Over the years H&M has applied a conservative and cautious tax policy. H&M complies with the OECD Transfer Pricing guidelines, which means that the profits are allocated and taxed where the value is created.
The overall aim of our tax policy is to reflect and support our business by ensuring a sustainable tax rate, mitigating tax risks in a timely and cost efficient way and complying with rules and regulations in the jurisdictions in which H&M operates.
H&M is present in many countries and by its presence contributes to society through various taxes and charges such as corporate tax, duties, payroll taxes and also indirectly through VAT levied on garments sold to customers.
TOTAL TAX LEVEL FOR THE H&M GROUP
H & M Hennes & Mauritz AB is a Swedish company, listed on the Swedish Stock Exchange (Nasdaq Stockholm). H&M applies International Financial Reporting Standards (IFRS) as adopted by the EU.
The H&M group’s total tax rate is a result of the reported profits of H&M’s various subsidiaries and the effective corporate tax rates in each country, which vary from country to country. H&M aims to pay the right amount of tax in the right country.
H&M’s total tax rate is higher than the Swedish corporate tax rate which currently is 22 percent (Feb’17). For detailed information about H&M’s tax rate please see the Annual Report.
H&M’S TRANSFER PRICING MODEL IN LINE WITH THE INTERNATIONAL TRANSFER PRICING GUIDELINES
The general underlying aim is that profits should be taxed where the value is created in accordance with the OECD and UN guidelines on transfer pricing.
H&M works with a highly integrated business model whereby the design, assortment planning and logistics and marketing functions are gathered into a separate company, H & M Hennes & Mauritz GBC AB (Sweden). For example, since H&M’s own design and assortment function creates the collections centrally in Sweden, the value for these functions is allocated to Sweden.
The procurement and sourcing function is located in Hong Kong and operates as the group’s central procurement and buying agent function. Since Hong Kong had been handling the group’s procurements in Asia since 1978, it was natural to continue to use and to further strengthen Hong Kong as the central hub for all H&M’s procurements representative offices worldwide.
Together with external advisors, H&M has analysed where the main value is created within the group. In H&M’s case the value created is split between a) the central functions in Sweden, b) the procurement and buying agent function in Hong Kong and c) the sales countries. The analysis shows that most of the value of the group is created in Sweden and should thus be taxed there. The above constitutes the foundation of H&M’s transfer pricing model for all inter-company transactions.
H&M’s transfer pricing model is in line with the International Transfer Pricing Guidelines. H&M also follows the local regulations of the country in which the relevant subsidiary is located when determining the prices of its inter-company transactions. H&M conducts its inter-company transactions at arm’s length and has implemented transfer pricing documentation to support the transfer pricing methods applied.
H&M applies the arm’s length principle to ensure that parties to the intra-group transactions are appropriately remunerated, that the transfer pricing methods are consistently applied, that accountability and transparency of transactions are ensured and that performance management is enhanced.
Transfer pricing documentation: H&M prepares transfer pricing documentation for its various inter-company transactions in order to meet the local transfer pricing documentation requirements of the countries in which the subsidiaries are located.
Governance: The global tax function at H&M has sole responsibility for initiating and documenting policies and guidelines for specific tax matters in the group. This tax policy has been discussed and reviewed by the Auditing Committee and thereafter approved by the Board of Directors. The quality management system for direct taxation and transfer pricing of H&M Hennes & Mauritz GBC AB was assessed and registered by Intertek as confirming to the requirements of SS-EN ISO 9001:2015 certificate for the period June 2016 to June 2019. (certificate number 0050077-00)
TAX RISKS AND EXTERNAL ADVISORS
H&M’s approach is to always maintain a conservative position with respect to managing tax matters. Tax positions occur from substance, e.g. operational income and doing business in a jurisdiction. Within H&M, tax exposures and tax risks can arise for numerous reasons. Typically, tax risks are much more likely to arise in cross-border situations given the multitude of tax jurisdictions as well as interpretational differences between different tax authorities. In most cases this can be handled in-house by H&M’s own tax department but in specific local compliance situations external tax advisors are used.
TRANSPARENT DIALOGUE WITH TAX AUTHORITIES
H&M pays its taxes at the appropriate times and provides any relevant information requested by the appropriate tax authority without delay in order to accurately establish the company’s tax liabilities.
H&M strives for good professional and transparent relationships with the tax authorities. H&M adheres to local rules and regulations on documentation retention requirements. H&M therefore always documents its communications with the tax authorities, which are logged in a separate e-room.
As a minimum, each tax-paying entity within the H&M group should document and retain all information required to determine the taxable amount and related taxation, such as accounting workbooks and sheets, files and other documentation.
H&M CONTRIBUTES BY CREATING JOBS AS WELL AS BY PAYING DIRECT AND INDIRECT TAXES AND OTHER CHARGES IN THE PRODUCTION COUNTRIES
H&M does not own any factories, but instead buys its products from independent suppliers in production countries located mainly in Asia and Europe. As H&M buys large volumes of garments and other related products in these countries, H&M contributes by creating jobs for many people. For many countries, these jobs, created by companies within the clothing industry such as H&M, spark further industrial development and help to lift individuals and nations out of poverty.
As mentioned earlier, for many years the value creation for H&M’s production has been located at H&M’s procurement and sourcing office in Hong Kong, which sets the buying-strategies for the group’s procurement and has also the task of working on strategic matters relating to control and monitoring of H&M’s Code of Conduct, replaced by the Sustainability Commitment in February 2016. Like many other international groups, H&M has chosen to carry on its business through representative offices in other countries. H&M thus has a number of local representative procurement offices in the production countries which have the task of coordinating the procurement orders with the local manufacturers on behalf of the Hong Kong office. As these representative offices only coordinate purchases, they are not considered to be permanent establishments. H&M accordingly has no trading activity that creates business income and is therefore not in a position to pay corporate income tax in the countries where the representative offices are located. H&M’s representative offices worldwide are organised under the group’s procurement company in Hong Kong, where relevant tax is also paid.
However, tax revenues other than corporate tax are generated in the production countries. H&M’s employees at the local representative offices pay income tax and social security payments. VAT is also paid on products and services purchased by H&M’s representative offices.
H&M also contributes other fees such as duties and environmental levies in countries where these are applicable.
Arm’s length principle: According to the arm’s length principle, companies within a multinational group should act as if they are independent of each other, i.e. “at arm’s length”. The international standard that OECD member countries have agreed should be used for determining transfer prices for tax purposes. It is set out in Article 9 of the OECD Model Tax Convention as follows: where “conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”.
Facts about the OECD: The mission of the OECD (Organisation for Economic Co-operation and Development) is to promote policies that will improve the economic and social well-being of people around the world. The OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems. The OECD works with governments to understand what drives economic, social and environmental change. The OECD measures productivity and global flows of trade and investment and analyses and compares data to predict future trends. The OECD sets international standards on a wide range of things, from agriculture and tax to the safety of chemicals.
The OECD Transfer Pricing Guidelines aim to give each country a fair share of a company’s profit under the arm’s length standard as well as protecting companies from double taxation. According to the OECD guidelines, companies within a multinational group should act as if they are independent of each other.
The OECD is presently reviewing part of its Transfer Pricing Guidelines under the G20 “Base Erosion and Profit Shifting” project. For example, new guidance has been published on transfer pricing documentation, including new and more detailed documentation requirements.
The International Chamber of Commerce (ICC) has worked hard in close partnership with organisations such as the OECD and the UN to ensure that the transfer pricing rules are as fair as possible and that no individual countries attempt to circumvent the guidelines drawn up within the OECD by means of local legislation. The issue of when a taxable activity arises (fixed place of business) has also been carefully investigated and elucidated over a number of years. The current practice is recognised and accepted by most countries and legislators around the world.
United Nations (UN): The United Nations Practical Manual on Transfer Pricing for Developing Countries is a response to the need, often expressed by developing countries, for clearer guidance on the policy and administrative aspects of applying transfer pricing analysis to some of the transactions of multinational enterprises (MNEs) in particular. Such guidance should not only assist policy makers and administrators in dealing with complex transfer pricing issues, but should also assist taxpayers in their dealings with tax administrations.