EU to Investigate IKEA's Dutch Tax Arrangements -- 3rd Update

Swedish furniture retailer IKEA Group could be forced to pay back millions of euros in alleged unpaid taxes to the Netherlands, following an investigation opened Monday by the European Union.

The probe by the European Commission fits into a wider strategy to squeeze more tax revenue from large multinationals and other companies operating in Europe. In particular, EU officials have been targeting sweetheart tax deals EU governments have granted companies in a bid to lure business to their countries.

"Member states cannot let selected companies pay less tax by allowing them to artificially shift their profits elsewhere," said EU antitrust chief Margrethe Vestager. "We will now carefully investigate the Netherlands' tax treatment of Inter IKEA."

The EU said its investigation into the Swedish retailer of flat-packed furniture focuses on the Dutch government's treatment of Inter IKEA Systems, one of the two groups operating the IKEA business.

In a statement, IKEA said it is "committed to paying taxes in accordance with laws and regulations wherever we operate."

"The way we have been taxed by national authorities, has in our view been in accordance with EU rules," said Josefin Thorell, a spokeswoman for Inter IKEA Group.

"The Netherlands will, of course, cooperate with the investigation in order to establish whether it involves state aid," the Dutch government said in a statement. "It has always been our position that rulings should not lead to a different result than the outcome of an ordinary tax return."

The commission said IKEA skirted paying taxes through the help of two tax rulings issued by the Netherlands in 2006 and 2011. Tax rulings, which confirm to the company how specific taxes should be calculated, aren't prohibited as such. However, they are illegal if they hand the company a benefit not available to other rivals.

The commission said it believed the tax treatment given to IKEA wasn't available to other companies in the Netherlands.

The EU started looking into IKEA's tax affairs following a 2016 report by the Green Party in the European Parliament, which accused IKEA of avoiding paying EUR1 billion ($1.18 billion) in taxes between 2009 and 2014. The European Parliament's report addresses issues not part of the EU's probe and thus any recovery amount would likely be smaller, according to an EU official.

"The investigation should not be limited to the Netherlands, obviously the core of IKEA's tax avoidance system, but should also look at Luxembourg and Belgium," said Sven Giegold, a Green Member of the European Parliament in charge of tax affairs.

The EU said the 2006 tax ruling endorsed a method to calculate an annual license fee that Inter IKEA Systems in the Netherlands paid to another IKEA company called I.I. Holding, based in Luxembourg.

The fee made up a significant part of Inter IKEA Systems' revenue and resulted in the shifting of most of the company's franchise profits to Luxembourg, where they remain untaxed, the EU said. The Luxembourg unit was part of a special tax scheme, exempting it from corporate taxation there. That scheme has since been declared illegal but no illegal aid had to be recovered.

The 2011 tax ruling issued by the Dutch government endorsed the price Inter IKEA Systems paid for the acquisition of the intellectual property rights from I.I. Holding. Inter IKEA received an intercompany loan from its parent company in Liechtenstein to finance the deal, the EU said.

That in turn allowed Inter IKEA Systems to shift its franchise profits outside the EU to Liechtenstein through its interest payments on the loan, the EU said. The commission said it would scrutinize whether those payments reflect economic reality.

The launch of the investigation into the Swedish retailer bolsters the EU's attempts to beat back accusations that it disproportionately targets American companies, particularly in its probes into alleged illegal state aid granted via favorable tax deals.

In a blockbuster decision, the commission in 2016 ordered Apple Inc. to pay Ireland EUR13 billion, in what it said was uncollected taxes, a ruling both Apple and Ireland are contesting. Shortly after that, the EU launched an investigation into French energy company Engie SA tax dealings with Luxembourg.

The commission has already trained its sights on Netherlands's tax rulings in the past. The EU in 2015 ordered the Dutch government to recover millions of euros from Starbucks Corp. in allegedly unpaid taxes, a decision the Netherlands is appealing.

The EU continues to investigate Engie's as well as McDonald's Corp.'s tax affairs with Luxembourg.

Write to Natalia Drozdiak at natalia.drozdiak@wsj.com

(END) Dow Jones Newswires

December 18, 2017 10:26 ET (15:26 GMT)