APAs in fashion as Swedish retailer H&M inks four-year Australian tax deal

Fast-fashion retailer H&M is one of a growing number of multinationals locking in their Australian tax, as debate continues about whether Australia has stopped corporate tax leakage.

H&M’s strongly performing Australian subsidiary has entered into a four-year Advanced Pricing Agreement (APA) with the tax office that expires on November 30, 2018.

Technology giants such as Apple and Google have used APAs with governments all over the world for decades.

The agreements seek to establish a consensus on what is a fair and proper taxable income attributable to local operations.

For tax authorities, APAs provide relative certainty of compliance with local tax laws and some guidance on revenues. For companies they avoid the risk of a big tax bill, penalties or litigation down the track.

But Jeffrey Knapp, Lecturer School of Accounting at UNSW, said APAs were about “low-cost regulation and the lowest possible inconvenience to the regulated party. But is it really about efficiency or is it about the letting the regulated party dominate?”

He said APAs risked coming up with a price that was not fair, but “given the extent of multinational tax avoidance over the past decade, anything could be an improvement [for the ATO].”

The ATO’s deputy commissioner Jeremy Hirschhorn said in April: “There is an attitude in some companies that if things are permitted by law, no matter how artificial they are, that that’s OK.

“There has been a minority who did seem to take it as a bit of a challenge to come up with an even fancier picture on a white board.”

The ATO told Fairfax Media that as of December 30, 2015, it had 162 active APAs in place, with an additional 115 in progress, of which 42 in the early engagement stage. This is up from 148 APAs as at June 30, 2015.

It did not reveal which other companies had an APA, due to confidentiality, or which sectors.

Paul Drum, head of policy at accounting body CPA Australia, said APAs were becoming increasingly popular due to a suite of tax minimisation and disclosure laws worldwide.

These include tougher anti-avoidance laws in Australia that are “some of the toughest in the world”, Multinational Anti Avoidance Legislation (MAAL) that applies from this year, and the so-called “Google tax”, which the government says is designed to ensure multinational companies “pay their fair share of tax in Australia”.

He said Australia also continued to play an active role in the G20’s BEPS (base erosion and profit shifting) project, which has led to country-by-country reporting for multinationals with annual global income of at least $1 billion.

“With the secrecy veil drawn back, APAs have an increasingly important role in a company’s operations,” Mr Drum said.

Australia has proved a bright spot for Swedish giant H&M, with sales rising 61 per cent year-on-year to $449 million Swedish krona ($71 million) in the May quarter. The latest Australian results were boosted by the opening of two stores in the quarter, taking its total local store numbers to 13.

The last annual accounts for its Australian subsidiary show it posted $161.9 million in sales in its 2015 financial year and made a profit of $3.83 million, up from $1.48 million the previous year.

Those accounts show H&M Australia paid its parent $95 million for trading stock and visual merchandise. This suggests the APA is not just about payments to its parent for intellectual property and marketing, but also the price it is paying for stock purchased on its behalf by the parent.

Australia is a tiny spot in H&M’s empire, which spans more than 4000 stores across 62 countries.