Fashion retailer’s tax dodges boost European inequality

Bloomberg tax star Jesse Drucker has another fine article out about the Spanish retailer Inditex, the parent of high street retail giant Zara. We would urge you to read it. Among many other things, it contains:

“In the past five years, Inditex has shifted almost $2 billion in profits to a tiny unit operating in the Netherlands and Switzerland, records show. Although that subsidiary employs only about 0.1 percent of Inditex’s worldwide workforce, it reported almost 20 percent of the parent company’s global profits last year.”

These Dutch and Swiss shenanigans have provided a terrific boost to inequality in Europe:

“This arrangement legally reduced Inditex’s taxes by as much as $325 million since 2009 — $100 million last year alone — and boosted the company’s net income by more than 3 percent. Thanks to Inditex’s soaring stock price, the company’s founder and majority owner, Amancio Ortega Gaona, last year became Europe’s wealthiest person and the third richest in the world.”

It is a sorry state of affairs, and an indictment of the OECD’s broken system for trying to tax international corporations. Inequality is the terrain of one of the defining struggles of our age. For wealthy individuals, tax avoidance strategies are the equivalent of a gold mine – and those are exactly the terms with which one tax adviser describes Inditex’ tax dodges.

Ordinary Italians are certainly suffering at the hands of this man:

“By moving $200 million in royalties to the Dutch subsidiary in the past five years, Zara’s Italian unit may have deprived Italy of about $60 million in corporate income taxes.”

And let’s not forget – there is NOTHING remotely productive about any of this. This is straightforward rent-seeking wealth extraction: from poor taxpayers to wealthy individuals and their families.  And it’s huge: as U.S. tax writer David Cay Johnston once put it,

“this is not trickle-down, but Niagara up.”

It is a classic case of corporate irresponsibility. The only thing one might say in their defence is the old slaver’s justification: “We are not the only ones.”

Finally, is the word ‘legally’ truly justified in the earlier paragraph above? Has the Inditex structure been challenged by all the relevant tax authorities, and has it stood firm? Journalists, usually with nervous libel lawyers breathing down their necks, often put the word ‘legal’ or ‘legally’ into these kinds of stories, yet it is surely impossible at this point (and probably forever) to determine whether all tax laws have been complied with or not. Tax avoidance generally means ‘it has not been shown to be illegal’ – which is quite a different thing from saying ‘it has been shown to be legal.’ A whole world of potential abuse lies between those two poles.

This an important general question, which David Quentin has explored in detail, and adds a major new angle to the tax avoidance debate. More on this question soon.