“I am occasionally reminded by the ATO that tax is a competition issue, and that a late-submitted BAS is unfair to competitors. But my competitors as a furniture maker include the likes of IKEA, who I understand is a charity registered in the Netherlands that pays no tax whatsoever in Australia. How is this fair, and how are we to encourage home grown entrepreneurs?” Email from a reader, Dave.
Dave makes a solid point. It is not just individuals who suffer from the failure of government to police big tax avoiders. It is local businesses too, small and large, forced to compete on the same playing field as their multinational rivals. The latter enjoy an advantage of scale and far lower funding costs and pay negligible tax.
It is the sort of mismatch you would expect to find in a lopsided junior school sporting contest.
Furniture retailer Nick Scali, an ASX-listed company, has just booked a pre-tax profit of $20 million and declared tax expense of $6 million for a bottom line of $14 million. Year in year out, Nick Scali pulls its weight, paying close to the 30 per cent corporate rate.
Same deal for David Jones and Myer, who also operate in homewares and pay full freight on the tax front.
Dave is not entirely right about IKEA. The flat-pack giant pays a smidgen of tax but he is definitely on the right track.
IKEA ruled off its books on Sunday, so it won’t be long before – if you know where to look (and that’s even tougher than finding the right aisle in the IKEA superstore) – you will find how little it forked out last year. For 2013 however, it showed an expense of $8.3 million. This is albeit a better contribution than tech giants Google and Apple but still paltry in the scheme of things.
Actual income tax paid during the year was $7.7 million, up from $2.6 million the year before. On revenues of $666 million though, and operating profit of $92 million, it is small.
Above the tax line in the IKEA profit and loss statement there is a strange “payment under Risk Agreement” of $47 million which effectively chews down the group’s taxable profit to just $27 million.
As auditor Ernst & Young has agreed with IKEA directors that IKEA only has to prepare a “special purpose report” rather than a general purpose set of accounts, all the meaningful stuff like related party transactions don’t have to be disclosed.
“In the opinion of directors the company is not a reporting entity,” says the filing. Well, it should be. If multinationals were held to the same standards of financial disclosure as their Australian counterparts that would be a good way to kick off the fight against the pestilence of global tax dodging.
As it is, you can only surmise the $47 million snip for a “Risk Agreement” may be a royalty paid to another IKEA entity in a more amicable tax jurisdiction.
The sole shareholder of IKEA Pty Ltd appears to be a Dutch entity called INGKA Holdings BV whose directors “have formally agreed to support the company (as a going concern) for at least the next 12 months”.
That’s mighty nice of them but thanks to the dearth of disclosure – the report stops dead at page 34 despite this being a company with 1,816 employees and $716 million in assets – there is no further mention about what this mysterious payment might be for.
A tinker on the internet throws up some clues. This INGKA Holdings BV appears to be owned by the Stinchting INGKA Foundation, a tax effective entity founded in 1982 by the Swedish billionaire and IKEA founder Ingvar Kamprad.
In turn, these are owned by another Netherlands entity, Inter IKEA Systems, which is said to receive 3 per cent of all IKEA revenues in royalties, and is owned by Inter IKEA Holdings, registered in Luxembourg – controlled in turn by a Liechtenstein foundation. You get the picture.
Contrast that with Nick Scali. No royalty payments for intellectual property registered in a low-tax structure offshore.
When things got tough in 2008, Nick Scali still paid its dues, booking a tax expense of $3 million on a pre-tax profit of $9 million. It has delivered a profit every year for the past decade.
Elsewhere in the discretionary spending sector, David Jones recently recorded a tax expense of $39 million on a pre-tax profit of $140 million.
For booksellers competing against Amazon, the playing field for tax is not level. It is unfair. It is a handicap for local business against powerful multinationals and a failure of policy and regulation which urgently needs to be addressed.