IKEA/Kamprad . again

WebJournal on International Taxation in Sweden, WITS, No 1/2016 (3)

IKEA/Kamprad – again.

The European Parliament is up in arms against the multinational companies' widespread tax base eroding tactics and profit shifting maneuvers, the scale of which has reached mindblowing proportions. We are talking of thousands of billions (=trillions) of dollars/euros. This was made plainly evident through what has been called the Lux Leaks scandal where a team of investigative journalists (icij.org) published a cache of documents revealing how hundreds of multinational companies by way of selective and secret ”sweetheart deals” provided by the tax administration in Luxembourg avoided taxes in the high tax countries where they were operating their businesses shifting them into low or nil tax jurisdictions such as Ireland, Switzerland, Belgium and the Netherlands which provide generous and, as just mentioned, secretive tax breaks for intercompany payments especially for finance and intellectual property (IP) holding companies.

The European Commission, in particular the commissioner for competition policy, Margarethe Vestager, has stormed against the tax abuses discovered in Lux Leaks, taking Luxembourg to task for providing forbidden state aid to several of the world's corporate giants e.g MacDonalds and Fiat ordering Luxembourg to reclaim hundreds of millions of tax reductions that has been doled out by their sweetheart deals. Recently, the EU Commission has also castigated Ireland for giving Apple tax breaks to a stateless company (!)¹ ordering Ireland to recover state aid to the tune of 13 billion euros plus interest.

Recently the Greens/EFA Group in the European Parliament has published a study regarding IKEA titled ”IKEA: Flat Pack Tax Avoidance, TAAKS AVOYD”, which unsurprisingly was one of the companies also found in the Lux Leaks data base. The report, http://www.greens-efa.eu/fileadmin/dam/Documents/TAXE_committee/Report_IKEA_tax_avoidance_Feb2016.pdf, has been sent to the Commission for further action.

IKEA and its founder Ingvar Kamprad never stop fascinating the world. Earlier this year he celebrated his 90-th birthday and can sincerely be proud of what he has accomplished in life. He has created 150-170 000 jobs around the world not counting all the thousands of people working for suppliers of his company. He has truly put Sweden on the world map and whenever I travel abroad I light up when I see the blue and yellow IKEA logo sprawling against the skyline. Heja Sverige! And Kamprad himself is such a passionate and charming person! Watching him scurrying around one of his stores hugging both customers and employees is a touching sight.

But as an analyst of international tax matters I become very concerned and upset about IKEA's and Kamprad's tactics. I have written extensively hereabout on this blog (petersundgren.blogspot.com). My main concern is the ”routing” of the three percent franchise/royalty income that is paid out by all IKEA stores around the world to the Netherlands based IKEA Systems company and which money, or at least the brunt of it, is subsequently – until January 2012 – passed on to the top secret Liechtenstein trust Interogo – the holy grail in the IKEA business structure. More hereinafter.

The franchise payments from the IKEA stores to Inter IKEA Systems in The Netherlands have been granted tax relief in the source states where the IKEA stores are located under the tax agreements made by The Netherlands with these countries. The subsequent (on-)payments by Inter IKEA Systems to Interogo are tax free for Interogo under Dutch national tax law and of course tax free in Liechtenstein too. These payments are based on a licence agreement between these two entities, an agreement which also has been unknown to everone. According to the Green's paper it has now been revealed that these payments have been declared as ”other charges” by Inter IKEA Systems. An Inter IKEA spokesman has confirmed that Inter IKEA Systems BV has made these payments to the Interogo foundation for use of the IKEA trademark. Interogo in this way has in effect become an intra IKEA group bank financing various IKEA investments around the world. A bank which has paid no taxes whatsoever on its income. By Mr Kamprad's own admission Interogo has amassed a the jaw-dropping fortune of a hundred billion (in Swedish miljarder) Swedish kronas equivalent to about 12 billion USD.

However, in the tax structure explained above Kamprad has, it is suggested, not paid attention to an important limitation of the tax relief provided in the tax treaties between The Netherlands and the source countries of the IKEA stores. And this relief is granted by the source states (usually under article 12 of the treaties) applies only if the recipient of the royalties, Inter IKEA Systems in this case, is (the real or actual) ”beneficial owner” of the income. In Swedish this condition is termed ”om personen i fråga har rätt till inkomsten”. In French the beneficial ownership requirement reads ”bénéficiaire effectif”, in German ”Nutzungsberechtiger”.

The main requirement to be fullfilled in order for Inter IKEASystems to meet the beneficial ownership test is that the company has legally owned the IKEA trademark/concept which has been franchised/licenced to the separate IKEA stores around the world. But this has not been the case. The legal owner of the IKEA brand has been – until 2012 - Interogo in Liechtenstein. Consequently, for tax purposes, Interogo – not Interikea Systems - has been the (ultimate) beneficial owner of the royalties pouring out from all IKEA stores to Inter IKEA Systems and subsequently, as just mentioned, paid onwards to Interogo. In a letter to me dated 7 August 2012 (see WebJournal on International Taxation in Sweden, (WITS) no 6/2012 http://petersundgren.blogspot.se/2012/09/kamprad-interogo-beneficial-ownership.html?updated-min=2012-01-01T00:00:00-08:00&updated-max=2013-01-01T00:00:00-08:00&max-results=14 ,Mr Anders Bylund, Head of Group Communications Inter IKEA Group has confirmed that the license agreement between Inter IKEA Systems and Interpogo gave Inter IKEA Systems B.V. the exclusive right to utilize the IKEA Trademarks in its franchise operation. We can thus establish that there have been two license agreements involved in this setup, frequently called a back-to-back (licensing) arrangement. But the Inter IKEA – Interogo licensing agreement, just as was the case with Interogo's very existence as already mentioned, has never been revealed to the world.

For tax purposes, and according to the beneficial ownership concept, the payments from the IKEA stores shall be deemed as having been paid directly to Interogo in Liechtenstein. And Liechtenstein has no income tax treaties whatsoever with any country. And if that had been the case the whole back-to-back license structure would have fallen apart. Or in other words: if Inter IKEA Systems had been known not to be the (ultimate) beneficial owner of the royalty payments under the Netherland's tax treaties that company should pay tax in all the source countries involved under the national tax laws of these countiries. Article 12 does not apply. In Sweden that would mean that InterIKEA Systems should pay company tax at a 22 percent tax rate on net income. (In most countries royalties are taxed at reduced rates of maybe 5-20 percent on gross income but can reach even higher rates in certain countries.)

Interestingly, IKEA have declared that the tax authorities in The Netherlands, the residence state of

Inter IKEA Systems, have verified that this company is the beneficial owner of the IKEA trademark, also prior to 2012. This conclusion, however, is not up to the residence state to make. It is the contracting source states of the IKEA stores around the world, the states that have surrendered their tax claims to the royalties in question, that should make this decision. It should also be borne in mind in this context that The Netherlands fisc, with all respect, has a vested interest in his decision, because if a source state would make an opposite decision regarding the beneficial ownership matter and impose a tax on the royalty, The Netherlands would be obliged to give Inter IKEA Systems a credit for such a tax in order to avoid double taxation.

In an examination of IKEA's Dutch conduit company arrangement one should also pay attention to to the EU interest/royalty directive (2003/49/EC). This directive also denies source state taxation of royalties but also provides, just like the tax treaties, that the recipient of such income must be the beneficial owner thereof. The directive also includes a specific paragraph (6) determining that the benefits of the directive may be withdrawn in the case of a transaction wich is established as its principal or one of its principal objectives tax evasion or tax avoidance. The question to ask oneself, or rather to ask IKEA, is thus, what were the main reason(s) from a business standpoint, why Interogo in Liechtenstein, as the owner of the trademark, could not set up licensing agreements itself directly with the various IKEA stores around the world for the use of the IKEA trademark? Why was it important to arrange this with back-to-back conduit licensing agreements through Inter IKEA Systems in The Netherlands? If these questions cannot be satisfactorily answered the EU directive does not apply.

IKEA and state aid

As afore mentioned IKEA too, under the LuxLeaks disclosures, has benefitted from very advantageous tax rulings provided by the Luxembourg tax authorities. Also in this case, see footnote 1 above regarding Apple, the tax breaks are derived from splitting the (finance income) profits of IKEA between a Luxembourg based company and its Swiss bransch, allocating almost all of the profits to the (very) low taxed branch and attributing only a fraction of the profits to be set off against the fully taxed Luxembourg company's overhead costs. Also in this case the lack of factual and economic justification is striking.

Transparency of IKEA

In the past the structure of Inter IKEA has always been shrouded in secrecy. That is, until 2011. What then happened was that journalists working for Swedish Television and Smålandsposten – Småland is the region in Sweden where IKEA was founded and where Kamprad grew up – managed to unearth the existence and identity of Interogo. One of the journalists has revealed that it was the most exiting episode of his professional life! Kamprad's first reaction, protesting violently to the presence of the TV cameramen was complete denial and dismissal of all allegations of tax evasion while swiftly entering his car. Very soon, however, he has completely admitted everytning about Interogo.
And this led also to swift changes within Inter IKEA Systems, especially on its website. (Interogo, unsurprisingly, has no website of its own.) Now, when browsing the IKEA website Interogo is openly revealed as the full owner of the shares of Inter IKEA Holding SA in Luxembourg of which Inter IKEA Systems in the Netherlands is a fully owned subsidiary. Interogo is described as an independent entity with legal personality and its own governing bodies. The Kamprad family does neither own nor control Interogo. It is controlled by a Supervisory Council, the ”Beirat”, consisting of seven members, at present (in alphabetic order): Hans Gydell, Mathias Kamprad, Birger Lund, Magnus Mandersson, Per Wendschlag, Urs Wickihalder and Alfred Wiederkehr. Each outgoing member of the Supervisory Council appoints his or her successor. Their seems to be no chairman of the Beirat. ”It is however intended that the family of Ingvar Kamprad, as the creator of IKEA, over generations should be offered the opportunity to be engaged in the Supervisory Council (Beirat) of Interogo, but always in minority”.Under the subtitle ”Governance of Interogo”, again, it is repeated that the Kamprad family shall allways be represented on the Beirat ”but must allways be in the minority”.There is no definition of who is a Kamprad family member.
What is not revealed, however, on the website, but is included in the statutes themselves of Interogo, is that the Kamprad family members can veto the appointments of successors of the Beirat made by the outgoing non Kamprad family Beirat members. So much for stressing the Kamprad family's minority influence on this Beirat!
In an interview with Smålandsposten a couple of years ago Kamprad said that the statutes of Interogo are quite flexible allowing them to be changed at short notice. For example, until some years ago the nomination of the Beirat members was determined by an equally secret and non-disclosed personal trust in Canada (Appo Trust in Ontario) controlled by Kamprad.
All this has not prevented Kamprad (after the exposure of the Interogo Liechtenstein trust), to put out a statement titled; ”We are open about the way we are structured”....... The statement also includes the ever repeated declaration that ”it goes without saying that both Inter IKEA Systems 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”. As if the trillions of dollars that avoid taxation due to base erosion tactics operated by the world's multinational companies is of no concern!
The secrecy in which IKEA allways has been shrouded has been frustrating for business and tax analysts and, of course, regulatory bodies not to mention tax administrations. It is not for nothing that article 12 of the statutes of Interogo reads: ”These statutes including specific changes thereof and all other factual and legal circumstances affecting the Foundation may not be disclosed to outsiders, in particular not to foreign administrative bodies.
All this should, however, be easily determinable through a tax examination of Interogo by invoking the tax information exchange agreements (TIEA's) signed by Liechtenstein with a number of other states. The Sweden-Liechtenstein agreement in these matters is dated 29 December 2010.
Summing up, the royalty conduit set-up explained above, at least until 2012, has ultimately been based on a lie. Or, to put it more politely, IKEA have not been totally forthcoming in revealing their company/trust or tax structure nor the license agreement between Inter IKEA Systems and Interogo.
As much as I admire Ingvar Kamprad the businessman I have no respect for Ingvar Kamprad the tax payer. As such he should be ashamed of himself.



Stockholm November 2016
peter.sundgren@gmail.com
070 4917670

1The Commission's investigation focused on the allocation in Ireland of the profits recorded in Ireland within Apple Sales International a normal Irish corporation according to two tax rulings issued by Ireland to Apple in 1991 and 2007. Both rulings endorsed an internal split of Apple Sales International's profits for tax purposes – they allocated the profits between its Irish branch and the company's head office. It is a ”so-called” head office because it exists only on paper: it has no employees, no premises and no real activities. The Irish branch was subject to the normal Irish corporation tax. However, the head office was neither subject to tax in Ireland nor anywhere else. This was possible under Irish tax law, which until 2013 allowed for so called ' Stateless companies'. As a result of the allocation method endorsed in the tax rulings only a fraction of Apple Sales International's profits were attributed to its Irish branch. The remaining, vast majority of profits was attributed to its ”head office”, where they remained untaxed..This meant that Apple Sales International paid very little tax, some years only 0.005% which means 50 euros in tax for every million euro in profit. The main conclusion of the EU Commission was that the splitting of the profits made from Apple's selling of products throughout Europe, the Middle East, Africa and India did not have any factual or economic justification.