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Corporate tax avoidance – what does Apple’s tax bill have to do with us?

On the face of it, the clever, multi-jurisdictional structures of companies like Apple and Google seem a clear case of corporate tax avoidance, and the Federal Govt in Australia appears justified in trying to stamp it out. Many reports and newspaper articles loudly proclaim that companies like Apple are only paying in the order of $193m tax in Australia on $27b revenue.

But like all things in tax, politics and computer design, nothing is ever as simple as it seems.

Firstly, there are a lot of moving parts in Apple’s international structure, which it must be stressed is completely legal.

Apple and other multinationals have simply done exactly what countries like Ireland and Singapore wants it to do: that is, bring its business to those countries in exchange for low corporate tax rates. It seems more than a little sanctimonious to criticise Apple for doing precisely what a sovereign country has encouraged it to do.

Or should we criticise Ireland for offering lower tax rates to attract the business? That would be odd, seeing as Australia (and most other countries) do a version of the same thing.

If Australia were striving to develop a healthy economy and thriving/robust society after years of internal turmoil and struggle, wouldn’t we as Australians want to try and find ways to attract investment and innovation to our shores?

Secondly, the law of unintended consequences is definitely something to watch. The Government’s own Parliamentary Budget Office has warned that unilateral diverted profits tax (a so called “Google Tax”) could lead to other countries imposing higher taxes on Australian businesses abroad in retribution.

Commentators and politicians tend to constantly overlook a fundamental feature of international taxation – profits are taxed at the source of the good or service, not where it is consumed. To be fair, commentators are not alone in overlooking this – the ATO has forgotten this on occasion as well, as the High Court case of Crown Insurance Limited, which I ran, shows.

The Managing Director of Google Australia, Maile Carnegie, clearly explained the issue by reversing the argument at the Senate Hearings this week:

“If you look at someone like Rio Tinto, they have 35 per cent of their customer base in China, but less than 1 per cent of their tax in China ... Google has a similar structure.”

Thirdly, as the Commissioner of Taxation has recently commented, major multinationals like Google and Apple are in continual dialogue with the ATO about specific items of income and deductions and are almost continually audited. These are frequently questions on which reasonable minds can differ, but the big companies have ample resources to properly argue their case with appropriate evidence, obtained in real time. In the words of Apple’s Tony King, "All our costs of doing business are reported in our books, and we buy products from affiliate companies outside of Australia. Apple has been operating in Australia for more than 30 years, and we now employ over 2,000 people here."

Transfer pricing is a well established mechanism by which multi-national companies are correctly taxed on the profit sources in specific countries. While Australia’s transfer pricing taxation regime is far from perfect, it is at least a well know, internationally accepted model that works.

As any business owner will tell you, one of the main objectives in how they run their business is how to remain competitive in a rapidly changing world, specifically, how to maintain profitability. Is it fair to expect any less from organisations like Google and Apple just because of their sheer size?

Google’s rep Maile Carnegie puts it this way, "I guess my answer to that one is that fundamentally, Google does not structure itself based on tax, it structures itself based on being competitive. We are not opposed to paying tax. What we're opposed to is being uncompetitive. And just like Australia needs to compete with Singapore or Ireland or the US or the UK for various things, we need to compete with the people sitting at this table as well as Tencent in China, as well as Ali Baba, who is now incorporated in the US. So we structure ourself to be competitive.”

Would you expect business owners or managers to respond in any other way?

Let’s take a moment here to consider the possible consequences.

My great concern is that taxes cannot be targeted at specific entities. Taxes that are introduced with the justification of a specific set of circumstances, quite frequently end up targeting taxpayers with completely different profiles.

So if the Treasurer introduces new legislation as a populist measure to counter the tax structuring of Apple and Google, we should all be very concerned to ensure that it does not end up catching ordinary Australian SME companies trading overseas. As we have seen, the consequences of poorly designed and administered tax can be incredibly damaging for individual taxpayers. These consequences should not be risked simply to grab a good headline that will have no other positive effect.

Putting it a little plainly.

Bad laws make bad results for the wrong people. The simple truth is that the more technical and complicated laws that are created, the more lawyers and accountants get paid to find loopholes (which we will, because greater complexity always results in greater loopholes) and you end up with an expensive cumbersome unworkable system that big companies with expansive legal budgets will always successfully exploit. Which of course greatly increases the chances of accidentally catching a little fish – the SME taxpayer – who cannot afford Apple’s lawyers and never thought for one second that the Google Tax would apply to them.


And don’t get me started on the possibility of retaliatory trade practices, identified by the parliamentary budget office, that’s for another article. 

Posted in: Tax & ATO News Australia at 10 April 15

Get your affairs in order before you leave Australia

Are you thinking about leaving Australia to take up a new job? Do you realise that you might be taxed in Australia on the income which you earn overseas? Seeking professional advice from a tax lawyer is imperative as they can provide you with the advice which you need to get your affairs in order so that you do not get surprised by an alarming tax bill.

 

If you are an Australian resident, you are taxed on income that you earn overseas. For example, if you accept a job in Dubai, you will be taxed in Australia on the income which you earn there. On the other hand, if you are a non-resident, you are only taxed on income which is sourced in Australia.
 
The residency tests used by the ATO to determine your residency status for tax purposes are not the same as those used by other Australian agencies, such as the Department of Immigration.

The main test that the ATO uses is the “resides test”. Basically, the ATO will look at whether you reside in Australia according to the ordinary meaning of “reside”.

If you do not satisfy this test, then the ATO may also look at any of the following tests:

• Have you been in Australia for more than 183 days in any year? (183 day test);
• Is your domicile in Australia? If it is, have you established a permanent place of abode outside of Australia (Domicile test); and
• Are you a current Commonwealth government employee? (Superannuation test).

The most contentious of these tests is the domicile test. Two recent AAT decisions found in favour of the ATO because although the taxpayers did not reside in Australia, the taxpayers were considered Australian residents for tax purposes because they failed to establish permanent places of abode outside Australia. In both cases, the taxpayers accepted employment overseas - one as a marine engineer in Dubai, the other as an operations technician in southern Oman. As the taxpayers were required to travel as part of their employment, both taxpayers lived in shared accommodation, but only spent a limited amount of time there. On this basis, the AAT held that the taxpayers had failed to establish permanent places of abode outside Australia.  In one case, the AAT described the taxpayer as a “citizen of the world”.

These cases clearly demonstrate that you need to carefully organise your affairs before you leave Australia.
 

Posted in: Tax & ATO News Australia at 05 June 13

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Tax & ATO News Australia

Author: David Hughes

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