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LONDON (Reuters) - When does a hamburger become intellectual property? For fast food giants, the transformation happens at the tax office.
Restaurant chains such as McDonald's, Burger King and Subway, and coffee chain Starbucks, save millions in taxes each year by claiming that part of what they're selling is the parent companies' know-how.
There's nothing illegal about this, but tax campaigners such as Richard Murphy say the tactic "undermines the whole tax system."
Take Florida-based Burger King. It has units in more than a dozen European countries which operate stores and support franchisees, who pay to operate independent stores.
Local units in places such as the UK and Germany are liable for taxes on any profit they make, levied at around 25 percent. To reduce that profit - and the tax - the units pay a fee for the right to use the brand. At Burger King this is around 5 percent of sales.
Such fees are common in tech firms and other multinationals.
In Burger King's case, the IP was created in the United States, home of the Whopper. But the fee the European units pay to use it goes to Burger King's main European office in Zug, Switzerland. There the effective tax rate could range from 2 percent to 12 percent, according to Thierry Boitelle, tax partner with law firm Bonnard Lawson in Geneva.
Zug-based Burger King Europe GmbH retains the payments, a Burger King spokesman said. Had the fee been remitted to the United States it would have faced a tax rate of 35 percent to 39 percent.
Around a third of the company's total revenues of $2.3 billion are generated outside the United States, Securities and Exchange Commission filings show. Burger King declined to comment on its royalty structures outside Europe.
It's hard to know how widespread this practice is. Tax experts say the use of intellectual property or royalty fees has existed for decades but spread after a U.S. loophole opened up in the 1990s. The fees first appeared in McDonald's UK accounts in 2007. The UK unit in 2011 paid 62 million pounds ($99 million), 4-5 percent of its turnover, in such fees. McDonald's European headquarters is also in Switzerland.
McDonald's overseas subsidiaries generate over $17 billion a year in revenues. "McDonald's believes that a local, decentralized approach is the best way to run our global business and drive long-term value," a UK spokesman said. He declined to say whether all overseas units pay royalties to group companies, or answer detailed questions. U.S. tax is paid on any royalties that flow to the United States, he added.
Sandwich chain Subway, with around 37,000 stores in 100 countries, has even more outlets than McDonald's. The chain, jointly owned by billionaires Fred DeLuca and Peter Buck, licenses restaurants across Europe directly from its European HQ in Amsterdam.
Subway International B.V. reaps around $150 million each year in royalty payments from franchisees in Europe. However, accounts show almost all the income flows to its parent, a partnership registered in the Caribbean island of Curacao which offers tax exemptions on overseas income, according to accountants Deloitte. Subway declined to answer questions about its tax affairs.
The average corporate income tax rate among members of the Organisation of Economic Cooperation and Development (OECD) was 25.5 percent last year, according to Deloitte. Burger King and Starbucks had a 13 percent tax rate on overseas income last year, while McDonald's paid 20 percent, regulatory filings show. Subway does not publish such data.
Edited by Sara Ledwith and Simon Robinson