Levelling the playing field on corporate tax

aldiPerhaps a little unnerved by the continued market share gains of Aldi, the German discount supermarket chain, Wesfarmers CEO, Richard Goyder, has questioned whether or not overseas retailers are paying their fair share of tax.

The issue raised by Goyder this week echoes Federal Government politicians, who are growing increasingly concerned about the erosion of their corporate tax base. However, Goyder may have targeted the wrong culprit.

The recent invasion of foreign retailers has brought the tax contribution of new market entrants into the spotlight, and the level scrutiny and compliance checking by the Australian Government is increasing.

There is a little less enthusiasm in the Federal Government for the concept of free markets and competition when it starts to hit the treasury, with many new retailers paying little or no tax, cutting their liability by charging local operations with license fees, management charges and other fees paid to overseas head offices.

Apple Australia, Ikea and Starbucks are among the global retailers who are able to minimise taxes paid by their local operations. But the classic example is probably Toys R Us. It is inconceivable that Toys R Us is still trading in 33 stores around Australia without making a profit since its launch in 1993. Toys R Us has accumulated losses on its Australian retail stores of more than $450 million, including a loss of $15 million on sales of $242m for the latest available year to February 2014. And yet the US parent has stayed in the market while going though major financial turbulence in its home market.

Why? Because there is little doubt that license fees and other charges from the Australian stores boost the parent company’s earnings while ensuring that the business enjoys a substantial tax break against its competitors, many of whom have gone belly up since 1993.

Another global brand retailer, Ikea, posted modest earnings of around $100 million on sales of almost $5 billion between 2002 and 2013. The company taxes paid by Ikea in that period were just $31 million, while around $1 billion travelled overseas to the parent company in a range of charges that included franchise fees and “risk agreement fees”.

Ikea has been criticised for a business structure that has been remarkably effective in minimising its tax liabilities internationally. But a $31 million tax contribution on $4.7 billion in sales in Australia is beyond the pale.

Yet another retailer, Apple Australia, which Inside Retail PREMIUM estimates to have annual sales of at least $800 million from its own retail stores alone, has also used license fees and other parent company charges to reduce its tax liabilities in Australia.

Between 2002 and 2013, Apple paid around $193 million in corporate taxes in Australia on estimated revenue from its total operations in Australia of around $27 billion. It has been estimated that in that same period, Apple sent $9 billion back to its parent company. But even if the sum was only half of that total, the issue of a level playing field with local retailers remains.

Obviously new retail start-ups do incur significant establishment costs, just as Woolworths have found with the homegrown Masters Home Improvement chain, and as the failed US bookstore, Borders, and Britain’s Mothercare chains, have found.

The Starbucks coffee chain also found Australia was a challenging market, closing 61 shops back in 2008 and selling its remaining 24 stores last year to a company associated with the Withers family and 7 Eleven after accumulating $143 million in losses over eight years on sales of more than $300 million. The loss figure was inflated again by charges levied by the parent company in the US.

The current wave of international entrants to the Australian market are also incurring losses as they establish. Japanese retailer, Uniqlo, indicated last January that it had lost $6 million on sales of $33 million in its first 12 months trading.

However, it is interesting to note that Zara is turning a profit and, in fact, generated earnings of $9.4 million on sales of $68.5 million in its first nine months of trading to January 2012.

The novelty value of Zara appears to have waned a little according to more recent financial reports. But the chain has still found a way to turn a profit and pay corporate taxes, where many other global retailers can’t seem to do so.

In the latest financial year, Zara has posted a $10.2 million profit on annual sales of $179 million. The net earnings result was down from $16.5 million in 2014.

The Goyder call

The call by Goyder for an examination of Aldi’s tax compliance strengthens the call for a more consistent approach to tax and a level playing field and reinforces the Federal Government’s push through the G20 nations to address the shifting of profits and tax minimisation by global corporates.

However, the Goyder call has probably been triggered by new research that shows Aldi with sales topping $5 billion and an 11.6 per cent share of the grocery market, up from around 3.1 per cent a decade ago.

In fact, figures the recent Roy Morgan Research Supermarket Currency report apparently understate the market share situation as Aldi has this week confirmed its sales are now around $6 billion, not $5 billion, which would translate to a market share of around 13 per cent, not 11.6 per cent.

In the Roy Morgan report, in the past 10 years, with Aldi and Costco expanding, it is estimated Woolworths’ market share has declined from 40.3 per cent to 38.5 per cent, and Coles from 37 per cent to 31.8 per cent as at March 2015. In the same period, the Metcash IGA chain lifted market share from 5.8 percent to 9.5 per cent, largely on the back of its Franklins acquisition.

Coles has been lauded by analysts for its turnaround and stronger growth in sales, while Woolworths has been castigated. Yet Coles has suffered a more substantial decline in market share, according to the report.

The Roy Morgan report indicates Aldi is having a greater impact on Coles, particularly in its home state of Victoria, than Woolworths, which can account for much of its market share decline on the Metcash acquisition of the largely NSW-based Franklins chain.

With mature store networks, Coles, Woolworths and Metcash are all likely to concede further market share to Aldi, which is rapidly expanding and planning to open around 40 stores across South Australia and West Australia in the next 18 months. Aldi’s market share in Victoria is currently estimated at 15.5 per cent and in NSW at 15.9 per cent.

Costco, which currently has sales approaching $1 billion from just seven stores, is also expanding and building its market share, which is already around two per cent of the market after launching in Australia with a single store in Melbourne in 2009.

Aldi fires back

While Goyder believes Aldi needs scrutiny on its tax compliance, the discount supermarket chain was quick to respond to the implied suggestion that it may not be paying its fair share of corporate tax.

The usually reticent Aldi released financial data on its Australian business for the first time, confirming annual sales of $6 billion for the financial year to December 2014, up from $5.3 billion a year previously and representing a 13 per cent increase.

Aldi revealed its average corporate tax for the past three years was almost 31 per cent of net profit, with around $80 million paid in corporate tax for the retailer’s 2013 financial year.

It is worth noting in regard to comparable tax treatment for retailers that Coles, Woolworths, Aldi and Costco all have a more favourable tax position as corporate owners of their stores than Metcash, which incurs an additional tax impost as a wholesaler – a cost that, in turn, impacts on its independent retailer customers.

With Goyder arguing at the American Chamber of Commerce in Melbourne that the government should not distinguish between big and small businesses on tax policies, the embattled Metcash might well be quite pleased that the Wesfarmers CEO has stirred the pot on tax and overseas retail entrants to the Australian market.

This story first appeated in Inside Retail PREMIUM, issue 2051.  To subscribe, click here.

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