whatever McDonalds is doing in Europe, hey, the unions could even be right, those profits are being brought back into the US. Since they are being repatriated and the US tax rate is higher than almost all in Europe, there is no reduction of the overall tax bill. And as such the outcome of any investigation isn't going to change much for the company as a whole.
Remember, a US company cannot use this offshore dodge to not pay taxes on profits paid out to investors. It can move tax around and it can delay payment. But delayed payment necessarily means an increase in the stock of offshore profits that haven't paid tax. In the absence of such an increase we've got to assume that there is no ongoing increase in profits not paying taxes somewhere.
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