McDonald’s [NYSE:MCD] avoided paying $500 million in Australian taxes between 2009 and 2013. That comes according to a new report by trade union PSI detailing the fast food giant’s tax avoidance scheme. And it makes the government’s decision to use the ATO to go after corporate tax dodgers look to be their smartest move in a long time.
McDonald’s is accused of diverting royalty payments from franchisees in Australia to send profits to tax havens. Taxes that should have been paid in Australia were rerouted to low-tax Singapore instead. That allowed McDonald’s to save up to half a billion dollars in profit that should have been paid as taxes in Australia.
This is the type of entitled behaviour that abuses the integrity of Australia’s entire tax system. You’re forced to pay your lot in taxes, but the wealthiest companies swindle their way out of it. Is there any surprise we have a $45 billion budget deficit? You may disagree with how the government manages the budget, but it doesn’t excuse tax cheats. Australia’s economic uncertainty is only explained by budget mismanagement if everyone pays their taxes. But that’s clearly not happening.
It’s not just McDonald’s that’s to blame either. Earlier this month the government put 30 large corporations on notice about tax avoidance. These are businesses with a turnover of more than $1 billion. If McDonald’s is any example, we’re talking about tens of billions lost in tax revenue. That reduces the government’s ability to spend on things like infrastructure. Things that both you and I take for granted. But we notice when the infrastructure spending falls.
Let me use some simple arithmetic here to count the cost to Australia’s economy. Admittedly it’s a ‘loose’ calculation, but I think it illustrates the point.
If every company avoided taxes to the same extent as McDonald’s, Australia would’ve received $15 billion dollars in extra taxes. Over the course of four years, that’s an extra $3.75 billion. That’s not insignificant. It would have allowed the government to build on its rainy day fund. And that rainy day has arrived with the budget deficit ballooning to $45 billion.
But the total amount the government could recoup from companies could be much larger. That’s because the ATO’s power to fine tax cheats goes much further. This month the governmented indicated the ATO could fine companies guilty of tax avoidance. The fine could be worth the same amount as what companies skimp on in taxes. In the case of McDonald’s, that would result in a total compensation of $1 billion.
Now imagine that we grouped all 30 companies in the same boat. And let’s assume they dodged taxes to the same extent as McDonald’s. That $15 billion lost through taxes would stand at $30 billion with the extra fine. That’s two thirds of the current budget deficit wiped out.
That would provide some reprieve to the economy. But it would also affect investors with stockholdings in McDonald’s.
It’s important you don’t jump to any conclusions as investors. That doesn’t just apply to investors in McDonald’s stock either. Broadly speaking, it’s still unknown which companies are facing the threat of hefty fines. And we don’t know the full extent of their tax avoidance.
But it’s understandable that you may have some concern if you’re a McDonald’s shareholder. For one, any tax compensation and fine would hurt dividends in the short run. But in terms of the actual value of the stock, not much would change.
McDonald’s shares dropped by $2.41 at 4.10pm (19 May). Five minutes later they regained almost all the losses. McDonald’s is one of the largest (and most profitable) companies in the world. It regularly reports turnover of over $35 billion. Their profit from Australia was projected at $1 billion for 2014. Globally, McDonald’s announced profits of $8 billion in 2013.
In the long run McDonald’s won’t get away with funnelling profits to Singapore. That could add over a $100 million to McDonald’s yearly tax bill.
So McDonald’s increased tax contributions isn’t likely to affect the company’s long term prospects. But it would go some way in shoring up Australia’s budget deficit. That wouldn’t be a bad outcome for the economy.
Contributor, The Daily Reckoning
PS: The tax concerns facing McDonald’s are likely to remain short term issues for investors. But the rest of the stock market looks increasingly unstable. Equity markets are continuing to boom this year.
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