We’re only two weeks into the second half of the year, but 2022 has already provided some valuable lessons that can be learned from recent Transfer Pricing (“TP”) cases involving some of the world’s most well-known brands. The latest to fall foul was McDonald’s. Hold onto your tastebuds as we serve up all the titbits.

In what has been confirmed as “the second-biggest tax settlement in French history”, the American fast-food chain was ordered to pay €1.25bn ($1.3bn) in France (made up of a €508m fine and €737m in back taxes) to avoid prosecution over tax evasion said to have been carried out between 2009 and 2020.

The company was found to have been using brand fees/royalties as a way to shift profits to low-tax jurisdictions. Investigators found that it is a widespread practice in the multinational (“MNE”) group to have inconsistent policies regarding these fees; generally, the fees paid were based on how profitable a certain branch was. In this way, the more profitable, the more fees were paid out to advantageous tax jurisdiction. With respect to the French operations, in particular, the royalties being paid to its parent company in Luxembourg were doubled in 2009 from 5% to 10%, a move which saw profits moved out of France to Luxembourg, which has significant tax benefits compared to France. While the company tried to justify this by referencing the increase in profits in France, both the commercial rationale and the economic substance in Luxembourg were found to be wanting, so their argument didn’t hold. It is reported that the TP documents and evidence required were “completely absent” and tax authorities could not find “any justification at all for the TP policy changes”.

Takeaways from McDonald’s

We have listed below key our key takeaways from the McDonalds case, together with the insight of many tax directors from other big corporations who weighed in on the ruling:

  • This case has reiterated how important it is for MNEs to perform consistent (annual) reviews of their TP arrangements across the group, and to have documentation in place to support and defend its practice. This is particularly important to ensure the pricing is still appropriate and fits within the business. Any discrepancy could lead to a large tax bill, which could have been prevented if the right documentation had been in place.

  • In TP cases dealing with intellectual property (“IP”), royalty fees, and licensing of IP, documentation needs to be extremely robust. Evidence on the commercial rationale for inter-company terms must be clearly documented.

  • Even with TP documentation in place and prices being within benchmarked ranges, corporations can still face a dispute, therefore consistency and transparency remain key parameters.

  • Many corporations confess it can be difficult to assess and explain where the economic ownership (of IP) is. Lack of knowledge or understanding provides little defence against a tax authority onslaught. The onus is clearly on the taxpayer to figure their IP out.

  • Many corporations are in favour of mitigating the risk of tax disputes by relying more on strategies such as dispute prevention methods such as advance pricing agreements (“APAs”) and mutual agreement procedures (“MAPs”) as a starting point.

  • It is important to centralise the TP policy design and documentation as much as possible to avoid any nasty jurisdictional surprises during audits by tax authorities.

  • Whilst central oversight is important, localisation cannot be overlooked.  Finding the right balance is key.

  • TP documentation needs to be treated as “live” – people and businesses are ever evolving. TP is quicker than most…..

  • It is crucial to not only have legal agreements in place to govern intra-group transactions, but those legal agreements must accurately reflect the true nature of the transactions.

  • TP is on almost every tax authority’s lips. Everyone is Hungry for a BIG MAC assessment.

Don’t risk it for the McFlurry. Reach out to our team of experts.

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How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.

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