Beating the big business tax minimisation schemes

Peter Mac

Swedish “flatpack” furniture manufacturer IKEA has suffered a number of blistering mass media attacks for business practices that reduce their Australian tax liabilities to a tiny fraction of the company’s profits here.

The criticism is certainly justified. Most ordinary working taxpayers, as well as companies that don’t engage in these practices, now have to pay a disproportionate share of the tax burden because of low-tax liability practices.

However, documents recently revealed by an international journalists group show that major Australian companies, including the Future Fund, AMP, the Goodmans Group, Lend Lease and the Macquarie group are among dozens of Australian companies engaged in similar activity.

According to Financial Review journalist Neil Chenoweth, the low tax practices include “hybrid debt structures, total swap returns, royalty payments, and inter-group loans”.

IKEA appears to have perfected the art, with the help of Australian accounting firm PwC. IKEA has reported making feeble profits from its Australian operations for decades, but according to Chenoweth it has actually made almost $1 billion in profits since 2003.

As he notes, from 2002 to 2013 IKEA sold goods worth $4.76 billion in the Australian stores. The company claims proudly that all its retail operations make a minimum 10 percent sales profit each year, so its Australian operations must therefore have actually made at least $460 million in profits from 2003 to 2013.

However, IKEA paid only $31 million in Australian tax for the period, because it claimed that after other costs were allowed for it ended up with total pre-tax profits of only $103 million. So where did the other profits go?

The answer is offshore, to the tax haven of Luxembourg. Between 2002 and 2013 the company made $532 billion in offshore payments, almost all of which ended up in another Luxembourg branch, Inter IKEA Holdings SA, because yet another purpose-made company group claims franchise fees on the company stores!

Chenoweth claims that “While the IKEA Group holds the intellectual property for IKEA products, Inter IKEA Systems BV holds the intellectual property on the stores … [and] charges 3 percent of the retail price of every IKEA product, no matter how cheap … So in 2008, when IKEA global sales totalled €22.49 billion, €747 million flowed in franchise fees to Inter IKEA Systems BV, virtually all of it tax free.

In Australia between 2002 and 2013 the franchise fees totalled $159 million, but the figure has risen since the company began building its megastores in 2006.

But that’s not all. The Inter IKEA Systems BV Group also acts as a financier for the IKEA Group (which includes the retail arm), and through a complex arrangement involving transactions in Switzerland, Belgium and Luxembourg, since 2006 it has charged the IKEA Group fees under a financial “risk agreement”.

Since 2009 some €6 billion has been transferred to the company in Luxembourg. Yet as Chenoweth notes: “The Luxembourg documents show the company’s 2011 tax return, when it paid ‘wealth tax’ of €199,170 and income tax of only €1,575.”

Innocence and a blind eye

Corporations typically excuse themselves for engaging in low-tax practices by stating that they are innocently operating within the limits of the law.

When the Macquarie group was questioned about its involvement in the Bermuda and Luxembourg tax havens a representative responded stiffly that “Macquarie returns all its income in accordance with [Australian global] provisions and complies with the taxation provisions of the international jurisdictions in which it operates.”

That’s an evasive answer. The reality is that corporations search incessantly for tax law loopholes which they can exploit to maximise their profits.

However, the statement also highlights another side to the issue, i.e. the tendency of governments to turn a blind eye to low-tax practices, or to actually facilitate them.

In the run-up to the G20 meeting federal treasurer Joe Hockey denounced companies that operated in Australia but paid very little income tax. The issue was on the G20 agenda because many countries are now seriously concerned about the devastating impact that tax avoidance schemes are having on their revenues.

However, Hockey failed to outline measures that he would take to counter the problem. Companies that engage in complex tax avoidance schemes subscribe to the late Kerry Packer’s declaration that anyone who voluntarily pays tax is a mug, and they will simply ignore Hockey’s reprimand.

Breaking the tax avoidance schemes would require new legislation and proper resources to enforce it, whereas the schemes have been going on for decades, with no adequate action by successive Australian national governments.

European nations are now discussing the possibility of introducing legislation to enforce the disclosure of information on the international transfer of profits. As journalist Mike Seecombe reports, that would include “country by country reporting, requiring multinationals to reveal such information as where they sell, where they employ people and where they record their profits”.

Also under consideration is the establishment of multinational agreements that would allow countries to collect taxes for other nations and to remit the proceeds to them.

The obvious stumbling block is the requirement for multinational agreement. The Tax Office is already involved in an international investigation into tax avoidance.

But the Abbott government’s policies are focused on serving the interests of the major corporations, and over the last 30 years under successive conservative governments the tax rate for wealthy individuals and major corporations has actually fallen.

The Abbott government has also announced that it intends to axe staffing levels within the Australian Tax Office and to permit corporations to hire private accountants as their tax assessors instead of the Tax Office.

The best thing the Australian people could do to ensure that companies pay proper taxes is to dump the present government. And in the meantime if companies don’t pay their taxes, we shouldn’t buy their products.