This article is by Antony Ting, senior lecturer in Taxation Law at the University of Sydney. It originally appeared on The Conversation.
analysis Apple, famous for its innovative products, is equally creative in its tax structure. From 2009 to 2012, it successfully sheltered US$44 billion from being taxed anywhere in the world, including sales generated in Australia.
While there are probably some sound reasons for Apple’s CEO, Tim Cook, to claim in a US congressional hearing in May 2013 that his company “complies fully with both the laws and spirit of the laws”, many people may think it is immoral for such a successful company to avoid taxation.
But the company shouldn’t be alone in the being blamed for the low tax it pays around the world. Concerted government action, including specific provisions inserted into US tax laws in 1997, have made it possible for multinationals with complex structures to funnel profits between the gaps of tax authorities. And it is unlikely to be a coincidence that Irish tax law has been crafted to allow companies incorporated in Ireland to take full advantage of these gaps in the US.
Mapping the reach of Apple’s iTax scheme and the rules it uses to hide profits is difficult, if not impossible, to discern from its financial statements. My research on this topic would have been impossible but for information revealed in the US Senate hearing in May last year.
The tax structure of Apple is designed to ensure that little income is left to be taxed in non-US markets like Australia. For example, when a customer buys an iPad in Australia for A$600, the sale is recorded as a revenue of Apple’s distribution subsidiary incorporated in Australia. But this company “purchases” the iPad from another Apple subsidiary incorporated in Ireland for A$550.
The Irish subsidiary is basically a shell company with no employees and no factory. The iPad was manufactured through third party contract manufacturers in China, who shipped it directly to Australia.
Hearings on both sides of the Atlantic have revealed that by effectively disabling one of its major anti-avoidance weapons in its tax law – namely the controlled foreign corporation regime – the US government has been knowingly facilitating the avoidance of foreign income tax by its multinationals.
Originally, under the US anti-avoidance regime called “subpart F”, the kinds of payments made to the Irish shell company by the Australian company would have been considered the income of the US parent. But changes made in 1997 meant Apple was able to elect to deem the Irish company to have “disappeared” for US tax purposes, thus escaping from the US tax net.
Apple’s tax structure not only takes advantage of gaps and loopholes in tax laws around the world, but also highlights the key role that politics can play in shaping these tax policies. The US government’s indulgent attitude towards the tax avoidance of its multinational firms’ is all done in the name of “promoting competitiveness” of national champions, including hugely successful companies like Apple.
Ireland also plays a key role in the avoidance structure. It provides the perfect complementary tax provisions to the US, allowing firms to create tax-free income. This has successfully attracted Apple, among others, to incorporate subsidiaries in the country.
A reading of US tax history suggests that the US government is unlikely to strengthen its tax laws any time soon. The corporate lobby in the US is too powerful for Congress to ignore.
So what can other countries like Australia do to protect their tax bases?
This is a difficult and complex issue requiring international consensus to reform the current cross-border tax rules. The OECD has already embarked on an ambitious project targeting “base erosion profit shifting” by these firms. But given the divergent political agenda of the G20 countries involved in the project, it’s difficult to predict an outcome.
Regardless of what progress is made by the G20, countries like Australia should consider implementing a properly designed country-by-country reporting regime. Under the regime, a multinational would have to disclose essential tax information – like turnover and profits, tax payments and the number of employees – separately for each country where it operates.
At present, tax authorities around the world often suffer from information asymmetry. While multinationals operate as one single enterprise, it is a challenge for tax authorities to obtain relevant information about these firms’ tax affairs in order to identify targets for further investigations and audits.
It is easy to sympathise with tax authorities who find it challenging to obtain even the most basic information, like the group structures of these multinationals. If a country-by-country reporting requirement had been in place, tax authorities would have been alerted to the extremely low effective tax rate paid by Apple in Ireland much earlier and could have taken appropriate actions promptly.
Besides this “identify-the-target” function, the country-by-country reporting system has another more important function: the deterrent effect. If a multinational knows there is a disclosure requirement for detailed country-by-country information, it may have less incentive to pursue aggressive tax avoidance schemes.
The potential tax benefit may be outweighed by the increased risk, not only of tax investigations and audits, but also of possibly damaging its reputation. Apple might have thought twice before implementing its iTax structure if it had known that country-by-country reporting could disclose its dark side to the public.
This article is drawn from research, authored by Dr Ting, to be published in a forthcoming issue of the British Tax Review. Antony Ting does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.
This article was originally published on The Conversation. Read the original article.
Image credit: Apple
Can the next article on this issue please name at least half a dozen of the other multinationals who do this? Holding up Apple, and occasionally Google, as the punching bag of global tax avoidance is getting old. Husic’s brand vocabulary might not be up to it, but I think Delimiters is.
The reason this article is about Apple is it is Apple who have just had documents leaked that showed exactly what they were doing and how they were avoiding tax. Other companies didn’t. Renai didn’t choose to pick Apple due to some inate hatred of Apple. Did you choose to post because of fanboi love for Apple?
Lionel, before my reply I went back to the previous half a dozen articles on the topic, not all written by Renai (including the one above), almost all focused on either Apple or Google. What about everyone else doing this? Everyone loves to punch Apple, because they’re the biggest (this is not about fanboyism, but thanks for playing) but the problem – whether it’s ‘immoral’ tax minimisation, or explotation of labor in developing nations, or… – is bigger than just Apple. It’s multinational Business As Usual.
Refering to Apple’s “iTax scheme” minimises the scope of the problem – for what purpose? Better click-through? Pft.
I fully agree with other commenters on previous related posts – this issue is a tax dodge that is the deliberate result of carefully constructed international tax arrangements.
All I’m asking is that if a series of articles on a particular topic by a range of authors that all tend to hold the (IMHO reasonable) view that this kind of ‘tax minimisation’ goes beyond what’s legal and is basically a global tax-dodge, which makes it much more difficult for a non-multinational or far smaller ‘multinational’ to genuinely compete, then it would be nice if at least some of the articles pointed out how widespread the issue really is, rather than directing all the punches at one bag, when there’s gym full of bags to take a swing at.
There are plenty Anthony. Off the top of my head, Apple, Google, Ebay, Amazon, and Starbucks all take advantage of the loophole.
There are also a bunch of medical companies doing the same. A lot of them are actually on the list of biggest Irish employers.
Of the ones listed above though, only Apple and Starbucks would have manufacturing costs, and with Starbucks that would generally be locally sourced.
The story gets interesting with the non-manufacturing companies, who are only selling digital rights and practices – there arent manufacturing costs to absorb the costs, so moving the money to Ireland has more characteristics of tax minimisation.
Starbucks is interesting for a different reason, because they dont export their product. So why are the profits for a US made and consumed product being moved away from the US controlling interests?
You’re spot on – the story gets more interesting if you look at those other companies. I’ve looked into the Apple angle pretty thoroughly lately, and can say with confidence that for them specifically, the problem isnt anywhere near as bad as people seem to think.
There is still a problem, and I’m not defending them, but of the amount Apple Australia is charged for a product, Apple Ireland is paying quite a portion in manufacturing costs, and GST. If there arent any manufacturing costs, as in what Google is selling, all Google Ireland would be paying on what they charge Google Australia is the GST portion.
So focus on those companies providing digital or non-importable products instead, and see where it goes. Personal feeling is that they will be in bigger trouble than Apple if/when a solution is found.
that would actually make for a really good read Anthony :D
Why is his statement “complies with the spirit of the laws” not challenged.
The fundamental spirit of most countries tax laws is to find a fair way to tax the income and profits that individuals and companies earn in their countries.
There is nothing fair about what Apple (and many other multinats as Anthony points out) is doing. They are not paying their fair share of tax for the profits they are generating.
This is not in the spirit of the laws. It is not even moral because it is actually stealing.
They are stealing wealth from Australia and Australians because they are taking profits out of our country without paying a fair amount of taxation to Australia for those profits and they are doing it deliberately and knowingly. They structures and transfers they set up are done for no other reason. Just to get more out of Australia than they should.
I think the media in the country needs to go harder and be a stronger voice on this matter. I love my iPad and iPhone and iMac but I also recognise that we need education and hospitals and Apple should pay it’s fair share of tax from what it makes on these profits to contribute to these just like I do and just like local businesses do and just like other businesses that don’t use these loopholes do.
A flat transaction tax would eliminate the scourge of offshore havens and tax impropriety, avoidance schemes along with the plethora of tax loopholes exploited by multinational corporations and the rich.
http://www.ft.com/in-depth/financial-transaction-tax
Australia’s current conservative government has no interest in forcing their secret benefactors and corporate friends to pay more tax, in exchange for reducing taxes to middle class and the poor, so until the rest of the developed world starts evolving to a 21st century taxation system, we will continue to trail behind and watch our standard of living plummet.
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