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Ikea's case study

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Ikea's case study

  1. 1. Multinational Tax Avoidance —— IKEA’s Case Dan Tao 1401213454 Jop Mulder 1502010118 Marika Torcitto 1502010085 Philip Schulting 1502010099 Yashu Xie 1401214049 Zhan Mou 1301213352 Group 10:
  2. 2. Contents Introduction IKEA’s Business Description IKEA’s Tax Planning Tax Avoidance Analysis CSR Analysis and Inspirations
  3. 3. • Corporate tax rates - Double Irish and Dutch Sandwich • Case study - IKEA business description: the world’s largest furniture company • IKEA’s tax planning (only pays 3,5% of taxes) • Tax avoidance analysis - Find out shortcomings and advantages of Ikea’s tax avoidance strategy • Conclusion - How to balance tax avoidance and CSR Agenda
  4. 4. Part One Introduction01
  5. 5. 1-2 Overview: Tax rate Corporate tax rate: overview -US and Japan have the highest corporate tax rate, respectively 39% and 37% -Virgin Islands, Bahamas an Bermuda have a corporate tax rate equal to 0% (no corporate tax rate)
  6. 6. 1-3 Overview: tax havens
  7. 7. 1-4 Intro to Tax avoidance Double Irish with a Dutch Sandwich: Apple, Starbucks and Google ? Double Irish with a Dutch Sandwich Several companies shift profits in Tax Havens territories for tax avoidance :channeling cash flow through the Netherlands and Ireland, due to their lower capital gain tax and corporate tax than US tax rates Method Other strategies: • Singapore Sling • Bermuda black hole
  8. 8. 1-5 Intro to CSR Socially responsible firms: charity activities and foundations Taxe advantage of them to initiate agressive tax avoidance strategies • “form of corporate self regulation integrated into a business model.” With some models, a firm engages in "actions that appear to further some social good, beyond the interests of the firm and that which is required by law.“ Mc Williams, Abagail (2001)
  9. 9. Part Two IKEA’s Business Description02
  10. 10. • Founded in 1943 in Sweden by the just 17 years old Ingvar Kamprad • Nowadays largest furniture company in the world with a revenue of 29 billion in 2014 • Sweden always known for high taxes - Effective tax rate of 2014 was 56.4% • Corporate tax 2014: 22% - highest in 1989: 60% • Ikea activities not set in Sweden 2-1 Intro to IKEA • In 1973 Kamprad left Sweden for taxation reasons CT1970’s >50%
  11. 11.  Very specific and aggressive tax avoidance strategy  Is a charity organization (stichting) therefore tax exempt  Set in The Netherlands (tax haven)  Tax burden 2.7% (2014) 2-2 IKEA overview  Complicated structure  Operations and franchising
  12. 12. 0 400 800 1200 1600 2010 2011 2012 2013 2014 Corporate Income Tax Other Taxes and duties Stores Tax Per Continent Revenue 2-3 Key numbers/facts FY04 FY13 FY14 179 303 315 Europe America Asia South-America 222 51 23 0 0,0 7,5 15,0 22,5 30,0 37,5 03 04 05 06 07 08 09 10 11 12 13 14 Total revenue in billions of euros
  13. 13. 2-3 Key numbers/facts 48% 22% 14% 14% 2% 2004 Group equity Other Payables Short-term Liabilities Other non-current liabilities Long-term liabilities IKEA has managed to decrease liabilities pays off loans every year • 147.000 employees important employee. In Sweden despite (un-swedish) behavior • €1.46 billion food turnover. • IKEA number 45 on the Forbes World's Most Valuable Brands List 71% 12% 10% 4% 3% 2014
  14. 14. Sharing key IKEA expertise, like logistics -India helping women and improving children literacy rate In-kind donations of IKEA products -50.000 matrasses to Syrian refugees 02 Goods 2-4 As a charity organization IKEA supports charity in three ways: 2010 2011 2012 2013 2014 45 65 82 101 104 Financial support for programs
  15. 15. Part Three IKEA’s Tax Planning03
  16. 16. 3-1 Yearly report In millions of euros FY14 Revenue 29.293 Cost of sales 16.372 Gross profit 12.921 Operating cost 9.128 Operating Income 3.793 Total financial income and expense 352 Income before minority interests and taxes 4.145 Tax 801 Income before minority interests 3.344 Minority interests 15 Net income 3.329
  17. 17. 3-2 A video
  18. 18. 3-3 Organizational structure IKEA Operations Franchising
  19. 19. 3-3 Organizational structure IKEA Operations Franchising
  20. 20. 3-4 Operations • INGKA holding is for-profit • Wholly owned by Stichting INGKA foundation IKEA Operations INGKA Holding (Netherlands) Stichting INGKA foundation (Netherlands) Franchising
  21. 21. 3-4 Operations IKEA Operations INGKA Holding (Netherlands) Stichting INGKA foundation (Netherlands) Franchising Operations  INGKA holding is for-profit  Wholly owned by Stichting INGKA foundation  Stichting  Tax exempt  Largest non-profit in the world  Estimated $35 billion in assets INGKA Holding Stichting INGKA Foundation
  22. 22. 3-5 Franchising • Franchisees pay 3% fees • Privately owned and unknown structure IKEA Operations INGKA Holding (Netherlands) Stichting INGKA foundation (Netherlands) Franchising Inter IKEA systems (Netherlands) Inter IKEA Holding (Luxembourg) Interogo Foundation (Lichtenstein)
  23. 23. Part Four Tax Avoidance Analysis04
  24. 24. OEM: Original Equipment Manufacture  When OEM, IEKA’s tax will be equal to OEM companies’ tax which is based on tax assessable price (P2);  When produce by IKEA itself, the tax is based on selling price (P2)  Because P1>P2, so T1 > T2, OEM can reduce tax efficiently. IKEA(Client) Selling Price (P1) 4-1 OEM Tax basis Manufacture company (Trustee) Tax assessable price (P2)
  25. 25. 4-2 Cost Control IKEA $1 Manufacture Influence VAT 1*(1+17%)= 1.17 Customers $1.2 1.2*(1+17%)= 1.204 Input tax: Deductible Output tax Tax Bureau Total tax= Output tax- input tax =1.204-1.17=0.034 Cost control can reduce price, and then reduce output tax, finally reduce total tax
  26. 26. 4-3 Increasing ads DM advertising: Direct Mailing advertising IKEA magazines: more than RMB 2 million/year in China; (1) Effective market rate: 100%; (2) Advertising fee belongs to SG&A (Operating cost), increasing operating cost, can reduce EBIT, and then reduce tax.
  27. 27. 4-4 Compensation (1)Balancing distribution The workers’ salary are distributed monthly. IKEA try to avoid large fluctuations, which can reduce the individual income tax efficiently Because of progressive tax rate. (2)salary of workers IKEA BD Sales Manager Average salary 10962 4226 11314 Most of workers (sales) can keep the lowest tax rate. (3)Bonus Bonus is distributed every 4 months instead of a year. According to the law, the bonus or a whole year will be treated like the salary of a certain month and count the tax. (4)Three insurances and one fund Endowment insurance,unemployment insurance, medical insurance, and housing fund are tax deductible, so IKEA will buy three insurances and one fund for workers.
  28. 28. 4-5 Other methods IKEA canteens  Total revenue until 2008: 1.6 Billion dollars/ year,  Tax rate of canteen: 5%; Tax rate of products: 17% Investment and research  Choose the lowest tax rate among different industries to invest;  Using government policies Transportation methods. (1) DIY: customers transport their products by themselves; (2) The third-party platform (3%) VAT of transportation=0; Other tax avoidance methods 01 02 03
  29. 29. Part Five CSR Analysis and Inspirations05
  30. 30. Though IKEA earns a lot with many strategic methods, whether IKEA’s tax planning is ethical or consistent with CSR is a problem. We generally think that IKEA doesn’t completely take the social responsibility. Does IKEA’s Tax Planning be consistent with CSR ? • Look from inside: safeguard the dignity and welfare benefits of workers. • Look from outside: play a good role in social environment. • Including economic, educational, cultural, environmental responsibility. The main content of Corporate Social Responsibility: 5-1 CSR Analysis
  31. 31. Economic Culture (1) Economic: Decrease the tax income of government, which may influence the social welfare construction. (3) Environment: Find the independent manufacturing company to decrease the tax may result in production improvement and environmental damage. (2) Credibility: The exposure of tax avoidance of IKEA as an international company lead the ruin of enterprise credibility. (4) Culture: The exposure of tax avoidance of IKEA may be harmful to its national culture in the worldwide scale. 5-1 CSR Analysis credibility Why IKEA’s Tax Planning isn’t consistent with CSR ? Environment
  32. 32. • Writer: Johan Stenebo, an old worker in IKEA for over 20 years, the personal assistant of Ingvar Kamprad (the founder of IKEA). • Main idea of this book: Reveals the truth of IKEA's operations, including the hypocrisy of its founder, tax avoidance planning by building complex branches and massively damage of environment and so on. A book about “The True IKEA” in 2009 5-1 CSR Analysis
  33. 33. Despite of the CSR issue, there may exist a large number of tax avoidance cases in the worldwide scale. The leaked documents of ICIJ organization in Nov 2014 revealed the Luxembourg Scandal which shocked the whole world. More than 340 global companies set Luxembourg branches to "cover" secret tax avoidance. • Companies set up branch offices in Luxembourg, using the preparation of complex accounting statements and legal framework to avoid tax. • Luxembourg helped enterprises to avoid as much as billions of dollars in tax. • Luxembourg was trapped into a credibility crisis. • Luxembourg promised not to be the haven of tax avoidance in three years. Luxembourg Scandal 5-2 Tax Scandals
  34. 34. P&G Inc. Pepsi Inc. IKEA Inc. Apple Inc. 5-2 Tax Scandals Representative Companies related to Tax Avoidance in Luxembourg Scandal JP Morgan
  35. 35. 5-3 Inspirations Tax avoidance may exist in current multinational enterprises under the economic globalization, however the space should be narrowed down in future. Governments should take measures to improve tax system, such as joining anti- avoidance group and shaping the legislation system. Multinational companies should make reasonable tax plan, with the consideration of the Corporate Social Responsibility rather than the profit only. Inspirations 01 02 03 Multinational taxpayer: Policy maker: Future Trend:
  36. 36. Thank You ! Group 10

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