Zara under EU scrutiny following reports of aggressive tax planning

Inditex's Zara used aggressive tax practices to avoid paying up to €585 million in taxes [Mike Mozart]

The European Commission will examine a scheme set up by Inditex, the parent firm of Zara, that could have helped the clothing retailer avoid at least €585 million in taxes, according to a report published on Thursday (8 December) by the Greens group, in the European Parliament.

The Inditex group includes popular brands like Zara, Zara Home, Massimo Dutti, Pull & Bear and Bershka. The conglomerate, owned by Amancio Ortega, the second richest person in the world according to Forbes, used aggressive corporate tax avoidance techniques to bypass higher tax regimes in Spain and France, in favour of jurisdictions with low taxes – primarily the Netherlands, Ireland and Switzerland.

According to the report, between 2011-2014, crisis-hit Spain could have lost €218 million in taxes from Zara, France around €76 million, Italy €57 million, Germany €25 million, Britain £22 million, Greece €20 million, Belgium €18 million, and Austria €6 million.

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Although the Greens noted that the tax strategy used by Zara and other corporations is legal, it raised “serious questions about whether the group behind Zara is paying taxes where its real economic activity takes place”, said MEP Sven Giegold, the Greens spokesperson on financial matters.

The European Commission took note of the report and will look into its findings, said Vanessa Mock, spokesperson for financial services, taxation and customs at the EU executive.

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Officials pointed out that the practices listed in the study probably derive from tax optimisation techniques, given that the volume in taxes avoided would have been much larger if Inditex benefited from a tailor-made arrangement with one of the low taxation countries.

The executive welcomed the Greens report, noting that it would help to keep up the pressure on the numerous initiatives put forward since November 2014, when the deals between Luxembourg and hundreds of multinationals to avoid their tax obligations first came to light.

The European Commission and Green MEPs urged member states to accept the proposal for a Common Consolidated Corporate Tax Base, seen as a significant step forward to avoid most of the aggressive tax schemes designed by corporations to reduce their tax bills.

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Denial

Inditex denied any wrongdoing. The group issued a statement saying that Zara paid more than €4.4 billion in corporate taxes between 2011-2015 (between 22% and 24% average).

“Inditex has a policy of the highest fiscal responsibility in every market we operate,” the statement said, adding that reports are “transparent” and available in the company’s annual report.

It is not the first time that Inditex’s tax schemes have been at the centre of controversy.

Following media reports, the group was forced to move all its e-commerce business from Ireland to Spain in 2012. As a result, Inditex paid 30% of corporate taxes for its growing market of online sales, compared to 12.5% under the Irish regime.

Although the Greens report added new details, the tax scheme used by Zara has been known since Bloomberg first unveiled the conglomerate’s baroque structure in 2014.

According to Bloomberg, Zara saved an estimated €325 million since 2009, and €100 million alone in 2013.

Background

The report drafted by the Greens noted that Inditex uses a double system. The retail activities of the group, including Zara, Pull & Bear, Bershka or Massimo Duti, are located across Europe and elsewhere, where they pay their taxes.

Meanwhile, non-retail activities, such as insurance or finance, are mostly located in low-tax countries such as the Netherlands, Ireland or Switzerland.

“It seems clear these countries offer certain tax benefits to the ITX group to establish their holdings, royalty-management, insurance, e-commerce, financial or purchasing companies, which other countries do not provide,” the document said. These parts of the group obtained much higher net profit margins, up to 70%, compared to 5% gained by the retail arm.

The EU agreed last June on a set of measures aiming at tackling some of the most common practices corporations use to avoid their taxes. The package included measures to avoid relocation of assets to avoid taxes, the exploitation of mismatches between different national regimes, and other clauses to address aggressive tax planning.