By Tanya Agarwal
Swedish-founded multinational group Ikea has its furniture empire under investigation. Following the claims that various deals have saved it around 1bn, the European Union launched an in-depth enquiry into the tax affairs of Ikea.
A complex corporate structure
The furniture company has joined a watch-list of the EU Commission, that already contains big names like Starbucks, Amazon and Apple. According to EU, the Swedish firm had funnelled revenue via low-tax subsidiaries. Ikea, with its two main sister companies, paid 1.07bn in tax on pre-tax profits of about 4.46bn in the last financial year. The company has a complex corporate structure, with offshoots in Luxembourg, Liechtenstein, and the Netherlands.
In the early 1980s, founder Ingvar Kamprad had split the brand in two. He created a franchise system: Inter Ikea (to look after the brand and concept) and Ikea Group (the main retailer). In order to use Inter Ikeas trademarks and concept, Ikea Group paid a fee of three percent of its annual revenues. Both companies were ultimately owned by foundationsthe one atop Inter Ikea was located in Liechtenstein and the Ikea Group one was in the Netherlands.
An ingenious scheme
IKEA fell under the scanner after the release of a report by the Greens in the European Parliament, who alleged that the corporation had used intercompany loans to avoid more than 1bn in taxes in Europe between 2009 and 2014. From 2006 to 2011, Inter Ikea paid an annual license fee to a sister company, II Holding, which was located in Luxembourg and which held certain intellectual property rights related to the Ikea concept. Those royalties were not taxed due to a special scheme Luxembourg had offered since 1929.
The scheme was ruled illegal by the Commission in 2006 under state aid rules and was closed at the end of 2010. The next year, Inter Ikea changed its structure by buying the intellectual property rights from II Holding using a loan from its Liechtenstein parent. The interest rate on the 5.4bn loan, according to Inter Ikeas latest annual report, is six percent. That reduces Inter Ikeas Dutch tax ball, as it was allowed to deduct the interest payments from its taxable profits, according to the Commission.
Unfair competition
EU competition commissioner, Margrethe Vestager, said, All companies, big or small, multinational or not, should pay their fair share of tax. Member states cannot let selected companies pay less tax by allowing them to artificially shift their profits elsewhere. We will now carefully investigate the Netherlands tax treatment of Inter Ikea.
The European Union is indifferent on the matter of different countries following different tax policies. However, it condemns the advantage that big multinational corporations may have over smaller rivals due to tax subsidies. Vestager has already had Apple, Amazon and McDonalds on the watch-list. Apple alone was revealed to have benefited to the amount of £11.5bn in unfair tax breaks.
The future outlook
Member states and the European Parliament on 15th December 2017, reached on a political agreement regarding new anti-money laundering rules. The latest rules will allow the public to see who ultimately owns or controls shell companies and is said to help crack down on money laundering, terrorism financing, tax evasion and avoidance.
Laure Brillaud, an anti-money laundering policy officer at Transparency International EU, has said, “The EU deserves credit for taking this bold leap to end the secrecy that facilitates corruption, tax evasion and other crimes.” He described the agreement as a major breakthrough.
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