A gentleman walks into a hospital and sees two doctors down on their hands and knees in one of the flower beds. He goes over and asks whether he can help. "No," replies one of the doctors. "We're about to do a heart transplant on an accountant and we're looking for a suitable stone." This sentiment of jest would ring true among many of the masses, especially those at the losing hand of the calculator, however many accountants are very rarely acknowledged for their wizardry off the books.
When asked what is the world’s second largest charity behind the Bill & Melinda Gates foundation one would be forgiven for answering with a gormless response. However ask one of the accountants at IKEA and you will be met with a wry smile and the response of the Stichting INGKA Foundation. Founded in 1982 by Swedish billionaire Ingvar Kamprad this outfit ingeniously exploits the loopholes of different jurisdictions to create a charity (according to a 2006 article in ‘the Economist’ one of the least generous charities). INGKA Holding is a private Dutch-registered company owned by Stichting INGKA Foundation which, in 2006, operated 207 of the 235 IKEA stores around the globe (other franchises mostly based in Asia and the Middle East run the remaining 28 stores). Stichtingen (otherwise known as foundations) are the most commonly registered not-for-profit organisations in Netherlands allowing for substantial tax-exemptions. If listed as a company in Netherlands, Stichting INGKA Foundation would be among the ten largest companies by market value. According to Wikipedia its current group equity is €19.7 billion with most of the group's profit being reinvested.
The Stichting INGKA foundation expected to spend 0.2% of its wealth (€45 million) on charitable giving in 2010, mostly dedicated to “innovation in the field of architectural and interior design”. Many argue that this governs self-interest and isn’t in fact charitable. IKEA responds to say that although this money is used for charitable purposes it is also used “for investing long-term in order to build a reserve for securing the IKEA group, in case of any future capital requirements.” Due to the loosely regulated nature of Stichtingen in Netherlands, INGKA are not legally obliged to publish accounts. As a result IKEA only releases annual sales figures. As contentious as this may seem to some, it is perfectly within the legal boundaries. Opposition who have contested the set-up of Stichting INGKA foundation have been advised by Dutch courts that this cannot be revoked or amended. Only non-influential minor changes can be made.
The wizardry doesn’t stop there. This set up may mean that the control over the company is water tight but the accountants have one more trick up their sleeve to ensure ways of channelling funds out of the company. The IKEA trademark and concept is owned by Inter IKEA Systems, another private Dutch company, which has nothing to do with INGKA holding group but rather Inter IKEA Holding (a company registered in Luxembourg). Inter IKEA Holdings is owned by an identically named organisation in the Netherlands Antilles who are run by a trust company in Curaçao of the southern Caribbean. Inter IKEA is a very lucrative set up which generates its money from the franchise agreements with each IKEA store – all of which pay 3% of sales. In 2004 the collection of franchise fees surmounted to €631m making Inter IKEA Systems €225m in pre-tax profits. This was after accountants deducted €590m for ‘other expenses’.
Shrewd accounting is no doubt accountable for IKEA being the world’s largest furniture retailer. It’s no surprise then that the larger organisations are looking to accountants to save millions through loopholes. Apple has recently come under fire for doing just this. Although headquartered in Cupertino, California Apple collects and invests the company’s entire profits through a subsidiary in Reno, Nevada called Braeburn Capital. The reason for this being that Nevada’s corporate tax rate is 0% compared to California’s 8.84% - saving the company billions a year in tax on interest and dividends. The establishment of Braeburn additionally allows Apple to lower taxes in states such as Florida, New Jersey and New Mexico who reduce taxes when a company’s financial management occurs elsewhere. In addition to the Reno office Apple has exploited the loopholes of other various low-tax jurisdictions such as Ireland, the Netherlands, Luxembourg and the British Virgin Islands.
Braeburn Capital may help to avoid state taxes but it is in the international subsidiaries where the magic really happens. In Luxembourg Apple have a small subsidiary set up called iTunes S.à r.l. which accounts for roughly 20% of iTunes worldwide sales. When customers in Europe, Africa or the Middle East purchase something from iTunes it is registered in Luxembourg (who offer discounted tax rates to Apple for using their country to route payments). Large organisations are not only following Apples lead on the technology front they are also attempting to replicate their accounting practice in a technique known as “Double Irish With a Dutch Sandwich”. Taxes are reduced by routing profits through Irish and Dutch subsidiaries onto the Caribbean. In a recent study by Martin A. Sullivan, former US Treasury Department economist, in 2011 Apple saved approximately $2.4 billion in federal taxes. Out of the $34.2 billion reported profits last year the global tax bill came to $3.3 billion.
Apple pioneered the creation of a new corporate tax structure in the late 1980’s called the ‘Double Irish’. Through the creation of two Irish subsidiary’s Apple were able to send royalties and patents developed in their headquarters to Ireland through the first subsidiary and onto the Caribbean through the second subsidiary. As a result some of the profits were taxed at the Irish 12.5% rate rather than the American tax rate 35%. The term Dutch Sandwich came through the fact that due to Irish treaties with the EU Apples profits could travel through the Netherlands with substantial tax exemptions. The combined result of the ‘“Double Irish With a Dutch Sandwich” enabled Apple to keep international taxes to 3.2% of foreign profits last year.
Albeit perfectly legal methods many believe that the accounting wizardry of these larger organisation means that the government and therefore general public are losing out. This is completely subjective with international firms as usually if someone is losing at home (headquarters) another is benefiting abroad. Either view point aside it is important to acknowledge the influence that fine accounting can have on the potential growth of a firm. In simple terms through tax loopholes greater capital reserves can be accumulated allowing for potential growth and improvement. It appears that in the modern corporate world the accountant’s calculator is mightier than the sword.
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