CASE STUDY ASSESSMENT
READ, LISTEN, WATCH, INVESTIGATE, THINK … THEN WRITE.
TASK: DO YOU THINK THAT THE TAX STRATEGIES USED BY GOOGLE-MICROSOFT AND APPLE IN AUSTRALIA COULD BE CONSIDERED ETHICAL?
Using theories of ethics, corporate social responsibility, stakeholder management and ASX P&R (principles and recommendations) develop a report defending or criticising (or both) the tax behaviour of global corporations such as Google, Microsoft and Apple in Australia.
Use the literature to justify your argument/s.
GLOBAL GIANTS SLIP THROUGH TAX NET
Some companies may pay zero tax. Photo: Lesley Parker
A major challenge facing the Australian Government and governments around the world is how to protect their tax revenue.
One response has been to target people who transfer assets or divert income to tax havens such as the Cayman Islands to avoid paying tax. In Australia, the Tax Office has targeted wealthy individuals with its Operation Wickenby. However, these responses target pickpockets, while bank robbers operate with impunity.
A far bigger challenge to tax revenue is income shifting by multinational corporations such as Apple. These businesses pay virtually no corporate tax, and have been defiant in the face of criticism.
A recent Organisation for Economic Co-operation and Development (OECD) report addressed these issues and came up with an “action plan”, which was endorsed by the finance ministers of the world’s richest nations ahead of the G20 leaders’ summit in September. OECD Secretary-General Angel Gurría said international tax rules were aimed at ensuring businesses don’t pay taxes in two countries. “This is laudable, but unfortunately these rules are now being abused to permit double non-taxation,” he said.
How do some companies manage to pay little or no tax? It is achieved by artificially structuring transactions so there’s little relation between the economic substance and legal form of the transactions.
Let’s take a simplified example of a company manufacturing devices in China, shipping them directly to Australia and selling them to customers in Sydney. If the transaction were structured in a way reflecting its economic substance, the taxable income would be equivalent to the sale amount received from the customer less the costs of manufacturer and other “real” business expenses.
The sale amount might be $300 a device, with “transfer pricing” rules dictating how much of that is recognized in Australia and China respectively. But, to avoid paying tax, extra “paper” transactions could be recorded. First, the devices would be sold to a company in Ireland before being resold to a company in Australia. Second, the company in Ireland could make “royalty” or “licence” payments to a second company registered in Ireland but resident in a tax haven such as the Cayman Islands. These payments could be $275 a device. Now there’s only $25 in taxable income to be recognised in Australia, China and Ireland.
Most of the income is recognised in the Cayman Islands and tax is avoided. Ireland doesn’t limit payments to the tax-haven company through transfer pricing rules, it allows a company registered in Ireland to be resident for tax purposes in a tax haven and it has a very low corporate tax rate.
Some in Ireland might call this being “tax competitive” and argue that significant employment is created in operating these shell companies. Maintaining the bank robbery analogy, others might call this driving the getaway car.
Why has so little been done? Tax treaties between countries constrain the ability of governments to respond and this has emboldened multinationals. These treaties were intended to provide clarity about where income should be taxed and prevent the taxation of income in more than one country. However, differences in tax laws have been exploited so income is not taxed anywhere.
Governments must act to either modernize the treaties or act unilaterally to ensure income is taxed appropriately. The aim should be to ensure income is recognized on the basis of the economic substance of transactions.
Peter Wells, head of Accounting, UTS Business School
http://www.uts.edu.au/about/uts-business-school/news/global-giants-slip-through-tax-net
WATCH
Australian Corporate Tax Avoidance Committee Enquiry: Apple, Google, Microsoft
https://www.youtube.com/watch?v=OAJMlBExD4w
APPLE PAYS $193M TAX IN AUSTRALIA ON $27B REVENUE AS FEDERAL GOVERNMENT VOWS TO CAPTURE LOST TAXES
The World Today
By Will Ockenden
Updated 7 Mar 2014, 1:00am
Sorry, this video has expired
VIDEO: Apple has come under scrutiny for tax avoidance.(ABC News)
PHOTO: Analysts say Apple has paid only $193 million of corporate tax on $27 billion in Australian sales.(AFP: Dale de la Rey)
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MAP: Australia
An Australian investigation into technology company Apple has revealed details on just how many billions of dollars the global giant has shifted in profits around the world to minimize its tax.
The Australian Financial Review's analysis shows that while Australians have bought $27 billion worth of Apple products since 2002, the company has paid only $193 million to the Australian Tax Office (ATO) - just 0.7 per cent of its turnover.
The newspaper estimates that around $9 billion in profit has been shifted offshore to minimise taxation.
-Apple worldwide in the past four years have avoided paying tax on $US44 billion,- said Antony Ting, a senior lecturer in taxation law at Sydney University.
Mr Ting has long been investigating how companies such as Apple, Microsoft and Google exploit tax laws to their advantage.
-If I pay $600 for an iPad in Australia, then $550 is paid to Apple Ireland and out of the $550, $220 is not taxed anywhere in the world,- Dr Ting explained.
-So that means basically around 40 per cent of the payments we make to buy Apple products in Australia has escaped Australian tax and at the same time escaped tax anywhere in the world.-
They are arranging themselves in such a way that the royalties go through Ireland to places like Bermuda where they're not taxed.
US-based tax lawyer Lee Sheppard
The Financial Review obtained a decade's worth of financial accounts for Apple Sales International.
Investigative journalist Neil Chenoweth discovered how Apple manages to avoid tax legally by moving money to foreign safe havens.
Dr Ting says it is the best estimate yet of the Apple profits which have escaped Australian coffers.
-Apple's structure is perfectly legal under the current tax law, but they are very good at looking at loopholes and the current structure has, in a way, the blessing of the US government,- he said.
-Because the US tax law provides or facilitates Apple to avoid foreign tax on their foreign income and the US government knows that this is the problem for over 10 years, but they do not take any action at all.
-What Apple convinced the US government [of] is that by helping Apple to avoid foreign tax, you are helping Apple to be more competitive in the world markets.-
Apple declined the ABC's request for an interview or a comment on the issue.
TRANSFER PRICING LOOPHOLE
Dr Ting says Apple uses a form of so-called transfer pricing to shift its taxable income to low tax countries.
-It's basically what we call transfer pricing - so Australia Apple purchased the iPads from Ireland and Ireland of course, the Irish company is in fact a paper company, it has virtually no employees, very small costs and all the products are manufactured in China by third party manufacturers,- he said.
-With the global transfer pricing arrangement, Apple Australia has to pay out of this $600 purchase... $550 to Ireland, so by that payment the bulk of the profit it shifts from Australia to Ireland and where it escaped tax anywhere in the world.-
US tax lawyer Lee Sheppard, who specialises in multinational corporations, says companies are exploiting the fact that most of their products' value rests in intellectual property.
AUDIO: US tax lawyer discusses global crackdown on tax evasion (The World Today)
-The value of such a product is really not in the plastic and glass, right? It's in the protected intellectual property, it's in the patents. That, as income, that could be represented by a royalty,- she said.
-What Apple and companies like it are doing is they are arranging themselves in such a way that the royalties go through Ireland to places like Bermuda where they're not taxed.-
Ms Sheppard says it is a perfectly legal way of doing business under current international tax law and corporate governance arrangements.
-Australia and the other G20 countries, and the members of the OECD (Organisation for Economic Co-operation and Development), they've all signed tax treaties and the tax treaties say that a company can deduct royalties and it can pay royalties to itself, essentially, and sometimes you have a treaty that says you don't withhold tax on that either.-
GOVERNMENT COMMITTED TO CAPTURING TAX
The Federal Government says it is committed to capturing taxes that companies like Apple have avoided.
Treasurer Joe Hockey, who hosted the recent G20 finance ministers meeting in Sydney, made tax avoidance a key part of the G20's agenda.
-The starting point is we will be discussing things that do affect the lives of everyday Australians,- he said at the time.
-We will be discussing taxation arrangements and transfer pricing by major corporations around the world.-
The Government was keen to press the message again this morning.
-Businesses should pay their fair share of tax where they earn profits and it's important though to address that in a coordinated way,- Finance Minister Mathias Cormann said.
AUDIO: Apple under fire from investigation into tax arrangements (The World Today)
The Trade Minister Andrew Robb has echoed that statement.
-Our view has been, as a government, that all companies must pay a fair share of tax,- he said.
There was a breakthrough at the G20, with nations agreeing to adopt new rules for the automatic exchange of tax information.
The OECD is also looking into the issue.
Dr Ting says while large companies will continue to try to avoid paying tax, some things are starting to change.
-With the international consensus [and the] determination of the government we can at least minimise the opportunities for multinationals to avoid tax.-
Topics: tax, multinationals, business-economics-and-finance, company-news, australia
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