Apple iTax stings global consumers

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Cross-posted from The Conversation.

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.

Indulging Apple

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.

Sympathy for the authorities

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.

Antony Ting is Senior Lecturer of Taxation Law at University of Sydney.

Houses and Holes

Comments

  1. High taxation leads to high(er) unemployment. Governments can’t have their cake and eat it. Do they want jobs or taxation revenue? With no appetite for collecting (land) rents publicly they can GAGF.

    Good on Apple (and others). The only shame is that Dutch sandwiches aren’t readily available to SMEs.

    • High taxation leads to high(er) unemployment. Governments can’t have their cake and eat it. Do they want jobs or taxation revenue? With no appetite for collecting (land) rents publicly they can GAGF.

      Horseshit.

      This kind of nonsense specifically favours large multinationals at the expense of the small and medium enterprises that power our economy. Apple is a leech on the Australian economy, it is not keeping unemployment low.

      • casewithscience

        @Jason

        Exactly – does anyone expect Apple to suddenly stop trading in Australia if they had to pay their tax here?

    • Consider this, most of Apple’s costs are based around development (done in the US) and production, not the Australia based sales staff. I don’t see how requiring them to pay tax is going to cause a large increase in unemployment. In fact, if Apple and the other multinationals paid their fair share of tax then the Govt could potentially cut company taxes across the board! Do you think that might help reduce unemployment?

      • You mean the US Govt there.

        As you rightly point out most of Apples costs are in R&D (IP creation) done in the US and in contract manufacturing predominately done in China.

        The government getting ripped off is the US – and they have only themselves to blame with their CFC, “check the box” and foreign income deferral regimes.

        What do they have/do in Australia? A wholesale / distribution function and a couple of flagship retail stores so Apple fanboys have a place to line up at every couple of years.

  2. This reminds me of the classic Aussie tax fraud where you set up a company in Vanuatu or Zurich & it charges your Oz business for “services” & you go overseas & travel on the o/s credit card, not having paid tax on the “services” income. Not really any different is it given that Apple produces nothing in Ireland but charges $550 for the Aussie iPad. Classic fraud!

  3. Mmmmm… as a succussful app developer, Apple have paid approx $50,000 in GST on my sales alone. They require every AU app dev to be GST registered and Apple do pay the GST. So 10% of all app sales are tax collected here in Oz. Fact.

      • Nope, they collect and pay the GST on the 30% of the sale they keep. I pay the GST on the 70%.
        My point is that GST is collected in full.
        About 60% of my app sales are OS and on that I pay company tax, so really not sure about the iTax arguments.

      • casewithscience

        GST is paid by the consumer, not the supplier. It is very different to a company earnings tax requirement.

      • I am fully aware of how GST works and perhaps I did not make myself clear. My bad…

        My point is that, from my experience, Amazon, Google and Samsung do not account for the GST part of their revenues whereas Apple does.

  4. Mr Cook says his company “complies fully with both the laws and spirit of the laws”. What a crock. They might be complying with the laws, but they are certainly not complying with the spirit of the laws. Another instance of someone ( preferably rich and/or famous ) said something, so it must be true.

  5. I remain somewhat confused about the iPad at $600. if Apple AU are buying it from OS, then no GST credit, yet when it sells it here, approx $60 in GST is collected. Not sure the quoited numbers are correct at all.

    • Apple do not pay GST. They just pass on the cost that was levied to the end customer. The consumer generates the GST liability by purchasing a product. Apple receives the money and passes it on in its return. To them it’s a neutral situation. The end user is the one generating GST revenue as they cannot claim anything back.

      I’d rather see a no corporation tax, income tax etc as these can be avoided with diligent tax planners and instead push the revenue raising on a land based tax which can’t be moved by tax planners unless they can magically move land that is. It would provide employment opportunity as we’re ultra competitive with low/no tax regimes.

  6. I would argue that based on the economic outcomes the structure of using Ireland as a re-invoicing location is subject to Part IV A (if it is still around).

    The use of Hong Kong as a reinvoicing structure was not uncommon in the early 1980’s and also served to overcome allegations of dumping of products sourced from some countries that needed foreign currency.

    Time to add a turnover tax on corporates, rebateable against company tax paid in Australia. Maybe with different rates based on industry or with ohter tweaks to ensure that companies like Apple and others engaged in transfer pricing, reinvoicing, use of Intellectual Property in tax havens are all caught.

    • For Part IVA to apply you need to prove that the dominant purpose for entering into the scheme is the tax benefit.

      We don’t manaufacture the goods here in Australia so some related party has to charge us something for the goods. Whether it be Ireland or some other country.

      Which is a transfer pricing issue.

      The problem is the USA continues to persist with citzenship being the determining factor when deciding if you are a resident for taxation purposes. For corporations this becomes where the company is legally incorporated rather than where does management and control reside.

  7. I dont blame the likes of Apple/Google/(insert multinational) for them dodging national taxes..

    They’re simply responding to the incentives put in place by our politicians.

    Talking about morality/fairness etc is pointless as corporate entities are largely designed to be sociopathic entities that extract as much rent for their owners as possible.

    Fix the laws and incentives surrounding this issue and the problem goes away overnight. However, you need to expect that these companies will kick and scream blood murder along the way…

    • “I dont blame the likes of Apple/Google/(insert multinational) for them dodging national taxes.. They’re simply responding to the incentives put in place by our politicians.”

      Indeed, as Chris Rock says, “Don’t hate the player, hate the game.”

      • drsmithyMEMBER

        Everyone knows wars require people to do horrible things.

        That doesn’t mean we don’t hold people responsible for war crimes.

      • ‘Everyone knows wars require people to do horrible things.
        That doesn’t mean we don’t hold people responsible for war crimes.’

        Very true and I do agree with you. I personally wouldn’t do it, and I don’t support Apple’s actions but I do think that fixing the system is better than getting worked up at public examples of exploitation of it. It distracts from the real problem. If Apple did start paying more tax, the ability to for others to do what they are doing now would not disappear.

  8. To the extent that corp taxes ARE levied then the MNC’s need to pay at the same rate as the other international and local co’s. How is it that the WTO agreements and the FTA’s can prescribe transnational agreements covering patent exclusivity but not taxation.

    There are thousands on MNC subsidiaries in Aus reducing company tax through royalty payments (to tax havens for use of corp IP) and through the manipulation of transfer pricing. As a result little tax is collected and the ATO (as I understand it audits about ten companies each year – and these can take several years)

    These companies see Australia as a market. They invest in no R&D here and no manufacturing here. They create few jobs (sales, marketing and distribution) and FA local investment.

    If they want IP protection and access to our legal institutions to enforce this then they should pay taxation according to our regime or stay away. I cannot see why their rights under the WTO / FTA’s are not linked to their obligations (to pay tax).

    If one is revoked or avoided then so should the other (unilaterally if necessary).

    I note that on ZH there have been articles suggesting the US regulators will provide an amnesty to allow many US co’s with substantial offshore cash holdings to repatriate their cash without tax penalties. Does this sound like free trade working?