IKEA’s Organizational Structures: Evaluating the Ethics of Tax Avoidance

IKEA's Organizational Structures

IKEA’s organizational structures

The various legal entities that currently comprise IKEA (hereafter referred to as the Kamprad business groups) originally began as one business group (the IKEA Group), founded in the 1940s in Sweden. The founder and owner of the IKEA Group, Ingvar Kamprad, and his family operated the group as a private corporation. The IKEA Group became an extremely successful retailer and operated with this legal structure until1973. Afterwards, Mr. Kamprad decided to divide the IKEA Group into two separate legal organizations as shown in Figure 1.1 He made the change to give the company “eternal life” by separating the core operations from the company’s brand. The result was one organization that owned the retail operations (Ingka Holding an d its related entities) and a separatorganization that owned the company’s brand and created a franchise system for the use of the company’s brand (Inter IKEA Holding and its related entities).

Mr. Kamprad gifted Inter IKEA Holdin g, a for-profit entity , to the Interogo Foundation, which was task ed with safeguarding an d improving the company’s brand. Inter IKEA Holding possesses th e firm’s overarch ing trademark and several business components, formerly part of the IKEA Group, such as its financial and real estate businesses. To acquire the trademark, Inter IKEA Holding borrowed money from another entity related to the Interogo Foundation and remits interest payments to that entity. This separate entity then pays dividends to the Interogo Foundation. A dditionally, Inter IKEA Holding pays a significant portion of “other charges” to undisclosed recipients.1 The founder gifted the for-profit entity Ingka Holdin g to the Ingka Foundation, which was tasked with owning and operating numerous stores either directly or through country-level subsidiaries. The Ingka Foundation’s tax home is located in the Nether lands whereas the Interogo Foundation is located in Liechtenstein.1 Ingka Holding is largely invo lved with the retail business, boasting nearly 40 billion euros in yearly sales. As of 2018, it employs over 200,000 individuals and operates over 400 stores across 50 markets. See Figure 2 for a chart of the largest regions by sales and sales trend. 3 Subsidiaries of Ingka Holding pay royalties based on sales revenue to Inter IKEA Holding for the useof its brand.

The mission, vision and values set forth by firm leadership significantly affect firm decision-making. A priv ately-controlled firm since its creation, the tone at the top of IKEA was largely influenced by Ingvar Kamprad and his close family members. The company operates according to seven values.

IKEA's Values

From its inception, the company dared to be different and explored unconventional paths by assuming th at customers will assemble their own furniture if it is explained to them in an understandable manner and by creating flat packaging for all products. The organization is cost-conscious. For example, IKEA sought to work with sail makers to provide canvas for its chairs during the off season, and in this way, the company was able to purchase these materials at a lower cost. In 2013, Mr. Kamprad published a “Testament” through which he expressed his belief that the product ra nge offered by Ingka Holding should be simple and straightforward. Costs should be kept as low as possible without compromising product functionality or t echnical quality, and prices should be reasonable. He also explained that because profit provides resources for the future, the profit-driven mission of the business is essential.

9 Mr. Kamprad is a leader by example and was notorious for living well below his means. Even though he was a very wealthy man, he preferred either public transportation or driving an outdated car, flew economy onlow-cost airlines, and collected the free salt and pepper packets from cafeterias. He made most life decisions by simply choosing the cheapest option,6 and he regarded taxes as another cost to manage, like transportation or condiments. In the 1970s, he moved his family to Switzerland in an announced effort to avoid income taxes and has publicly stated being “preoccupied with the problem of avoiding income and inheritance taxes...since at least the 1960s.” 1 Mr. Kamprad has been known to make comments such as “wasting r esources is a mortal sin.”

Mr. Kamprad stated that as the compan y was emerging globally, he chose to create the two business groups in a tax efficient way. 2 Given that the two Kamprad business groups consist of private for-profit companies and foundations, they are not subject to the stringent financial reporting and disclosure regulations required for publicly-traded firms. Also, given the Interogo6 IKEA’s Organizational Structures: Evaluating the Ethics of Tax Avoidance Foundation and the Ingka Foundation have separate ownership, no consolidation takes place between Inter IKEA Holding and Ingka Holding and their respective related entities for financial reporting purposes. Further, the interconnected relationships between the groups creates income-shifting opportunities as stock ownership creates dividend payments, loans create interest payments, and franchise agreements create royalty payments. Figure 5 shows income tax as a percentage of income before minority interests and taxes for Ingka Holding for the time period 2012-2016.