The owner of Zara saved “at least” €585 million in taxes by using aggressive corporate tax avoidance techniques in Ireland, the Netherlands and Switzerland, a new report from Europe’s Green Party/EFA claims. Some €60 million of this is related to the group’s Irish operations.
"Companies like Inditex structure themselves to take advantage of the lowest tax rates and the lack of harmonisation of tax systems at the European level," the report, published in Brussels on Thursday, said. Without an overhaul of European Union policy, "multinationals and their tax consultants, together with states which choose to engage in destructive tax competition, will continue to get around efforts to clamp down on profit shifting and tax avoidance".
Inditex (ITX), which owns and operates eight brands, including Zara, Massimo Dutti and Pull & Bear, runs a number of shops across Ireland, including Dublin, Cork, Limerick and Galway. It also hosts ecommerce operations for the group.
Typically, non-retail companies of the group, which had net profit margins of between 20 and 70 per cent, were all located in the Netherlands, Ireland or Switzerland.
Questions raised
According to the report, Inditex availed of three main avoidance techniques to reduce its tax bill, techniques which are “currently legal but raising questions whether ITX pays taxes where its real economic activity takes place”.
In Ireland, the report finds that Inditex uses Irish subsidiaries dedicated mostly to financial activities (intercompany loans and insurances) and an ecommerce subsidiary, registering huge profits, which are taxed at 12.5 per cent, or 0 per cent in the case of capital gains.
In the Netherlands, royalty fees are paid by Inditex retail branches to a Dutch subsidiary, where they are taxed at 15 per cent. This Dutch subsidiary got € 3.7 billion in revenue in the 2011-2014 period and had a net income of €1.7 billion, with just 203 employees (as of 2014), according to the report.
“According to our estimations, shifting royalties to the Netherlands has cost in missing tax revenues: €218 million for Spain, €25 million for Germany, €57 million for Italy, €76 million for France, €20 million for Greece, £22 million for the UK, €18 million for Belgium and €6 million for Austria”.
The group has also used Switzerland to reduce its tax bill. One of its main trading firms is located in Fribourg, Switzerland, from where it buys low-cost manufactured clothes from producers in countries such as Bangladesh, Turkey or Morocco to sell back to other group companies. In 2014, the ITX Swiss holding company had the most own resources in the group (€1.4 billion in 2014) and paid taxes on profits at 7.8 per cent, or “possibly even less”, the report says.
Irish operations
The report shows that although Ireland is a small-to-medium-sized country in terms of clothing sales for ITX, three of its Irish group companies (ITX Fashion, ITX Re, Zara Financien) reported higher net profit than in countries such as Germany or Italy in the years 2011-2014.
ITX Fashion was formed in 2006, and initially all of the group’s ecommerce business was run out of this operation. However, after media attention, ITX decided to transfer the ecommerce business for Spain to the Spanish-based subsidiary Fashion Retail. Nonetheless, the report estimates that having ITX Fashion located in Ireland saved ITX €29.8 million in taxes in 2011-2014 (compared to if it were based in Spain). Recent figures show that, in the 12 months to the end of January 2016, revenues rose by more than 40 per cent on the prior year up to €317 million, while profits rose to €54.7 million, up from €45 million the previous year.
ITX also has a Dublin-based captive reinsurance business, ITX Re, which assumes insurance business related to other companies of the ITX group.
“We have estimated that ITX avoided paying at least €12.3 million in taxes in the 2011-2014 period by having this company located in Ireland (rather than in Spain),” the report claims.
The report finds the purpose of Zara Financiën, a financial company with no Irish employees, is to receive interests on a loan given to a group company, ITX Financien, based in the Netherlands.
“Intra-company loans are known to be a tax-avoidance technique widely used by companies to reduce their tax bill,” the report says.
By using this Irish-based company, the report says that ITX has avoided paying €16.8 million in taxes. In addition, Zara Financien did not pay any corporate tax in Ireland, despite having a net income of €53.9 million in the 2011-2014 period.
Inditex response
Responding to the report, Zara outlined what it said were errors in the report, which it claimed was “based on erroneous premises that lead it to mistaken conclusions”. It said Inditex “complies with prevailing tax legislation in all the 93 markets in which it operates” and had paid more than €4.4 billion in corporate taxes in the period under review.
“Inditex adopts a highly responsible tax policy in all the markets in which it operates,” the company said.
