IKEA pays no tax in Australia despite surging sales in the pandemic. IKEA versus Nick Scali. Both sell furniture, only one pays tax. Michael West looks at the quintessential case of multinational tax bludging.
News report, July 8: “A COVID-positive Sydneysider spent 11 hours at a busy IKEA while infectious, plunging 2,000 shoppers into 14 days of self-isolation”.
IKEA is shut now in NSW, as Premier Gladys Berejiklian belatedly moved to close the pandemic risk from super-spreader retail sites. Yet, like Harvey Norman and Bunnings, the Swedish furniture juggernaut had been in the cherished position of being permitted to trade in lockdown while small businesses have been shut down en masse.
The difference with IKEA is that it pays virtually no tax. It takes but does not contribute. It does not pull its weight in this country, a country where the schooling of its executives’ children is subsidised by taxpayers, where its business and its people are protected by a publicly funded police force, legal system and army.
It has barely paid any income tax for four years in Australia, and not much before that. It is, like many multinationals operating in this Australia, a corporate welfare bludger. Its latest financial reports show IKEA has flourished during the pandemic.
Just to illustrate how unfair this is, we can look at the Australian owned furniture chain, Nick Scali, and compare it with IKEA.
Nick Scali is far smaller, yet it has paid $32m in tax over the past two years whereas IKEA has paid just a touch over half a million dollars all up – that’s less than one million dollars on more than $3 billion in total income.
IKEA, whose parent is in the Netherlands – part of a tricky tax avoidance web of companies – racked up cash receipts from its customers of $1.7b last year, up strongly from $1.5b the year before, despite the virus. Executives helped themselves to a large increase in pay.
Nick Scali made a fraction of that, disclosing cash from customers of $262m, down slightly from the year before while its profit was almost dead stable at $42m. It was a bit naughty, still putting its hand out for a bit of Jobkeeper; but so did a rash of corporations who posted record profits, Harvey Norman being the most notorious, having refused thus far to pay any of it back.
Debt-loading, transfer pricing
How does IKEA get away with it? A mix of franchise fees and intellectual property payments to parent companies up the corporate ladder. Every year, as its revenues climb, IKEA finds ways to bump up its costs. The aim, ably assisted by tax dodging advisors KPMG, is to wipe out profit, to “offshore” it as, no profit means no tax to pay.
A whip through the accounts of both companies shows IKEA is raking out profits by “debt loading” too, that is, some offshore entity writes loans to IKEA Australia and the interest on those loans – some $20m a year – is siphoned overseas.
It’s pretty blatant but the trick with these things is to not make it so blatant that the ATO comes after you.
So it is that Nick Scali, with no offshore structures to exploit, disclosed no “related party transactions”. Here are some telling figures: its longer-term debts last year were priced at an average interest rate of $1.78%.
IKEA however, which is far larger and must therefore have access to far cheaper financing, was paying interest on its debts of up to 4.4%. Why? Because this interest is on debts provided by IKEA itself so the interest on the half a billion in loans from offshore flows offshore, almost $40m over the past two years.
It is impossible to see it from the accounts; it is not disclosed, but transfer pricing also plays a part. IKEA buys its furniture from its associates offshore and the more it pays its foreign associates for this furniture, the more profit flows overseas to lower tax jurisdictions.
Despite bathing in cash from its Australian customers, IKEA has recorded losses over the past two years. It even recorded a tax benefit in 2019.
The way the tax lawyers, Big Four accounting wizards and HQs structure multinational companies means they are effectively agencies, not bodies corporate, and should be taxed as such. These are like fake companies. In a real body corporate, directors are obliged to maximise profit for their corporation.
There are no such notes in IKEA’s accounts but in most of these multinational subsidiaries, executives bonuses are struck on the share performance of the mothership in the US or the UK. This means that Australian directors actually have incentives to rob Australia and sign off on dodgy tax structures which maximise returns for some entity overseas.
This is the case with a lot of them and, to make the point in this story, Nick Scali directors (as this is listed on ASX and has no offshore structures to dodge tax) however are incentivised by the performance of the Australian entity alone. They are real directors. IKEA’s real directors arguably reside in another county. They are arguably shadow directors. They are the ones who really call the shots.
According to Federal Budget forecasts, Treasury is expecting tax receipts from large corporations to fall in the coming years as a proportion of total tax. Who is to do the heavy lifting? Who is to pay more to keep the roads, hospitals, law enforcement agencies operating? The poor beleaguered PAYG taxpayers, that’s who.
Michael West established michaelwest.com.au to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences.