It is a widespread practice for big corporations and businesses to try reducing their expenditures as much as possible, that includes avoiding taxes. The most well-known way to do so, is to register the whole enterprise or its branches in countries with low corporate taxes. Thus the tax money that should go to the business’s country of residence goes to a “third party” and can constitute a huge loss in potential governmental income. But is it always so bad? Do the losses outweigh the gains? Are there other factors that need to be considered? In this article I will try to find the answers to these questions, looking specifically, at the case of IKEA coming to Latvia and other problems regarding tax losses in this country.
The Swedish furniture and house interior giant IKEA is notorious for avoiding taxes. Its founder Ingvar Kamprad spent 40 years in Switzerland to avoid Sweden’s high taxes as well as those of The United Kingdom. There he reduced his expenditures by diverting profits to a sister company (1). The enterprise has a branch in one of the Baltic States – Lithuania. Recently a deal was struck to open an IKEA’s branch in Latvia as well. This has spiked a debate about the possible gains and losses of this event. Even tough the IKEA’s Latvian branch would pay the necessary property and employment taxes, the potential off-shoring of any profit taxes might have a substantial impact on the local budget.
On the other hand the arrival of the franchise would benefit Latvia greatly by creating new jobs and adding stimulus to the stagnating economy. Another great win would be logistics, meaning, Latvians would not have to go to Lithuania for a better choice of affordable furniture which in turn means less money left there and more money staying here. Nevertheless if IKEA continues its tax evasion practices, our country would miss out on a lot of potential tax revenue that’s much needed for economic, social and cultural development, such as raising the monthly minimum wage and ensuring a free higher education, which has lately become extremely important (2).
Although tax evasion by certain companies is quite a big deal, it’s not the only way of losing potential tax revenue. This can also happen because of the choice of consumers to buy foreign, not local products. Any taxes from the production of or profits generated by selling goods will be received by the country where the manufacturing is located and there are two reasons for non-local shopping to occur. One is simple – the price. According to the director of The Latvian Federation of food enterprises, there are no big producer companies in Latvia and the smaller ones cannot afford to produce goods any cheaper. Therefore local products are often more expensive (3) and Latvian consumers cannot always afford them. If the same product made in another country is cheaper, they will probably choose it.
Another reason for choosing imported products is the fact that there are simply no local alternatives. As an example I can mention vegetarian and vegan products. Global demand for them has grown rapidly during the past few years (4, 5) and lately the debate of a “meat-less” diet has become a topical issue in Latvia as well, as evidenced by a court hearing about vegetarian lunch for students of The Free school of Ikšķile (6). In response to this, Latvian retailers are placing more and more vegetarian and vegan products in their stores, however a lot of them are not local. You can buy locally grown grains, vegetables and legumes, but it is not the case for most of the “specialized foods” like vegan ice-cream, mock-meats, plant-based milks, soy or broth. The same applies to food supplements and shoes. For this reason vegetarians and vegans in Latvia chose to purchase a lot of their products from other countries such as Sweden, Italy or USA thus ensuring entrepreneurship and tax revenues over there instead of in Latvia. In this way Latvia loses a lot of potential, but the fault is not in our consumers alone – buying tendencies have changed a lot since the restoration of our independence, therefore I think that the producing tendencies have not completely caught up and should move forward as well and I do believe that the vegetarians and vegans of Latvia would be more than happy to consume local rather than foreign products.
Author: Liene Rozenštrauha, LAPAS volunteer,2nd year Communication and public relations student Vidzeme University of applied sciences.
- How IKEA Billionaire Legally Avoided Taxes From 1973 Until 2015. Retrieved from: https://www.forbes.com/sites/robertwood/2015/11/02/how-ikea-billionaire-legally-avoided-taxes-from-1973-until-2015/#3980b1dc5af5
- Number of state-funded students may shrink 5,500 in three years. Retrieved from: http://www.lsm.lv/en/article/societ/society/number-of-state-funded-students-may-shrink-5500-in-three-years.a206344/
- Why local products ar more expensive (in LV). Retrieved from: http://lr1.lsm.lv/lv/raksts/krustpunkta/kvalitatiivi-lokalie-produkti-ir-dargaki.a41826
- Number of global vegetarian food and drink product launches doubles between 2009 and 2013. Retrieved from: http://www.mintel.com/press-centre/food-and-drink/number-of-global-vegetarian-food-and-drink-product-launches-doubles-between-2009-and-2013
- Vegan is going mainstream, trend data suggests. Retrieved from: http://www.mintel.com/press-centre/food-and-drink/number-of-global-vegetarian-food-and-drink-product-launches-doubles-between-2009-and-2013
- School victorious in vegetarian food row. Retrieved from: http://www.lsm.lv/en/article/societ/society/school-victorious-in-vegetarian-food-row.a208326/