news The Federal Labor Party has demanded the Government bring Australia’s international taxation regulations into line to deal with multinationals such as Apple and Google, which are siphoning billions of dollars of revenue out of Australia while paying only small amounts of local tax.
In a statement issued this morning, Shadow Assistant Treasurer Andrew Leigh called on Treasurer Joe Hockey to show strong leadership at the G20 Finance Ministers’ meeting this week to achieve global action to crack down on “multinational corporations that pay little or no taxation at all”.
“Since coming to office, the Abbott Government has talked a big game on multinational profit-shifting. But all it has done is to water down Labor’s sensible reforms that ensure multinationals pay their fair share,” said Leigh.“On 14 December 2013, Assistant Treasurer Arthur Sinodinos announced that it would abandon a $700 million measure to prevent multinational firms reducing their tax bill.”
“On 4 January 2014, Senator Sinodinos said he was considering abandoning measures that required 200 of Australia’s largest firms to disclose their total income, taxable income and tax paid.”
“The Coalition seems to favour loopholes and secrecy – not fairness and transparency. It’s not fair that under existing rules global firms can siphon profits earned in Australia to low-taxing countries. That’s hundreds of millions of dollars of tax revenue lost that could go towards Australian hospitals, schools and infrastructure,” Leigh said.
The issue has been a long-running one with relation to the technology sector. In the year to 28 September 2013, for example, Apple recently reported that it made $6.1 billion in revenues, with gross profits up 7.4 percent to $529.4 million. However, the company continued to pay only a small amount of tax in Australia, listing its local corporate income tax expense as $36 million for the period, despite the fact that it made $6.1 billion in revenues.
The reason Apple pays so little tax in Australia is that as a proportion of revenues, Apple’s cost of goods sold in Australia is significantly higher as listed in its ASIC documents than it is in the US, meaning the company pays little tax in Australia compared with its US tax situation.
Similarly, for the 2012 calendar year, the Australian division of search and software giant Google paid a meagre $4.1 million in tax (compared with $74,176 the year previously), despite the fact that industry analysts regularly estimate that the company makes over $1 billion in revenues from Australia each year. Much of the revenue is not counted in Google Australia’s financial results as it is billed from offshore.
Corporations such as Apple and Google, which make huge sums of money from sales in Australia but have not historically paid tax sums commensurate with those revenues, have been under the microscope recently. The Labor Federal Government had planned a raft of tax reform measures to deal with corporations that the Australian Taxation Office suspected were not dealing at proper arm’s length terms with their foreign associated entities. However, the Coalition has stopped short of committing to tackle the issue.
Internationally, a number of European countries such as the UK, France and Italy have enacted new tax laws to deal with the situation.
“When tax rules allow businesses to shift their income away from where it was produced, it erodes that country’s tax base and shifts the burden onto individual taxpayers,” said Leigh today.
“International tax rules are not keeping pace with changes in the digital age and the realities of doing business in our globalised world. Rapid and dramatic shifts in global economic activity, driven largely by e-commerce, pose very real and significant risks to Australia’s corporate tax base and the tax bases of countries right around the world.”
“There is a pressing need for action. This week’s G20 finance ministers is a potential watershed moment in international tax policy,” said Leigh. “Labor advanced a fair agenda to combat tax avoidance and evasion. It’s up Joe Hockey and Arthur Sinodinos to take up the baton left by Wayne Swan and David Bradbury so multinationals pay their fair share of tax. Until they do Australian households and businesses will have to take on a higher tax burden and local communities suffer.”
opinion/analysis
Other first-world jurisdictions are clearly moving to tackle this issue, and it is time Australia did as well. The rules as they stand are currently substantially unfair and let the multinationals get away with blue murder. If revenue and profits are earned in Australia, it should be taxed in Australia — that’s a basic for any tax system.
Image credit: Apple
Got to love the cost of goods sold BS. Some how, as if by magic, an apple product made in the same chinese factory, and transported a shorter distance to Australia, magicly costs more. Maybe they only make Australian apple products on days where they pay penalty rates…
Then there is this http://www.afr.com/p/national/news_corp_blew_the_budget_DFlluROVi0F6CV1fQ5UJvJ
People argue about this all the time, but the reality is that even if the laws are changed, its going to mean NOTHING to Australia. Transfer pricing is a legitimate tool, and for the end markets is largely used correctly. The simple fact is that most products are made elsewhere, and the cost is passed along the line.
So, to use Apple as an example, the iPad we see on the shelf for $800 has around $500 in parts (give or take). That cost isnt felt in Australia, its felt in the US by the parent company, or the West Indies thanks to the Dutch/Irish sandwich loophole.
Anyhow, wherever its made overseas, they still need to recoup their costs, so when its sold to the Australian branch, they get charged $650 to cover the production, transport, and administrative costs incurred to that point. So the Australian part of that $800 is actually down to $150. Which needs to be spread between the importer the local distributor (if any) and the retailer. Then their portion of profit needs to pay for stores, advertising, staff, etc. Doesnt leave much left.
And the profit margins on most multinational products is generally pretty slim. Sorry, the problem you’re describing here is already addressed by current transfer pricing legislation, where that import cost (the $650 in the example) has to be a fair price. And it is. If it isnt, the laws are already there, around the world.
Its not a problem here, its a problem in the US where that $650 is diverted away from the original jurisditcion thanks to the Ireland — Netherlands — Ireland loophole.
To use a different example, lets look at Woolworths and Coles. To pick an example, lets look at 1 litre of olive oil, listed at $10 on the shelf. You buy it, Woolies doesnt make $10 on the sale, they make about 50c. The product costs $8 per item from the distributor, who pays $6 to the importer, who pays $5 to the manufacturing plant, who pays $3 to the olive producer in the first place – the final $10 is split at various levels.
The last $2 Woolies gets is split further, to cover the costs of running the supermarket – rent, electricity, staff, advertising, etc so then end up making very little out of the $10 they charge for the product.
The end result may surprise people, but when you do that for every product Woolies sells, they end up only paying tax on around 1-2% of their turnover. Almost exactly the same proportion as Apple does in Australia. And people think its OK because Woolies is Australian when the basic rules of costs v profit are in play.
Do a little google searching, the info is publicly available.
GongGav, I think you’ll find that Apple and Google have far superior profit margins than Woolies. If Apple/Google profit margin is a large multiple of Woolies, why are they paying the same proportion of tax? Their profit margins are certainly not slim, both achieve EBIT to revenue ratios of about 30%. Woolies is more like 8%.
Apple and Google in America perhaps, but we’re not talking about Apple and Google in America, we’re talking about Apple Australia, and Google Australia. They have to buy the base product from overseas, and that cost is going to go overseas. Where it goes is a problem for the originating country, which in most cases is the US, because the parent company gifts their assets to the Irish holding company.
Thats what transfer pricing is all about – the initial big cost of the product isnt going to stay in Australia no matter what they do, and thats where the problem is. The laws are already there to deal with shifty transfer pricing, and the action being demanded will achieve exactly nothing.
This is what I’m trying to get to – the problem isnt in Australia, its in Ireland, the Netherlands, and the US, specifically the shelf companies holding the assets rather than the developing company. Changing the laws here wont change where the problem is, because what is happening HERE is exactly how it should happen.
People get confused with gross revenue and gross profit, which are two very different things. Woolies gross revenue for 2013 was $58b. It cost them $42b to buy stock, and a further roughly $13b in other costs. Gross profit was around the $3b mark, and they paid about $1b in tax against that. Net profit out of that $58.5b was $2.254b.
All legit, but if someone said to you that Woolies earned $58.5b and only paid $1b in tax, whats your reaction? Exactly the same things happen to every other company, including Apple Australia – they buy stock, the money they pay goes somewhere else. And as soon as it goes overseas its another countries issue. Us changing Australian laws wont close the loophole, and how people interpret the problem already has a solution here in Australia.
The only thing that changes is that Apple Australia buys the product from a related entity. Thats exactly what the transfer pricing laws deal with and if they were doing something wrong, you better believe that a big stick would be used on them. What Apple International charges Apple Australia is a reasonable price, or the authorities would have been all over them years ago.
If people dont understand the problem, how can they understand the solution? To use Woolies numbers, people need to focus on the $3,214,800,000 profit, and the taxes paid on that, rather than the $58,516,400,000 they turned over.
Source – http://www.woolworthslimited.com.au/icms_docs/137198_Annual_Report_2013.pdf – page 118
We could always invade Ireland.
Oh wait, they’re not brown.
In all seriousness though, is it really that unfeasible to tax based on the source country (China?) rather than the virtual Ireland/US/Netherlands? Products that are sold in Australia don’t physically travel through Ireland.
Fair question, but again it already happens. Example I give is an iPad. $800 on the shelf. Using rough figures, $100 goes to the vendor, $100 goes to Apple Australia, and $600 goes to Apple Ireland.
But it doesnt stop there. Apple Ireland hasnt made $600 on the product, they still need to get it made. So the manufacturer has spent $450 making it, and charges Apple Ireland $500. The manufacturer has to pay for all the bits and pieces from other specialist manufacturers (the screen, the battery, etc) so that $450 is split to pay for all the components.
And those component makers are going to be paying tax on their profit wherever they are, after their costs in sourcing their own basic components, all the way to the people buying sand and making the silicone. This whole situation is being blown out of proportion, because people are looking at the gross revenue and not the net profit before tax.
I’d love to see what that figure is, because I expect far less people would be having problems. Its still an issue, dont get me wrong, but its not the doomsday scenario the politicians are representing.
Again, people look at the $800 you pay for an iPad, and expect tax to be paid on that in Australia, when the reality is that each step of the chain, from basic components to end user, splits that $800, makes a little profit, and pays tax on that.
ONE step of the chain is all this is about – from the point it becomes a usable product, to the distribution network. And that one step isnt as big a portion of the final price that people think. For the most part that one step is an issue for the US as well, not Australia.
From your example, that would be (if they only sold iPads) 12.5% of $6.1 billion in revenue, that’s 762.5 million to the vendors and 762.5 million to Apple Australia. On that, there are operating costs for Apple Australia, but in order to get a $36 million tax bill, the operating costs would have to be 762.5-36/0.3 = $642.5 million. Does that sound right? I don’t know. It’s more likely that the margin that Apple Australia gets is even slimmer, with Apple Ireland taking a larger piece of the cake (I wouldn’t be surprised if it were as much as 90%). Go to any Apple store, they won’t give you a discount. And actually, the margin that vendors/resellers get is probably more like 10% (judging by the occasional sale and anecdotal evidence from salespeople employed by resellers).
I mean, isn’t Apple Ireland really a non-practicing entity in a sense?
How is it not tax avoidance?
That ONE step is the one that matters here. Apple is not paying its fair share.
Actually, with Apple Australia as both a wholesaler and reseller, their gross profit (and in turn, net profit) should be even greater, and yet, they paid only 36 million in tax.
Actually, why are we even doing this exercise, gross profits are given:
$529.4 million on $6.1 billion in revenues.
That means “Apple Ireland” (we’ll call it) takes more than 90% of revenues. $36 million in tax implies $120 million in net profit, i.e. $409.4 million operating costs.
Apple Ireland is the one step that matters.
Poop, it didnt post my reply from yesterday :(
Dont take my numbers as gospel, they are somewhat random.
You’re right, the problem is Ireland, not here, and that gets lost on most people because they dont understand WHERE the problem is or how big (or small) it actually is.
Out of the shelf price we see, there is only a small portion that represents the actual profit to Apple. Call it $50 per item, or $100, its not as much as most people seem to think. And when it gets laundered from Ireland to the Netherlands, and back to Ireland, its that last step that causes the problem.
At that point, the money is in the hands of a non resident company (through shareholdings, or something like that), and gets moved offshore. US law doesnt recognise moving the money that way, but Irish law does, and thats the kicker. But in effect its only $50 or $100 of the final shelf price. Thats where the drama is. The other $700 to $750 is taxed somewhere.
For Australia, all we care about is the portion after what Apple Australia gets charged – in my example, from the $600 to $800 mark. Each of those parts, in one way or another, gets taxed somewhere in Australia as company tax. And there is still GST on top, which for an $800 iPad is around $73.
We collect taxes from Apple, dont worry about that. What happens HERE is what should be happening. It’s the diverting of the headquarters portion away from the US that is the problem. And thats something we cant change.
To put it a different way, when they finally do come up with a solution, people are going to be disappointed with the outcome.
Okay, but, my point is that Apple Ireland is charging Apple Australia 90% of the retail price for the wholesale product. Apple is deliberately avoiding tax payable on the major part of their profit – contained in the 90%. Money which comes from Australians and is paid for goods and services sold in Australia. I imagine they chose 10% as the magic number that allows them to have gross profit close to equal to operating costs (so that net profit, and therefore tax payable, is very small). This is ridiculous. Of course they’re going to try to minimise their tax paid – but should they be allowed to? Apple Ireland doesn’t even really sell the product, or ship it, to Australia. Can’t something be done on that front?
Suddenly BEPS become a milestone. Does these guys read anything from OECD?
Even his media release “IT’S TIME TO BRING INTERNATIONAL TAX RULES INTO THE 21ST CENTURY” has been poorly chosen. What happened between 2007-2013? Was that period XIX century?
Well… politicians… quoting a former president “They are all the same sh#t”
http://www.cefitax.org/beps-global-outbreak-australia/
Its been a problem for decades, not just since 2007. Every year or two, the opposition calls for some sort of solution, yet when they get into power, they do nothing themselves.
See my longer posts above – very little we do here will result in something people want, because most people misunderstand the problem.
Short summary is that its one of those problems thats in the Too Hard basket, and everyone is hoping that someone else comes up with an answer, when in reality its just a fortunate chain of laws that several countries have in place to encourage business. Nothing ILLEGAL is being done, but in the end what needs to happen is that these companies need to pay more tax in the US, where their headquarters are actually located.
And that involves putting solutions in place their, to prevent transfer of assets to shelf companies, as well as encouraging Ireland and the Netherlands to find some solution to their loopholes. But even if they do that, there are other loopholes they can use ot minimise their tax. This is just the best one.
Little bit of info. Everyone knows that Apple has a massive amount of cash on hand. What most people dont know is that they have that cash on hand because they are diverting their profits through Ireland to Bermuda, or wherever it is.
They cant pay that directly to shareholders though, because if they bring it back into the US it becomes taxable. So what they are doing is taking out massive low interest loans to have tax free cash in the US to pay out dividends, then using that offshore cash to pay the loans down, when it creates a loss situation in the US. Have a revenue neutral position (or ‘loss’) in the US, the money being brought in doesnt get taxed.
They are also lobbying heavily for a one off exemption of taxation for bringing the money in, to avoid the taxes as well.
To be fair, they don’t have to pay more tax in the USA, they just need to pay more tax in general.
If that means the USA parent company earns less, because they paid more tax on Australian revenue then so be it.
I don’t think you are right to characterise this as a problem for the USA, so much as a problem for any jurisdiction in which Apple does business. If they are able to charge inflated tax-free amounts in Ireland to avoid taxation in the USA, then they are able to charge inflated tax-free amounts in ireland to avoid taxation anywhere in the world.
The problem is Ireland, but that doesn’t mean Australia can’t get a fairer share of the taxation.
(Remember; if you don’t pay any tax on the products you sell out of Ireland, what incentive is there for you not to have a gigantic markup on the product in Ireland? – since you won’t be paying any tax on it at all!)
I will add that I do understand your argument, and fundamentally agree – there is very little that can be done about this except ensure that pricing is harmonised between regions.
IE America should not have a significantly lower ‘Cost of product’ when compared to Australia [volume not withstanding].
With all respect PeterA, it IS ultimately a problem with the US portion. I’m using somewhat random numbers with my various examples, because I dont know the fine detail breakup, but of the ticket price on the shelf, the whole problem actually boils down to a very small portion, which is the main point I’m trying to make.
Using isuppli.com’s listing, the one I’m thinking of (64Gb wifi iPad air) has a shelf price of $700, and a total manufacturing cost of around $300. That $300 needs to be paid by Apple, and will fall into the Chinese jurisdiction (assuming all the parts making up that $300 are sourced in China)
So, $400 left, spread around the globe through a central control company (Apple Ireland). When they move the product to whichever country, local taxes kick in right there. My somewhat random numbers use $600 as a base cost Apple Australia is being charged, and I dont think its too far from the mark. $300 for manufacturing, $100 for Apple Irelands “profit”, Aussietax markup, and GST.
To say its a problem for the US is correct because the important non-taxed part should be caught in the US laws. Whatever we do wont change whats happening during the manufacturing process, or after it lands on our shores. The key problem is whatever amount Apple Ireland is culling as profit, to launder through to Bermuda.
That amount should be falling squarely in the jurisdiction of the USA. But thats the only part thats a problem, which is what I keep coming back to. Every other part is being taxed, and being taxed at a reasonable rate, depending on the country.
If they are charging inflated rates in Ireland, then the current laws are already there to address that. Thats exactly what transfer pricing laws are about. If the proportions get out of whack, every government in the world is ready to jump on it.
I’ve been doing this for 20 something years, I know transfer pricing well enough to understand whats going on. And when they come up with a solution, I’m saying right now that people still wont be happy, because all its going to address is a small portion that should be taxed where the real HQ is, not the paper HQ.
To use Australian taxes as a rough guide, of the $800 some $280 comes out as tax – $72 GST on the $800, and 30% of the non-Irish portion, or roughly 30% of $700. If they bring that key part back into the right tax jurisdiction (30% on the Bermuda bound $100), that $280 jumps to $310.
Dont hold those numbers to gospel, because every country has different tax rates, but thats a very simple example of what’s not being taxed – its $30ish per item, or about 10% short of what it should be. Thats all. And that should be taxed in America.
The multinationals have access to big 5 accounting firms who guide them on how to price their products. It would imagine they attribute a large chunk of the cost to intellectual property / knowledge and if the bulk of this declared in low tax countries then Australia is getting duped just as much as the US.
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