The Australian Taxation Office (ATO) has initiated one of its most significant actions against a multinational group with the issuance of a tax claim of approximately 171 million Australian dollars against IKEA Australia, following years of auditing focused on transfer pricing and profit shifting practices. This measure represents a turning point in the interpretation of intra-group transactions in developed jurisdictions and highlights the growing willingness of tax administrations to question financial structures that, while operating within the legal framework, are inconsistent with economic substance and the arm’s length principle.
Background to the claim: growing sales, contained profits
Despite significant revenue growth—with AUD$1.765 billion in sales in fiscal year 2025—IKEA Australia has historically reported poor or marginal net results, even after decades of operation and expansion. According to the ATO, this disconnect between sales volume and tax results is largely explained by intra-group payments of franchises, licenses, and royalties to related entities in Europe, which has artificially reduced the tax base in Australia and shifted profits to jurisdictions with lower tax burdens.
Between 2004 and 2014, the company legally transferred more than AUD 2 billion overseas under these agreements, without those amounts being taxed in Australia. The ATO is now challenging whether these transactions reflect a genuine commercial reality or were designed to transfer profits out of the country.
Transfer pricing at the heart of the conflict
At the heart of the dispute is the way IKEA has structured its intra-group transactions, particularly those related to the use of intellectual property and trademarks. Royalty payments made to an entity based in Luxembourg—a jurisdiction historically associated with favorable tax rulings—are now being analyzed as possible mechanisms that have facilitated the erosion of the tax base in Australia.
From a Transfer Pricing perspective, these types of structures raise fundamental questions about:
- Whether the agreed terms reflect what would have been agreed between independent parties (arm’s length).
- The functional and economic justification for intra-group franchise and royalty payments.
- The relationship between the functions, assets, and risks actually assumed by the entities involved.
When Transfer Pricing does not meet these criteria, tax authorities have a technical basis for making adjustments and reallocating income to the jurisdictions where it is actually generated. This issue is central to assessing whether a taxpayer has complied with its international and domestic tax obligations.
Profit shifting and its link to Transfer Pricing
The IKEA case refers to a broader concept than simple documentary compliance: the phenomenon known as profit shifting. This term describes the allocation of profits to low-tax jurisdictions through internal transaction prices, royalties, or financial charges, artificially reducing the tax base in countries with higher taxes.
Although mere tax optimization is not illegal per se, the arm’s length principle requires that accounting results and transaction terms reflect an economic reality consistent with the behavior of independent companies. Internal pricing slides that systematically reduce local profitability without economic justification other than tax savings can be challenged and adjusted by the administration.
The ATO has examined these practices in detail and, after years of dialogue and auditing, has issued a position paper—a formal step in the tax dispute process—covering extended historical periods, suggesting that the agency believes there are sufficient grounds to question the applicability of IKEA’s Transfer Pricing practices.
Relevance of the case: why does it matter for Transfer Pricing?
The claim against IKEA Australia represents a paradigmatic case of how tax authorities can address Transfer Pricing structures that:
- Disconnect reported profits from actual economic generation.
- Use intra-group payments to move profits to low-tax jurisdictions.
- Require rigorous scrutiny of Transfer Pricing documentation (functional analysis, comparables, economic justification).
This case also coincides with a broader regulatory context in Australia and other jurisdictions, where corporate transparency and the fight against profit shifting are high on the compliance agenda.
IKEA’s responses and tax defense
IKEA Australia has reacted strongly, stating that it disagrees with the ATO’s position and intends to dispute any tax liability resulting from the audit process. The company states that it does not consider it likely that any tax will be due in respect of the matters under review and has therefore not recognized a tax provision in its financial statements as of August 31, 2025.
In addition, IKEA has emphasized its commitment to legal and regulatory compliance where it operates and noted that it cooperated with the ATO during the audit process. However, the statement in its corporate report reflects a divergent view of the interpretation of its Transfer Pricing practices compared to that of the Australian administration.
This type of response is common in high-profile Transfer Pricing disputes, where companies seek to preserve their tax position through formal objection processes and, eventually, litigation. The issuance of a position paper clearly indicates that the dispute has moved beyond a simple consultation and is heading toward more formal stages of the tax dispute resolution process.
Conclusion: implications for multinational groups
The ATO v. IKEA Australia case sets an important precedent in the area of intra-group structure auditing and serves as a clear reminder that Transfer Pricing policies must be based on verifiable economic fundamentals. In particular, it is essential to have:
- A robust functional analysis documenting functions, assets, and risks.
- A clear economic justification for intra-group payment structures.
- Technical evidence of arm’s length conditions in each controlled transaction.
- Consistent alignment between accounting results and actual economic substance.
The growing attention of tax administrations to schemes likely to generate profit shifting shows that it is no longer sufficient to formally comply with documentation obligations. The authorities evaluate the economic coherence, overall consistency, and commercial rationality of the structures adopted.
In this context, a preventive review of transfer pricing policies and intra-group agreements becomes a strategic risk management tool. At TPC Group, as a company specializing in transfer pricing, we assist multinational groups in the evaluation, restructuring, and technical defense of their operating models, strengthening their position in the face of complex audits and international tax disputes.
Source: channelnews