Add Zara To That List Of Apple, Google, Microsoft And Other Tax Dodging !$**s

By Tim Worstall , written on February 26, 2014

From The News Desk

This is the interesting claim made by Jesse Drucker over at Bloomberg, that we need to add to our little list of multinational companies that are stealing the crusts from the mouths of the poor by not paying their just and righteous tax dues. You know, to follow that interminable series of stories concerning Apple, Google, Starbucks and all the rest.

That latest addition should be Inditex, the company that owns Zara and a number of other fashion chains.

Now it should be said that I've had the occasional run in with Mr. Drucker: he certainly has indicated that I'm just an apologist of the 0.1% who hang out with the Vampire Squid. Something I aspire to perhaps but I've not got there yet. However, the truth or not of the assertions depends upon their truth or not, not my career plan to be a lickspittle. And I'm afraid that that's where these stories often seem to fall down.

The actual description of what Zara is doing is correct. Simply put, they've a company in the low tax Netherlands which owns the brands and has the staff who know how to design and trick out a store. All shops must pay to use that brands and those skills and this thus transfers revenue from the countries the shops are actually in to that low tax Holland. There's nothing wrong with that part of the description. However, the problem comes here:

Multinational tax avoidance has risen to the top of the international political agenda, with the Group of 20 nations and the European Commission both overseeing efforts to crack down. The political ire, though, is focused on U.S. technology companies such as Google Inc. and Apple Inc., which shift valuable software patent rights into offshore units. Inditex shows that a retail company can also cut its taxes by moving rights to know-how such as designing a store window display into low-tax units.
It centres on the meaning of that word "tax avoidance". Tax evasion is the easy one, that's the stuff that is illegal. None of this activity being described is illegal so therefore it's simply not tax evasion. Tax avoidance is a much more malleable phrase. I know of one tax campaigner, just as an example you understand, who insists that using legitimate tax reliefs is avoidance if done by someone he doesn't like and not so if done by someone he does. Rather subjective in my view but that's the way he plays it. The generally accepted usage though is that it's the use of structures or allowances in a manner which the original framers of the law didn't intend them to be used.

OK, which then leads us to ask whether the framers of the EU's tax laws (and most law about trading across the internal frontiers of the EU is indeed EU law, this is what the Single Market means) did in fact think that shifting royalties around was something that shouldn't be done. And that's a hard case to make as this extract from said laws makes clear:

The I+R Directive is designed to eliminate withholding tax obstacles in the area of cross-border interest and royalty payments within a group of companies by abolishing:

withholding taxes on royalty payments arising in a Member State, and withholding taxes on interest payments arising in a Member State.

These interest and royalty payments shall be exempt from any taxes in that State provided that the beneficial owner of the payment is a company or permanent establishment in another Member State. They've not just allowed this to happen they've actually made it illegal for anyone to try and tax that money disappearing off over the horizon. So it's very difficult indeed to think that they didn't both accept and possibly even mean for this sort of behaviour to be going on. In which case it's not tax avoidance as it's not subverting the meaning of those tax laws.

At which point the case that Zara (as it did with Apple, Google and the rest) is actually engaging in tax avoidance seems to fall apart. Sure, they're reducing their tax bills but they seem to be doing so in a manner that the law expressly allows. Not just using a loophole, an unconsidered foible that is the meaning of tax avoidance, but something expressly put into the law for them to use in exactly this manner.

[image adapted by Brad Jonas for Pando via thinkstock]