Nine takeaways based on my article on the European Commission’s state aid tax case against the hamburger giant: Tax Notes International, February 4, 2019.
If you want to check out the Commission’s decisions, here are the links to the initial and final versions.
1. The Commission appears to rely almost entirely on statements made by McDonalds, its tax advisor and the Luxembourg tax administration, regarding the position under US tax law. Why didn’t it carry out its own independent investigation?
2. It can be argued, based on a plain reading of the treaty text, that Luxembourg was only required to exempt if there would have been double taxation if it didn’t. Since the initial decision made clear that the US could not tax the branch, there was no risk of double taxation. Conclusion: Luxembourg did not need to exempt, so doing so constituted state aid. Why did the Commission not raise this argument to support its initial decision. And why, once it was raised (in the Commission’s final decision), was it not pursued?
3. Why did the Commission’s initial decision not specifically address whether the reason why the US could not tax McDonalds’ branch was because of the interaction of US domestic law and the treaty with Luxembourg? After all, the answer to this question was crucial to the passage from the OECD’s Model Tax Convention Commentary that the Commission cited in support of its initial decision.
4. When it did get around to looking at this question (in its final decision) the Commission concluded that the US and Luxembourg had interpreted the treaty differently because of differences in their domestic tax laws. So far so good. Then, in coming to its ‘no state aid’ decision, the Commission cited OECD sources that the Commission itself had just said applied to treaty interpretations that were ‘unrelated to domestic law’. Aside from the question whether the OECD sources were on point, this is simply self-contradictory.
5. Why did the Commission not address a 2008 change to the OECD’s commentary to the Model Tax Convention that could have meant the first passage in that commentary relied on by the Commission would not have been applicable anyway? And why did they not explain why they considered the OECD’s commentary was even relevant to interpreting the tax treaty between the US and Luxembourg?
6. What was the relevance of other rulings being ‘in line with’ Luxembourg’s approach under the McDonalds ruling? Was this an alternative ground for the ‘no state aid’ decision, in case the Commission’s treaty analysis was wrong, i.e. there was a benefit but it was not selective? If the Commission’s analysis was equally applicable to these other rulings (as the Commission seems to think it was) what possible relevance could they have had, since that analysis concluded that there was no benefit?
7. Why did the Commission change its mind from its ‘state aid’ initial decision to its ‘no state aid’ final decision. The technical arguments are at any rate not fully convincing. Could it be that the Commission realised it had bitten off more than it could chew on the technical issues and was looking for a way out? Or was it simply that with all the political criticism of its state aid ‘crusade’, in particular from the US, it decided that ‘discretion was the better part of valour’?
8. The (tax) world is moving on and we now have the OECD’s Multilateral Instrument as well as the EU‘s Anti-tax avoidance directive, both of which take a swing at McDonalds type structures (although both have a certain time-lag). Meanwhile it looks like both McDonalds and Luxembourg may have been wrong-footed by the Commission’s initial decision since both have taken remedial steps, Luxembourg by way of a law change and McDonalds by way of restructuring out of its US branch.
9. @European Commission: Let me know if you need any help next time.