Taaks Avoyd: IKEA’s flat pack tax avoidance schemes

We all know how simple IKEA’s instructions for constructing its flat pack furniture are. At the other end of the scale of simplicity, in fact, at the level of preposterously complex, is IKEA’s corporate structure. Founder Ingvar Kamprad has published claims that the company is open about its structure, and has published what he says is the full extent of the web of ownership. However, a report from earlier this year by the Greens/EFA party in the EU shows that his picture of the corporation’s structure does not even come close to the actual web.

One of the conclusions of the report, IKEA: flat pack tax avoidance, Taaks Avoyd, was to ask the EC to open an investigation into IKEA’s tax practices. Importantly, the report does not claim that IKEA is breaking the law. In contrast, it is complying with regulations, but, the report claims, current EU tax rules and those of individual countries in the EU, facilitate tax avoidance to an enormous extent. The EC has responded by opening an in-depth investigation into the Netherlands’ tax treatment of Inter IKEA on 18 December this year. It’s a start, but there are plenty of other IKEA groups and subsidiaries domiciled in Liechtenstein, Belgium, Luxembourg, Curacao, France, Norway, and other jurisdictions. In fact, the EC is only investigating one of the two main IKEA entities, Inter IKEA. The IKEA Group, the other main entity is not yet under investigation. The report names, in addition, a bewildering array of entities. The Greens’ report is 34, double-columned pages long, with a lot of diagrams, and this article can only touch on some of the complexities of IKEA’s tax avoidance.

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.
Commissioner Margrethe Vestager, in charge of EU competition policy

But first, the EC investigation’s focus. The EC “has concerns that two Dutch tax rulings may have allowed Inter IKEA to pay less tax and given them an unfair advantage over other companies, in breach of EU State aid rules.” In the early 1980s, IKEA changed into a franchising model. This means that Inter IKEA does not own the IKEA shops, but they pay a franchise fee of 3 percent of their turnover to Inter IKEA Systems, a subsidiary of Inter IKEA Group in the Netherlands. Preliminary inquiries “indicate that two tax rulings, granted by the Dutch tax authorities in 2006 and 2011, have significantly reduced Inter IKEA Systems' taxable profits in the Netherlands.”

The EC has concerns that the two tax rulings may have given Inter IKEA Systems an unfair advantage compared to other companies subject to the same national taxation rules in the Netherlands, a situation that would breach EU State aid rules. A 2006 tax ruling “endorsed a method to calculate an annual licence fee to be paid by Inter IKEA Systems in the Netherlands to another company of the Inter IKEA group called I.I. Holding, based in Luxembourg.” I.I. Holding held certain intellectual property rights required for the IKEA franchise concept. And the fees paid to it made up a significant part of Inter IKEA Systems' revenue, which fees shifted franchise profits to Luxembourg, where they remained untaxed as part of a special tax scheme, which was exempt from corporate taxation.

We are open about the way we are structured, Ingvar Kamprad, excerpts

The franchise structure
My solution was to set up what was to become the current franchise structure with the two separate companies: Inter IKEA and IKEA Group – owned by two separate foundations.
Inter IKEA, owned by Inter IKEA Holding S.A., based in Luxembourg, would own the right to the IKEA concept and thus become the franchisor with responsibility to protect the brand and further develop the concept. IKEA Group, owned by INGKA Holding B.V., based in the Netherlands, became the main franchisee (among other independent franchisees), as well as the company responsible for product development and total supply chain.
The foundations
The characteristic of a foundation is that it owns itself. Subsequently, funds held by a foundation can only be used for purposes determined by the foundation’s statutes. Interogo Foundation, based in Liechtenstein, is the owner of Inter IKEA Holding S.A., the parent company of the Inter IKEA Group.
Interogo Foundation is an enterprise foundation whose entire purpose is to invest in expansion of the company business and secure longevity. In other words, funds held by the Interogo foundation are kept as a financial security only to be used in the event of Inter-IKEA experiencing financial difficulties. Funds could also be used to support individual IKEA retailers experiencing financial difficulties and for philanthropic purposes.
The Interogo foundation is controlled by my family and is managed by a board of directors (Stiftungsrat) consisting of external board members only.
Stichting INGKA Foundation, based in The Netherlands, is the sole owner of INGKA Holding B.V. , the parent company of the IKEA Group. The statutes of that foundation determine, similarly, the two sole purposes of the foundation to be to secure necessary financial security and longevity for the IKEA Group and to support philanthropic programs through the Stichting IKEA Foundation, according to the statutes of that foundation.
The foundation is lead [sic] by a five member board of directors, on which my family has two seats.
Taxes
It goes without saying that both Inter IKEA and the IKEA Group pay taxes, as any other company, in every country they operate around the world. The operations comply with all relevant laws and regulations and thus pay taxes accordingly. However, we have always viewed taxes as a cost, equal to any other cost of doing business. An optimized tax structure allows us the flexibility to use funds, that have already been taxed in one market, in new markets for further business development without the additional burden of double taxation.

In July 2006, the EC deemed this special tax scheme illegal and required the scheme to end by 31 December 2010. Then, in 2011, Inter IKEA changed the way it was structured and bought the intellectual property rights formerly held by I.I. Holding, financing this with an intercompany loan from its parent company in Liechtenstein. We’ll get to that parent company later. But a second Dutch tax ruling allowed the deduction of these interest payments from Inter IKEA Systems' taxable profits. This meant that most of Systems’ franchise profits were shifted to the parent company. “The opening of an in-depth investigation gives the Netherlands and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.”

This behaviour was described by Kamprad as adopting an “optimized tax structure”.

Now for the report. First, it questions whether even forthcoming EC tax rules, those proposed under the European Corporate Tax Package (ECTP), will regulate such tax structures. While the ECTP addresses the “offshore dimension” of tax havens, “it does not seem to apprehend the reality of tax competition between EU countries themselves.”

In 1982, Kamprad had transferred legal ownership of the IKEA Group’s parent company, Ingka Holding BV, to a Dutch domiciled foundation, the Stichting INGKA. Unfortunately for tax authorities and investigations, such an ownership structure makes its finances exempt from public disclosure under Dutch law. The Kamprad family also owns the IKANO Group, which split off from IKEA in 1988. IKANO is controlled by Ingvar Kamprad’s three sons and owned through a holding company in Curaçao. Kamprad also transferred legal ownership of the Inter IKEA Group, a different corporate entity from IKEA Group, to the Liechtenstein-domiciled Interogo Foundation in 1989. This foundation is nominally independent, though its ruling council is comprised solely of the Kamprad family. This council is supervised by a seven-member Supervisory Council on which the Kamprad family is guaranteed up to three seats. However, the remainder of the council “is composed largely of men with long-standing and close ties to the Kamprads and both of the major IKEA business groups.”

IKEA’s tax avoidance runs into the billions of Euros. “From 1991 to 2014,” says the report, “IKEA franchisees paid €13.6 billion in tax-deductible royalties to the Inter IKEA Group” and continue to pay around €1 billion annually. IKEA Group subsidiaries “move a large part of their income to Inter IKEA Systems BV in the Netherlands. Subsequently the Inter IKEA Group makes sure much of this income remains untaxed by transferring it (directly or indirectly) to other entities,” including to Interogo.

Then, on 1 January 2012, Interogo sold the IKEA trademark to Inter IKEA Systems BV for €9 billion. This was financed by an intercompany loan that now allows the Inter IKEA Group to “shift profits to its legal owner (Interogo) through tax-deductible interest payments.” A diagram in the report notes that, since 2012, “the Dutch conduit subsidiary pays interest on debt incurred to acquire the IKEA trademark.” Since there is no withholding tax on royalties and interest sent abroad in the Netherlands, this means that this money is not taxed. IKEA’s accounts also show an “Other charges" expense which is deducted from taxable income. Not only is this money also not taxed in the Netherlands, no one knows to whom these charges are paid. And in Liechtenstein, where Interogo is based, dividends received from foreign subsidiaries are tax free.

From 1991 to 2014, Inter IKEA Group reduced “its taxable income by more than €12 billion, offsetting almost all of the royalty income received (€14.3 billion) from IKEA stores.” This, and other moves, reduced the group’s effective tax rate to just 3 percent. Had this income been taxed at the statutory tax rate of 25 percent “Inter IKEA Systems BV would have had to pay an additional €3 billion to the Dutch tax administration.” And that is just one of the “optimized tax structures.”

Then there is Belgium. “Prior to 2010, a Belgian company called Inter IKEA Treasury SA acted as an internal financing arm for the Inter IKEA Group,” says the report, “generating income from interest on loans offered to group companies and paying out interest to unspecified Inter IKEA affiliates from whom it borrowed the money in the first place.” At that time, the Treasury was designated a “coordination centre” allowing it to benefit from a super low tax rate of 1.98 percent, compared to a regular 33 percent in Belgium.

Then Luxembourg. Because the Belgian “coordination centre” regime was terminated by order of the EU in 2011, the company shifted activities there. This resulted in “an arrangement which guaranteed that an Inter IKEA Group subsidiary (now called Inter Finance SA) domiciled in Luxembourg would pay almost no tax on an estimated €6 billion in loans funded by subsidiaries in Curacao and Cyprus and funnelled to affiliates through a newly established Swiss branch of Inter Finance SA.” This resulted in an effective rate of just 2.4 percent, “as compared with the Luxembourg statutory rate of 29.2%.” Even before the loss of the “coordination centre” regime, the Dutch tax authorities set up a Notional Interest Deduction (NID) regime in 2007. “The NID allows companies to deduct fictional interest payments from their taxable income,” says the report, again reducing the tax rate to around 2 percent in the Netherlands.

Finally, says the report, it is not possible, “using public documents, to identify the specific sources or the ultimate destination of funds flowing through IKEA Service Centre NV,” another Dutch subsidiary. However, the report suggests that debt is being “pushed down to operating subsidiaries in order to reduce their taxable income and pay virtually no tax.”

Confused? And a number of these “arrangements” were proposed – legally – by some of the big accounting firms, including PwC.

In addition to calling for a full investigation of IKEA, the report makes a number of recommendations, which include:

The Council of Member States should adopt a more ambitious Anti-Tax Avoidance Package.

Make tax rulings between companies and European countries publicly available.

Adopt public country by country reporting for all large companies operating in Europe.

Fight tax secrecy.

Close existing tax loopholes.

Harmonise the corporate tax base in Europe.

Open investigations into IKEA’s tax practices. Not just in the Netherlands, but also its preferential treatment as a result of the ruling in Luxembourg and other potentially harmful tax measures (e.g. the NID scheme in Belgium or the absence of withholding tax on royalties under bilateral treaties if the beneficial owner is domiciled in Liechtenstein).