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By Joe Kirwin
The European Commission launched an illegal government-aid probe over concerns that two Dutch government tax rulings given to Inter IKEA group allowed the Swedish retailer to avoid tax by using transfer pricing schemes to shift profits.
The EU competition authority stated that “it has concerns” the two tax rulings, one of which dates to 2006 and the other to 2011, gave IKEA an ”unfair advantage“ to the privately held companies’ franchising model set up in the early 1980s. The announcement is likely a signal more state aid probes of transfer-pricing arrangements can be expected, a competition law expert told Bloomberg Tax.
”Our preliminary inquiries indicate that the two tax rulings granted by the Dutch tax authorities in 2006 and 2011 have significantly reduced Inter IKEA Systems’ taxable profits in the Netherlands,“ the European Commission said in a Dec. 18 statement.
The 2006 Dutch tax ruling endorsed a method to calculate an annual license fee for Netherlands-based Inter IKEA Systems to pay Luxembourg-based I.I. Holding, another company of the Inter IKEA groups, according to the Dec. 18 statement.
The European Commission didn’t state how much the Dutch government would have to retrieve from IKEA in the form of back taxes if the EU competition authority concludes the illegal state aid was granted.
IKEA insisted in a Dec. 18 statement to Bloomberg Tax that it is committed “to paying taxes in accordance with laws and regulations wherever we operate.”
“The way we have been taxed by national authorities has in our view been in accordance with EU rules,” the statement said. “It is good if the investigation can bring clarity and confirm that.”
The European Green party alleged in a 2016 report that the Ikea group avoided about one billion euros ($1.18 billion) in taxes between 2009 and 2014 by shifting profits. It shared its findings with the commission.
Like many other big companies, “IKEA has been using a series of tax loopholes for years to avoid paying taxes,“ Sven Giegold, a European Green Party member from Germany, told Bloomberg Tax in an Dec. 18 email.”
The investigation shouldn’t be limited to the Netherlands, obviously the core of IKEA’s tax avoidance system, but should also look at Luxembourg and Belgium, he said.
The Dutch government issued a Dec. 18 statement emphasizing that the commission probe is only a preliminary step and no conclusions have been drawn. It wouldn’t comment on the substance of the issues raised by the EU competition authority.
‘It has always been our position that rulings should not lead to a different result than the outcome of an ordinary tax return,” the Dutch Ministry of Finance said in a statement emailed to Bloomberg Tax. “They should not lead to selective advantages being granted to individual businesses and to a distortion of the internal market.”
The European Commission determined in 2006 that a Luxembourg tax scheme used by IKEA was illegal state aid. The company then changed its structure in 2011 when the 2006 tax penalty was set to come due so that “as a result, the 2006 tax ruling was no longer applicable.” Inter IKEA Systems also purchased intellectual property rights from the Luxembourg holding company with a loan from its parent company based in Liechtenstein, according to the commission.
The Dutch government “endorsed the price paid by Inter IKEA systems for the acquisition of the intellectual property,” in a second tax ruling in 2011, the commission said. It added that the 2011 Dutch tax ruling “endorsed the interest to be paid under the inter-company loan to the parent company in Liechtenstein and the deduction of these interest payments from Inter IKEA Systems taxable profits in the Netherlands.
“The Commission considers at this stage that the treatment endorsed in the two tax rulings may have resulted in tax benefits in favor of Inter IKEA Systems, which are not available to other companies subject to the same national taxation rules in the Netherlands,” the EU competition authority said the a statement.
Asked to comment on the merits of the European Commission concerns raised in its Dec. 18 statement, Kai Struckmann, a Brussels-based partner with White & Case LLP and former commission official, told Bloomberg Tax that it was “difficult to say, especially as the decision is not public yet.”
Still, the announcement likely indicates a new wave of state aid probes on intra-group transfer pricing arrangements can be expected, Struckmann said.
“According to public statements of high ranking EC officials tax probes remain a priority in the future and it is likely there will be more cases,” he said.
Transfer pricing issues are a major concern in the more 100 ongoing tax ruling investigations, European Competition Commissioner Margrethe Vestager told members of the European Parliament in 2016 and again earlier this year.
Many of the probes were opened after the so-called Luxleaks, a leaked trove of secret agreements between Luxembourg and companies like Walt Disny Co. The sweetheart tax rulings between the Luxembourg government and multinational companies occurred when current European Commission President Jean-Claude Juncker served as Luxembourg’s prime minister and finance minister.
The probe follows another high-profile case when the European Commission concluded in 2015 that Starbucks Corp. benefited from illegal state aid because of various transfer pricing arrangements using intellectual property rights. That case is under appeal in the European Court of Justice.
Tax advocacy groups such as Oxfam International insist the corporate tax policies of the Netherlands make the country equivalent to a tax haven and say it should be listed on the EU tax haven blacklist. The list include 17 countries, none of which are EU member nations.
“Two weeks after the EU adopted its first tax haven black list this new case shows Europe still has to put its own house in order when it comes to ending tax havens within the EU,” Aurore Chardonnet, an Oxfam policy adviser, said in a Dec. 18 statement.
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