IKEA treaty shopping a concern even after FIPB dismissal

this is despite FIPB over-ruling the issue of treaty shopping raised by the Dept of Revenue

Range of product categories that Swedish furniture major IKEA can sell in India is not the only hurdle that it is facing right now.  “Treaty shopping” is another concern that has been reiterated ahead of the next meeting of the Foreign Investment Promotion Board (FIPB), which will take up IKEA’s application once again on Thursday (January 24).

This is despite FIPB over-ruling the issue of “treaty shopping” raised by the Department of Revenue (DoR) on November 20, 2012. The Board gave a “conditional” nod to IKEA to invest in India, while striking off more than 50 per cent of the product categories from its list of offerings, at that meeting. In its noting, FIPB said, “the Board observed that objection of DoR is generic in nature and can be over-ruled.”     

Treaty shopping refers to the practice of structuring a multinational business to take advantage of more favourable tax treaties available in certain jurisdictions. India has Double Taxation Avoidance Agreement (DTAA) with several countries including Netherlands, and the Department of Revenue’s concern is over the fact that the IKEA application has been made by Ingka Holding Overseas, Netherlands.    

According to the world’s largest furniture chain’s application to FIPB, the IKEA brand is owned by Inter IKEA Systems, Netherlands, a member of the Inter IKEA Group, which in turn is the sole owner and worldwide franchisor of the IKEA brand. All IKEA retail stores worldwide operate under franchise agreements with Inter IKEA Systems. For the India market, Inter IKEA Systems has granted exclusive franchise rights to Ingka Holding Overseas for opening retail stores in the country.    

The Department of Revenue, which has often objected to multinational companies’ routing of investment through countries like Mauritius and Netherlands to derive tax benefits for the treaties that India has with them, fears that IKEA is doing the same.

Sources close to the development pointed out that DoR, in order to check treaty shopping, wants to know from which group companies IKEA’s India investment will come from. But since IKEA is a big group, investment could come from any of the group companies, they argued.            

IKEA told Business Standard that it had so far not received any questions (from the government) around this topic. “As of now, the application process is still ongoing. IKEA respects this process and remains positive.” According to the company spokesperson, “the IKEA Group pays taxes in accordance with local laws and regulations, in each of the countries where we operate. The effective company income tax rate in total for the fiscal year 2012 was 17.8 per cent and company income taxes amounted to Euro695 million. Property taxes were Euro 190 million in the financial year 2012. “
 
IKEA, meanwhile, has pointed out to the Department of Economic Affairs (DEA) that a correction should be made in the amount of proposed investment to Rs 10,500 crore, instead of Rs 4,200 crore that was announced by FIPB after the November 20 meeting.

Although commerce and industry minister Anand Sharma has said that FIPB was set to clear the IKEA proposal in the next meeting, the finance ministry and the Department of Industrial Policy and Promotion (DIPP) have been engaged in a tussle of sorts over the Swedish company’s application. DIPP, under the commerce and industry ministry, is the administrative department for retail trading. 

Recently, in a letter to his DIPP counterpart, a senior DEA official said, "In the revised application/representation of Ingka Holdings (the applicant company for IKEA), what has been left out and why needs to be understood." The official sought to know the "reasons for these changes at various stages" to ensure the matter could be put "in the right perspective in FIPB deliberations".

Responding to the letter, a DIPP official clarified IKEA's revised proposal had the "approval of the commerce and industry minister, according to the practice in all cases of single-brand retail trading".