Following in the footsteps of Apple, Amazon, Starbucks, and McDonalds, the world’s biggest clothing retailer Inditex has come under fire from Members of the European Parliament (MEPs) for using “aggressive” techniques to sidestep at least €585m (U.S.$626M) in taxes between 2011 and 2014.
The company, owner of brands including Zara and Massimo Dutti and controlled by Spanish billionaire Amancio Ortega, Europe’s richest person, denies the allegations.
In a report called Tax Shopping released in December, the Greens/European Free Alliance (EFA)—the latter an association of regional/nationalist political parties—singled out Inditex for using aggressive corporate tax avoidance schemes, mainly in the Netherlands, Switzerland, and Ireland. The report adds that it has uncovered examples of Irish companies belonging to Inditex that report millions in turnover but do not have a single employee and have not paid any corporate tax at all.
None of the techniques used are illegal, but they do raise questions over whether Inditex—like so many other companies—pays taxes where its real economic activity takes place.
According to the report, one of the key ways the company avoided tax was to move profits to the Netherlands through royalties, which companies pay in exchange for the right to use a brand name. The Greens claim that royalty payments are “a well-known trick for large companies that wish to transfer profits to countries where taxation is lower,” adding that “it’s a bit like if you were paying your parents (or Grandma) for the right to use your family name.” The report says that the Dutch subsidiary that enables this on behalf of the Inditex group achieved a profit-per-employee rate of €2.4m (U.S.$2.57M) in 2014: the general rate of profit-per-employee for the Inditex group stands at just €18,000.
Green MEPs believe that so long as different EU members can set different—and lower—corporate tax rates to entice businesses to set up operations, companies are set to continue to take advantage of the lack of tax harmonisation across the Single Market and report the bulk of their profits in low-tax EU jurisdictions until the Commission takes action.
“Public information about where companies employ people, where they declare profits and ultimately where they pay taxes is not a luxury, it’s a must.”
For example, many of the companies in the Inditex group are purely retail-focussed and have low profit margins (between negative figures and 5 percent, according to the Greens’ research), which means that the issue of company location for tax purposes under these circumstances is negligible in most EU countries.
However, other companies within the Inditex group that specialise in financial management, branding management, e-commerce, or insurance business have much higher net profit margins—between 20 percent and 70 percent in some circumstances. Accordingly, they are all located in countries known to have very accommodating tax legislation: namely, the Netherlands, Ireland, or Switzerland.
The report estimates that, as a direct result of such tax planning, several EU countries have lost out on millions of Euros worth of tax revenue: €218m (U.S.$233M) for Spain, €25m (U.S.$27M)for Germany, €57m (U.S.$61M) for Italy, €76m (U.S.$81M) for France, €20m (U.S.$21M) for Greece, £22m (U.S.$27M) for the United Kingdom, €18m (U.S.$19M) for Belgium, and €6m (U.S.$6.4M) for Austria.
More widely, according to recent estimates by the European Parliament, the European Union is losing between €50bn to €70bn annually due to “aggressive” corporate tax planning.
In a statement, the Greens/EFA said: “Public information about where companies employ people, where they declare profits and ultimately where they pay taxes is not a luxury, it’s a must.” It added: “Without tax transparency as a first step, the multinationals and their tax consultants, together with states who choose to engage in destructive tax competition, will continue to get around efforts to clamp down on tax avoidance.”
Naturally, Inditex disputes the claims, saying that “the report is based on erroneous premises that lead it to mistaken conclusions.” In a statement, the company says that Inditex complies with prevailing tax legislation in all the 93 markets in which it operates; that all group companies are fully tax transparent and details on each can be found in the annual report; and that transactions between group companies are audited regularly by the tax authorities in each country—meaning that, if there’s a problem, the regulator can investigate and start proceedings. So far, none have.
RECOMMENDATIONS FOR BETTER TAX TRANSPARENCY
In its report, Tax Shopping: Exploring Zara’s Tax Avoidance Business, the European Parliament’s Green/EFA parties make four key recommendations to cut down on tax avoidance and to improve tax reporting. They are:
1: The need for greater transparency and public country-by-country reporting. Current financial reporting standards do not provide sufficient information to determine what is really artificial arrangements designed to shift profits to low-tax jurisdictions.
2: The need for publication of tax rulings received by large companies. While progress has been made to ensure tax authorities in Europe know about sweetheart tax deals received by large companies in other European countries, this is not enough, says the report. There is huge selectivity and discretion as to which rulings are really sent to other countries’ tax authorities. A simpler option would be to make such information publicly available so that citizens and shareholders know which companies receive a special tax treatment.
3: The need to adopt a Common Consolidated Corporate Tax Base (CCCTB) in Europe. Multinationals should pay tax where they make their profits, and the EU should set up a CCCTB to establish a single set of rules that companies operating within the single market would use to calculate their taxable profits, as well as establish a formula for allocating those taxable profits to member states based on their real economic activities. To be effective and fair the CCCTB must be robust enough to prevent multinationals from shifting profits out of the EU and should also ensure that EU-based multinationals will not be able to shift profits out of non-EU countries to non-EU tax havens.
4: The need for a minimum corporate tax rate in Europe. European corporate tax reforms should not increase the risk of greater tax competition on corporate tax rates. Several European member states—including the United Kingdom, the Netherlands, Belgium, and France—have recently announced their intention to reduce their corporate tax rate, with Hungary claiming to go as low as 9 percent.
Source: Greens/European Free Alliance: Tax Shopping
Inditex is not the first large-profile company that Green MEPs have targeted. A report released last February revealed how furniture maker Ikea may have avoided paying at least €1bn (U.S.$1.07B) in taxes to EU nations over six years. At a European Parliament hearing in March, Ikea said its tax affairs are in line with international rules, adding that Ikea Group paid about €822m (U.S.$880M) in corporate income tax globally, “which equals an effective corporate income tax rate of just below 20 percent.”
Irrespective of which figures one chooses to believe, sharp tax practices that follow the letter of the law rather than its spirit are always going to be leveraged by companies to the best of their ability, unless rules are changed and/or better enforced. Consequently, Green MEPs want change.
To improve tax transparency and to ensure that EU states get the revenues they deserve, the Greens have called for mandatory country-by-country-reporting “of key financial data” to ensure taxes paid by multinationals in each country are aligned with their activities in those jurisdictions. They also want a common consolidated corporate tax base so that taxable income can be allocated to those jurisdictions where the company does substantive business, as well as a minimum corporate income tax throughout the European Union to prevent a race by EU members to slash rates to win investment.
The European Commission has already proposed several measures to tackle the problem, which includes some of the reforms that the Greens are asking for. The Anti-Tax Avoidance Package (ATAP), released by the European Commission in January 2016, aims to implement guidelines agreed by the OECD’s Base Erosion and Profit Shifting (BEPS) project—itself an initiative to cut down on tax loopholes.
ATAP contains measures such as the “controlled foreign company (CFC)” rule that will allow the EU member state where a parent company is headquartered to tax certain profits the company parks in a subsidiary in a low tax country. The package also provides for “exit taxation” which prevents companies from avoiding tax by re-locating their assets, as well as measures to ensure companies do not artificially indebt subsidiaries in high-tax countries.
The Commission has also proposed to create mandatory public country-by-country reporting so that large companies would need to publicly disclose where they have subsidiaries; how many people they employ per country; where they have assets; where they declare profits; and where they pay taxes. But the idea is facing resistance from some member states reluctant to mandate that companies make such information public (it would be sufficient for tax authorities alone to know, however).
Also, at the end of October the Commission outlined proposals for a common consolidated corporate tax base (CCCTB) to help avoid tax competition among EU member states.
However, these proposals take time: The plans for a CCCTB, for example, were first mooted in 2011 and still require approval from member states, some of whom are likely to want to water it down.
And just what appetite is there at the top of the EU’s executive to actually implement meaningful reform? According to press reports in The Guardian and other newspapers published on 1 January, European Commission President Jean-Claude Juncker spent years in his previous role as Luxembourg’s prime minister (as well as finance and treasury minister) secretly blocking or diluting efforts by a majority of EU member states to tackle tax avoidance by multinational corporations.
In 2014 the “Luxleaks” scandal revealed that Luxembourg had handed out hundreds of secret “tax rulings” (akin to the agreement that Apple had with the Irish government) to multinational businesses detailing favourable tax terms so long as the companies located in the tiny EU member state.
Juncker has since conceded that Luxembourg’s tax system was “not always in line with fiscal fairness” and may have breached “ethical and moral standards.” He also now supports the Commission’s pursuit of investigations into specific tax rulings, including deals Luxembourg granted separately to McDonald’s and Amazon.
Yet in a political structure like the European Union where reform is based on consensus, some member states have too much to lose if the single market is truly turned into a level playing field with regard to corporate tax treatment. As such, the road to reform is likely to be a long one.