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  • Gadgets, Industry, News - Written by on Monday, March 25, 2013 17:30 - 15 Comments

    “Open, frank + candid”: Apple defends tiny tax bill

    news Iconic technology giant Apple has described its relationship with the Australian Taxation Office as “open, frank and candid” and its process of calculating its local tax obligation as “rigorous”, despite the fact that the company last year paid local company tax of just $40 million, off Australian revenues of $6 billion.

    In January, Apple revealed it had a record year in terms of revenues and profits from its Australian operation over the past year, raking in revenues up 23 percent to almost $6 billion for the year to the end of September last year, as new iPad and iPhone launches sent the company’s finances into the stratosphere over the past 12 months.

    The figures were revealed in Apple’s Australian financial results published with the Australian Securities and Investments Commission, shortly after the company released its global quarterly results in the US. They showed that over the year to the end of September 2012, Apple pulled in local revenues of $5.99 billion over that year, up 22.9 percent from the previous year’s figure of $4.87 billion.

    The company made gross profits of $493.1 million after the cost of goods sold were taken out of its equation, with net profits coming in at $98 million. The company’s largest expenses, apart from the cost of goods sold, which is an internally calculated figure charged by Apple Australia’s US parent, were sales, marketing and distribution expenses of $296.2 million (up from $215.3 million the previous year) and administration expenses of $45 million. The company disclosed that it paid local income taxes of just $40 million, off net profit of $98.6 million.

    As with Google Australia’s revenues disclosed last year (the company paid local tax of just $74,000 off estimated revenues of close to $1 billion), Apple’s financial disclosure cause uproar in the political community, with figures such as Labor backbencher Ed Husic describing Apple’s tax duty as “simply staggering”.

    There is one significant anomaly in Apple Australia’s financial results from a profit perspective compared with its global results. In Australia, the company only made a relatively small net profit — $98.6 million, off top-line revenues of almost $6 billion. However, globally, the company in its most recent quarter made a significantly higher net income figure as a proportion of revenue — $13 billion off revenues of $54.5 billion. As a proportion of revenues, Apple’s cost of goods sold in Australia is significantly higher than it is globally, meaning the company pays little tax in Australia compared with its global tax situation.

    The Federal Government is currently introducing a swathe of new tax measures which it hopes will enable it to more closely examine tax situations such as those used by Apple and Google.

    However, speaking before the Federal Parliament’s IT price hike inquiry last week, Apple Australia managing director Anthony King strongly defended his company’s taxation situation, stating that it had a good relationship with the Australian Taxation Office.

    “I am happy to talk in generalities around the components of our tax return and the process that we go through with the Australian tax office every year,” said King. “That process is very open, rigorous and transparent. We report to the ATO all the revenue that we derive in the Australian market. We report to the ATO all the costs of doing business in the Australian market, from product costs to all of our operating expenses. That brings us down to a net profit number. That net profit number is a number that we are very open about with the Australian tax office.

    “They know our revenue, they know our costs and they know all of the details about the way in which we have financial affairs running in any particular year. Against that net profit, we apply the 30 per cent corporate tax rate for Australia and we pay our tax expense. We pay our taxes when they are due—not only income tax expense but GST, payroll, [fringe benefits tax] and any other tax that might be incurred in doing business in Australia.”

    “We are very clear in the way that our revenues, cost of sale and any of our local operating costs are registered to the Apple Australian entity. We have very robust and deep accounting systems in place to ensure that all of the revenues associated with doing business in Australia are fairly reported and all of the cost of sale in terms of the hardware, transformation costs and shipping costs are fairly reported—as indeed, are all of the local operating expenses in doing business in Australia. And those numbers are considerable: we employ 2,600 people around the country. We have 18 retail stores. We have operating leases. We have considerable costs incurred in the sales and distribution of our products within the Australian market.”

    However, the executive was pushed heavily in the hearing by MPs such as Husic, with the politicians questioning King about the details of Apple’s so-called “transfer pricing” mechanism by which it prices the cost of goods when transferring them between its legal entities (such as its Australian division and its US parent). It is this mechanism which accounts for the cost of goods sold and which critics say allows multinationals such as Apple to keep their Australian net profits, and therefore taxation, down.

    “… it was reported earlier this year as a result of information obtained through ASIC that on the basis of generating here in Australia $6 billion in revenue Apple paid only $40 million in tax. Apparently that is two-thirds of one per cent of your turnover. You do not manufacture here. You do not conduct R&D here,” Husic told King.

    “I am going to put something to you, which I would welcome your response to. It is not all these other add-on figures that are set. On the issue I was referring to earlier, about where exactly is the point at which you set the prices: is it set by the US before it agrees to a transfer price on product? You set your prices based on what you believe is in the best commercial interests of the company, obviously; but taking into account taxation as well. I put it that the reason why Australian consumers pay more has more to do with your transfer price than anything else.”

    However, King disagreed with Husic’s claim that Apple’s transfer pricing policies were behind the issue of Australians paying more for the same Apple products than US consumers did.

    King said: “We clearly record and report the revenue that we derive in Australia. We report to the ATO all of the costs associated with doing business in Australia. The ATO is the referee, so to speak, in the middle of this. We have a very open, frank and candid dialogue every year with the ATO about our tax affairs, which includes, like any company, our revenue and our costs down to our net income. They are really the three items that are relevant for our discussions with the ATO. We track all of the revenue that we derive here. We track and report all of the costs associated with doing business, which brings us to the net profit number. We have a very good relationship with the ATO, and I am sure our tax guys absolutely love it whenever they have to spend time with the folks down the road!”

    In general, King said that the internal cost of Apple products was set at a level which was broadly consistent in markets around the world in US dollars, and then translated into local currency, although the cost of some components — such as Australian power connectors — could vary. The Apple executive said, to the best of his knowledge, that Apple’s Australian division paid broadly the same price for services from the company’s US division that other Apple divisions did.

    opinion/analysis
    Again, I’m sorry, but I really must call into doubt here the credibility of Anthony King’s testimony before the committee on the company’s Australian tax situation, as I did with King’s previous claims with respect to Australian prices on goods sold through its iTunes store.

    If you examine Apple’s tax situation globally, the ridiculous nature of its Australian tax situation becomes clear. Consider the fact that in Australia, last year the company only made a relatively small net profit — $98.6 million, off top-line revenues of almost $6 billion. However, globally, the company in its most recent quarter made a significantly higher net income figure as a proportion of revenue — $13 billion off revenues of $54.5 billion. As I mentioned earlier in this article, a proportion of revenues, Apple’s cost of goods sold in Australia is significantly higher than it is globally, meaning the company pays a tiny amount of tax in Australia compared with its global tax situation.

    Furthermore, as MPs pointed out to Apple in the hearings last week, the company does not host research & development or manufacturing facilities in Australia. In this context, the claim that it is legitimate that Apple should make only a miniscule profit in Australia and a massive one in the US is clearly ludicrous. Apple is widely acknowledged as one of the most profitable companies in the world. It is simply not credible for King to assert that his company is being as transparent as it can with the Australian Taxation Office with respect to its local tax obligations; clearly the company is utilising, as many companies of its size do, favourable transfer pricing on the cost of its goods sold, to ensure it will minimise its Australian tax obligation.

    Is such a practice legal? Probably, although the Government is changing the law in this area. Is it ethical? Not in the slightest. Apple is taking billions of dollars out of Australia every year at the moment — and paying very little tax.

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    1. Greg
      Posted 26/03/2013 at 7:02 am | Permalink |

      Sorry if this is a simple question – but is apple making a profit twice?

      Ie: the global operations profit on the sale to Apple Australia, and then Apple Australia profits on sales to Australian customers?

      And if so does every country work the same way? Including the US sales?

      • GongGav
        Posted 26/03/2013 at 11:04 am | Permalink |

        Not quite. They took $6b in Australia, but transferred $5.5b overseas. That $5.5b doesnt get taxed through our system, but wherever it ends up. Which is usually the Cayman Islands, or somewhere like that.

        How apple works is simple. Say you buy an iPad for $600. $550 of that represents what they paid Apple International for the product, $50 represents what Apple and the store you bought it from take as gross profit. Then out of that $50, $40 are the costs of running the Australian branch of the company.

        Much of this debate gets caught up in the $600, when they should be looking at the 2 parts separately. The $550 and the $50.

        To look at it another way, if you bought an imported car, the bulk of that cost goes back to wherever the car was made, whether its the maker in Europe, Asia, or America. So why would that portion of the cost ever be counted?

        And at its most basic, thats where the problem lies. What part or the shelf price is being siphoned out of Australia, and whether its too much. End of the day, it isnt by as much as people think.

        • Greg Alexander
          Posted 26/03/2013 at 11:11 am | Permalink |

          Thanks GongGav.
          Part of my question stems from the concept that selling to Australia adds “another layer”.

          If you look at it as “Apple Global” (or whatever) wholesales to Apple Australia, who wholesale to JB Hifi, who sell to consumers, it makes sense. Each layer adds a markup for the work they do to make it all happen.

          And it works for the USA too – “Global” wholesales to Apple USA who wholesale to Best Buy or whatever.

          But if it’s “Apple USA” wholesales to “Apple Australia”, who wholesales to JB Hifi – then obviously in the US they have one less layer, and the prices become reduced. But given that the computers ship from China anyway, and don’t come via the US, the difference in extra layers would no longer make sense. There’s an artificial extra layer in Australia (or there’s a hidden extra layer in the US that doesn’t get factored in).

          So are there as many handling layers from China to Bestbuy as there are to JB Hifi? And do the corporate layers match?

          • GongGav
            Posted 26/03/2013 at 11:47 am | Permalink |

            It still works the same way for Apple USA as well.

            They do whats called transfer pricing, where you move assets from one part of the business to another part. The cost of goods is moved with it, so the appropriate company gets credit for the costs, and profits. Where the problem comes from is where a multinational company moves those assets across borders.

            For most multinationals, they can take advantage of a few tax loopholes around the globe to pay very very little tax on their profit, and the key to that is transfer pricing. So Apple International charges everyone, including Apple USA, an amount per product thats borderline price gouging. Because its only internal numbers the net effect on the business is zero, but it effects the profits for that branch of the company, and hence the amount of taxable profit.

            Where the US gets benefits we dont is the sheer size of their economy. Its significantly cheaper to import the products into America, because there is just so much product being moved there. Here, not so much, so the middle man needs a higher profit margin per product for his own business, which transfers to the sticker price.

            Its actually a shelf company in Ireland that all the money funnels through. Apple USA is no different in that regard, so no, there isnt one less layer. They effectively get a similar benefit from the size of their economy though.

            To put it a different way, JB HiFi might order 100,000 iPads for sale around Australia, whereas Best Buy might order 1,000,000. 10 pallet load versus 100 pallets. And its more cost effective to move 100 pallets instead of 10.

            • SMEMatt
              Posted 26/03/2013 at 12:20 pm | Permalink |

              This happens across industry and has even got some sectors in trouble when trying to expand.
              There was a mine a few years back that payed very little royalties to the traditional owners because their international parent was charging the local operation well above market to freight the ore out of the country. I will let you guess what happened when they wanted to expand the mine.

    2. Ben
      Posted 26/03/2013 at 9:04 am | Permalink |

      Employees pay tax on their revenue line, it’s time companies did the same.

      • Greg Alexander
        Posted 26/03/2013 at 10:07 am | Permalink |

        Yes I think that’s going to be critical to the world economy in the near future.

        • GongGav
          Posted 26/03/2013 at 11:57 am | Permalink |

          Its not easy to solve.

          Heres the problem. See the transfer pricing comment above for some background. Of the $600 for an iPad, $550 is transfered to Apple International, a company in Ireland, where the company tax rate is very low as an incentive for businesses to operate there.

          They then use transfer pricing to move the money to the Netherlands, which have a nifty little loophole that makes transfer pricing between European countries legal, and tax free. Then the move the money back to a second Irish company, which is actually based in the Cayman Islands. Because the company is registered in Ireland, there’s no tax on the transfer, and because the company is foreign, the money isnt taxed when it gets back to Ireland.

          So its taxed under Cayman Island rules. Which I think means they pay about 1% tax. The only part thats taxed in Ireland is a small residual to cover the operating costs of the 12 people that actually work there. The 2nd Irish company is a shelf company with no staff.

          So to fix the problem, you need to change Australian law, Irish law, Dutch law, and Cayman Islands law. We cant just change our laws, as we have other loopholes that would still let it happen. Like moving the profits through New Zealand first, which would be allowable under other laws. So you need to change their laws as well, at which point some other country becomes the loophole.

          Its complicated to solve, and hence why it hasnt been solved yet. And really, theres not much AUSTRALIA can do about it. Its a global thing. Transfer pricing is a genuine issue for multinationals, so you cant just shut it down, or you create bigger problems elsewhere.

    3. Bob.H
      Posted 26/03/2013 at 10:18 am | Permalink |

      Apple does what every Company operating in Australia does. It pays the least amount out that it possibly can to derive its net distributable profits. In this it is no different to any other individual or Company.

      If the Australian Tax laws are defective and don’t achieve what the Government wants then the fault lies with the Government not the taxpayer.

      There is no ethical consideration.

      This action is called good business management..

    4. Stephen H
      Posted 26/03/2013 at 11:54 am | Permalink |

      Globalisation has been fantastic for businesses. Unfortunately, it doesn’t take account of either people or governments. Until governments sort out collectively how to deal with global industries, companies like Apple will continue to shift their earnings to countries where they will pay the least tax. It’s a fact of business.

      Countries have to collectively act to stop this, which probably means the UN. Standardising international business tax law would solve the problem overnight – and mean there is no incentive to shift profits. Of course, countries have enough trouble agreeing to local tax laws so this is not something that is likely to happen any time soon. And some countries which have deliberately structured their tax law to encourage investment will lose out big. Finally, business law is not just a national issue but a state issue. If individual states within countries continue to offer tax breaks, the problem remains.

      tl;dr – it’s complicated, and business has the upper hand.

    5. Bob.H
      Posted 26/03/2013 at 2:55 pm | Permalink |

      The problem is that the Government doesn’t have the guts to fix the problem.

      Income tax with all its exemptions deductions and rebates is an inefficient way to raise revenue and is inherently open to abuse. It is really becoming a dinosaur in the modern world.

      A direct tax on turnover without any deductions is the simplest way to raise revenue and has the least opportunity for tax reduction, legal or illegal. This why the majority of businesses oppose it.

      Until the Government tell the businesses to go jump and impose an equitable system for everyone we will continue to have the problem of tax minimisation demonstrated by Apple.

      • GongGav
        Posted 26/03/2013 at 3:14 pm | Permalink |

        That simply wont work. You would destroy our economy in the process, and undo decades of work to create what is considered one of the most stable on the planet.

        There are reasons a debit tax system hasnt been put in place, the simplest of which are our agreements with foreign companies. By agreement we cant tax money that is heading overseas, because their laws take precedence. Its actually an extension of whats in the Australian constitution.

        It might look good on paper, and seem to solve plenty of problems, but the problems such a process would introduce are far worse. In short, you would end up with Australia being boycotted by the rest of the world.

        And no, thats not an exageration.

        The alternative would be to remove our money from Australia and do all our financial dealings offshore. Get hit once, and once only. Which wouldnt solve the problem.

        • Bob.H
          Posted 26/03/2013 at 3:36 pm | Permalink |

          “By agreement we cant tax money that is heading overseas, because their laws take precedence. Its actually an extension of whats in the Australian constitution.”

          I would suggest that you go and have a look at our double tax agreements. We do impose tax on money going overseas including interest, dividends and royalties.

          If we can’t impose a debits tax how come we have a GST which is imposed on transactions within Australia regardless of overseas affiliations? Why hasn’t that sent us in to economic oblivion?

          Where in the Constitution does it prevent a debits tax system? Last time I looked the Commonwealth had the taxation powers ceded to it from the States so the Commonwealth powers wouldn’t be covered by the Constitution as far as I am aware.

          • GongGav
            Posted 26/03/2013 at 4:48 pm | Permalink |

            Fine, if you think it’s got a chance of working, go to your Federal member and tell them to man up and get it going.

            It simply wont work, as good as it looks on paper. I’m talking from experience here, I administered the last debits tax we had in Australia, and I work with GST legislation now. Oh, and I worked in Sales Tax as well. Three similar issues.

            GST isnt charged on transactions by the way, its charged on goods and services. Big difference. You have something thats taxable, its a flat 10% of the cost. That cost is effectively transferred along the wholesale and retail line to the final consumer, which is very different to what you propose.

            The most common debit tax suggested is a small percentage hit to every transaction, usually a small amount like 0.5% of the value. Which undermines every business practice our economy has built up over 100 years of taxation, and alienates us to the global economy.

            Why would large multinationals deal with Australia when every money movement loses 0.5%? Or more. Lets take Apple. They move an iPad into Australia, for $550. Semi-random number, its what I’ve been using in regards their $6b revenues debate, so I’m sticking with it.

            So, they move that $550 product into Australia. $2.75 hit. The importer (Apple Aus) onsells the product to JB HiFi for $600. Another $3 hit. JB HiFi banks that $600, another hit. They pay their staff out of that, another hit. Apple Aus banks their take, ANOTHER hit. Apple International moves the $550 out of Australia, yet another hit…

            They add up, which is great for the system, that one transaction has just generated around $20 in taxes. Out of what is currently (and frankly, correctly) a $50 gross profit in Australia.

            And therein lies the little nasty with a debits tax. Imports end up getting smashed by the tax, because the biggest part of the cost gets hit twice, while the smaller part relevant to Australia gets hit half a dozen times if not more.

            Now go tell the economy of Australia that we’ll be hitting their profits for around 40%. The average punter wont care, they take their pay out and work with cash. Oh, there’s another problem right there. Cash sales stay out of the debits tax system.

            It. Just. Wont. Work.

    6. Bob.H
      Posted 26/03/2013 at 8:30 pm | Permalink |

      @ GongGav You say.
      “”I’m talking from experience here, I administered the last debits tax we had in Australia…..”

      To the best of my knowledge Australia has never had a debits tax of any sort so I would be really interested if you could reveal the details. The closest that I can recall was a stamp duty on financial transactions which was found to breach the interstate trade provisions of the Constitution.

      “GST isnt charged on transactions by the way, its charged on goods and services.”

      Get real there has to be a transaction for GST to be charged. Playing word games doesn’t answer the questions that I put which I note that you have not answered.

      “Out of what is currently (and frankly, correctly) a $50 gross profit in Australia.”

      So you tell me that you have extensive experience work with tax yet you don’t seem to understand transfer pricing. Sorry GavGong but anyone who has had experience working with tax since the late 70′s is well aware of this problem.

      This is the problem that we are looking at currently with Apple and others. No country has found a solution to this practice in a traditional “income tax” system so it is obvious that another system is required.

      A suitable variation on the debits tax that you describe may just be the answer.




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