The Dim-Post

March 18, 2016

The Apple Tax

Filed under: economics,finance — danylmc @ 9:16 am

Matt Nippert reckons:

A major Herald investigation has found the 20 multinational companies most aggressive in shifting profits out of New Zealand overall paid virtually no income tax, despite recording nearly $10 billion in annual sales to Kiwi consumers.

The analysis of financial information of more than 100 multinational corporations and their New Zealand subsidiaries showed that, had the New Zealand branches of these 20 firms reported profits at the same healthy rate as their parents, their combined income tax bill would have been nearly $490 million.

But according to their most-recent accounts filed with the Companies Office, most covering the 2014 calender year, these 20 companies overall paid just $1.8m in income taxes after several claimed tens of millions of dollars in tax deferments and losses.

It’s a bit weird, on the face of it, that companies pay tax on their profits while workers pay tax on their revenue. If you earn $100,000 a year in salary you don’t get to go on holiday, buy a new car and some jewels and then tell the tax man ‘Sorry, but I broke even this year. I got nothing for you.’

There are good arguments for taxing companies this way but they all rely on businesses actually wanting to make a profit. If many of our largest companies don’t want to be profitable – if they exist to channel revenue directly to parent holders in lower tax jurisdictions overseas and then declare a loss – then the model fails.

Here’s one solution, that I half-thought through while brushing my teeth this morning: give IRD the power to designate deliberate non-profit companies and tax them based on revenue, not profit. Just like the rest of us. This might cause them all sorts of terrible problems during economic downturns but if they’re worried about that then they can shift back to the old model where they declare profits and pay dividends to their parent, not ‘licensing fees’, or whatever, which turn vastly profitable companies into loss-makers.

41 Comments »

  1. Another solution for multinationals and franchises might be to just require them to post a proportionate fraction of their profit to their revenue. If Apple makes, say, 1% of their revenue here, then charge them NZ tax rates on 1% of their *worldwide* profit. Instead of letting them decide which country the profit ends up landing in.

    Comment by Stephen Davis — March 18, 2016 @ 10:27 am

  2. Bout time the gov. does smething about this!!!!!!!!!!

    Comment by A M Thom — March 18, 2016 @ 11:09 am

  3. The UK government has been tackling this issue. Makes for interesting reading.

    Comment by Robert Singers — March 18, 2016 @ 11:24 am

  4. If you earn $100,000 a year in salary you don’t get to go on holiday, buy a new car and some jewels and then tell the tax man ‘Sorry, but I broke even this year. I got nothing for you.’

    You can’t? Oh shit … !

    Comment by Andrew Geddis — March 18, 2016 @ 11:26 am

  5. My impression is that the problem of taxing multinationals can be tackled, and is being tackled, by collaboration between governments. Limited success so far but the promise of more, further down the track. It may be better to keep plugging on with this approach, than to try to unilaterally reform the NZ corporate tax framework.

    A.

    Comment by Antoine — March 18, 2016 @ 11:55 am

  6. Interestingly IRD basically has this power already , they were willing to give it a go with a couple of surgeons in Christchurch playing games with a family trust (http://www.stuff.co.nz/business/money/5498103/IRD-wins-landmark-tax-case) but they haven’t got the stomach to go after a multi-national.

    Comment by Mike — March 18, 2016 @ 11:57 am

  7. My first point would be tax is a cost so these firms moving tax to low rate jurisdictions means consumers get cheaper products (with more profit left for future innovation). So good on these companies prudently mitigating tax for *our* benefit.

    Outside that, careful what you wish for. These co’s have no real physical presence here. The same rules necessary to tax them here will allow overseas jurisdictions to tax our exporters on their exports. Why shouldn’t, for example, China tax our apple sales being made there, even if our orchardists have no physical presence in China? The world devolves again into the limited consumer choices wrought by protectionism.

    Far better for a small country like NZ to compete on tax. Have a low taxing regime here to make these co’s move profit and staff plus work here.

    Comment by Mark Hubbard (@MarkHubbard33) — March 18, 2016 @ 11:58 am

  8. Would a tax on company revenue look all that different from GST?

    Comment by Graeme Edgeler — March 18, 2016 @ 12:08 pm

  9. @Graeme: yes it would. For instance, GST-liable sales can be offset by GST-liable purchases. Further, parties exporting from NZ collect revenue but do not pay GST. And so on.

    Comment by Antoine — March 18, 2016 @ 12:32 pm

  10. PS I think a revenue tax favors (a) taking revenue offshore and (b) vertical integration

    Comment by Antoine — March 18, 2016 @ 1:29 pm

  11. “consumers get cheaper products (with more profit left for future innovation)”

    R&D is its own cost and does not have to come out of company profits.

    Comment by gasmark — March 18, 2016 @ 2:07 pm

  12. “consumers get cheaper products” -Apple? Really?

    http://www.radionz.co.nz/programmes/first-person/story/201776580/first-person-with-john-campbell-apple's-high-ideals-and-low-tax-bill

    Nice work by John Campbell

    Comment by Corokia — March 18, 2016 @ 2:33 pm

  13. Re (12) … God help me. But hands up, yes, got me. Changes none of rest of comment, however, which is the unbracketed substantial part🙂

    Comment by Mark Hubbard (@MarkHubbard33) — March 18, 2016 @ 2:34 pm

  14. ‘Interestingly IRD basically has this power already ,……….. but they haven’t got the stomach to go after a multi-national.’

    They sure went after Aussie banks – ANZ and Westpac, think – that were using aggressive schemes to lower their tax bill and the two had to pay a large amount to settle. Or are Australians too meek, mild and exceptionally ethical to qualify as multi-nationals?

    In any event corporate tax is ultimately paid for by shareholders and the employees of the companies concerned and the real value of companies like Apple is not their tax contribution but their products and services.

    And some companies like Amazon – while in its world takeover mode – operate primarily to expand the empire and increase the share price with the latter being linked not to current but projected returns over time.

    Comment by Tinakori — March 18, 2016 @ 2:49 pm

  15. @Graeme/@Antoine – further, Facebook and Google (for instance) sell (in cash terms) exclusively to GST registered companies – any GST Google NZ levy is claimed straight back.

    (The transaction where they provide a service to an end-user in return for their eyeballs/information is effectively untaxed).

    Comment by richdrich — March 18, 2016 @ 3:35 pm

  16. Another dodge is the charitable status of some big businesses (mostly church based) who pay no tax but compete with businesses who do pay tax. Breakfast foods and plant nurseries come to mind

    Comment by jger — March 18, 2016 @ 3:51 pm

  17. “They sure went after Aussie banks – ANZ and Westpac, think – that were using aggressive schemes to lower their tax bill and the two had to pay a large amount to settle. Or are Australians too meek, mild and exceptionally ethical to qualify as multi-nationals?”

    That was a bit different, that was a dispute over whether the banks were complying with the terms of an earlier ruling over how they could conduct certain transactions. Above I was talking about the Comissioners power to determine income.

    Comment by Mike — March 18, 2016 @ 4:07 pm

  18. “@Graeme/@Antoine – further, Facebook and Google (for instance) sell (in cash terms) exclusively to GST registered companies – any GST Google NZ levy is claimed straight back.”

    Not necessarily, I purchased advertising on Facebook for a page that I run, it is not run as a business, but considering I was in NZ, paying NZ$, with an NZ credit card, buying advertising to be specifically delivered to NZ based users, I was surprised that the receipt had no GST information what so ever.

    Comment by Mike — March 18, 2016 @ 4:11 pm

  19. Wouldn’t it be nice if we had an opposition party capable of joining dots like the Herald can?

    Comment by leeharmanclark — March 18, 2016 @ 4:44 pm

  20. It would be, but they make stupid decisions and take the rope from the commentariat and dirty politics crew to paint themselves into absurd corners like this: http://www.newshub.co.nz/politics/labour-threatens-facebook-ban-over-tax-issue-2014012815

    Comment by Mike — March 18, 2016 @ 4:52 pm

  21. Mike, the reason you didnt get any GST information, is there was no GST paid on the transaction by Facebook. Thats their play, the transaction is done via their Irish/ dutch/Luxembourg ? subsidiary. Its all done offshore via their website. Credit card payments are good for that.

    Comment by ghostwhowalksnz — March 18, 2016 @ 4:54 pm

  22. >It’s a bit weird, on the face of it, that companies pay tax on their profits while workers pay tax on their revenue.

    Nah. Profit is what a company’s income is. Many workers do claim costs – they’re called contractors. PAYE people don’t, but they get other privileges.

    Comment by Ben Wilson — March 18, 2016 @ 4:57 pm

  23. @Mark Hubbard “My first point would be tax is a cost so these firms moving tax to low rate jurisdictions means consumers get cheaper products …So good on these companies prudently mitigating tax for *our* benefit.”

    That’s not how it works though. These firms (or indeed any firm) charge as much as possible as the market will bear for their products. An additional tax should only reduce the profit to the company. If the company could have charged its consumers 10% more (say) without significant loss of market share, etc, then the company would have already been doing so.

    It is possible that properly paying tax might make a product so unprofitable that the company doesn’t want to bother selling it. But as tax is charged as a percentage of the profit this shouldn’t really be the case. And if a company can only make what it considers “enough profit” by unfairly avoiding contributing to society in tax, then it isn’t a company we should want to operate in NZ anyway.

    Alternatively, having to properly pay tax might well be used as a pretext by a company to “say” that they have raise the consumer price. But that’s just the company trying it on. If consumers refuse to pay the higher price, then the company will have to return prices to the original level.

    Comment by RJL — March 18, 2016 @ 5:04 pm

  24. This is one of the very rare situations where my own business experience is relevant. I was running a promotion in Christchurch which didn’t end up generating any revenue. My boss explained there was a tax reason why it had to be shut down faster than you’d expect – expenses which don’t help generate income can’t be used to offset revenue for tax purposes. They’re the equivalent of holidays, cars, and jewels.

    Comment by Gareth Wilson — March 18, 2016 @ 6:03 pm

  25. I am not sure why Apple is the target. After all a few years ago, Apple had no footprint in NZ. Everything was sold through a NZ distributor that imported the products itself from Australia (Renaissance). The profit made by retailers never exceeded 8% gross margin on Apple gear; all profit was made from accessories such as mouse mats and cables, etc. At the distributor level the profit was minimal as well. All in all, very similar to the profit being reported now. The simply reality is, is that there isn’t a lot of value add in the distribution chain.

    So, if the concept of revenue deemed to earn X% profit ever took off a company such as Apple could simply revert to that model. Net result to the government is not a whole lot more tax and consumers end up with worse experience.

    Plus there is the little question of the US which claims priority on all Apple profit.

    Comment by Chris White — March 18, 2016 @ 8:41 pm

  26. After all a few years ago, Apple had no footprint in NZ. Everything was sold through a NZ distributor that imported the products itself from Australia (Renaissance). The profit made by retailers never exceeded 8% gross margin on Apple gear; all profit was made from accessories such as mouse mats and cables, etc. At the distributor level the profit was minimal as well. All in all, very similar to the profit being reported now. The simply reality is, is that there isn’t a lot of value add in the distribution chain.

    In 1992 I was quoted a price of just over $NZ18000 by the Apple dealer on College Hill for a Mac Quadra 900 basic box & keyboard. After importing from a US discounter and paying GST on delivery I still had change from $12000. Apple did promptly provide a replacement power supply when the original under warranty in the first week of use, but that involved a phone call to Cupertino, with parts sent from Australia.

    Comment by Joe W — March 18, 2016 @ 9:43 pm

  27. “failed under warranty”

    Comment by Joe W — March 18, 2016 @ 9:44 pm

  28. “Why shouldn’t, for example, China tax our apple sales being made there, even if our orchardists have no physical presence in China?”

    You said it. They have every right to as should we.

    Comment by Myles T — March 19, 2016 @ 12:15 am

  29. “The simply reality is, is that there isn’t a lot of value add in the distribution chain”

    If that was the case why would they be stating large profits in NZ then? Are they overstating profits here to avoid tax back home?

    Comment by Myles T — March 19, 2016 @ 12:18 am

  30. And I sometimes wonder how many of these tax dodgers also receive taxpayer largesse at the same time.

    Comment by Kumara Republic — March 19, 2016 @ 1:05 am

  31. Talking of Apples, perhaps Mr Nippert might care to compare the companies’ tax with their profits rather than with their revenue.

    Typical rabid leftist bullshit Herald reporting, sucked up hook line and sinker by people too lazy to think..

    Comment by Adolf Fiinkensein — March 19, 2016 @ 9:33 am

  32. “Mike, the reason you didnt get any GST information, is there was no GST paid on the transaction by Facebook. Thats their play, the transaction is done via their Irish/ dutch/Luxembourg ? subsidiary. Its all done offshore via their website. Credit card payments are good for that.”

    I am aware that is how the transaction works, but quite simply they should be paying gst on that. Just the same as if I was in NZ buying a billboard ad in NZ to advertise to NZ people.

    Adolf Fiinkensein:
    “Talking of Apples, perhaps Mr Nippert might care to compare the companies’ tax with their profits rather than with their revenue.”

    Good little troll running DPF’s line. Quite simply the “licencing fee” which is paid back to a tax haven is the profit, not a cost, they are cooking the books. And he is not claiming they should be taxed on their revenue.

    I do wonder how DPF might feel if an overseas polling company came here and set up on a similar basis and started under cutting him by 20%.

    Comment by Mike — March 19, 2016 @ 10:00 am

  33. The comparison about a ‘local billboard’ isnt valid, as the facebook pages/servers are located overseas. The only way to catch them is not a GST type tax on revenue but an old fashioned sales tax paid by the user only. ie like the petrol tax that is paid by the person buying fuel ( GST is on top of all other fuel taxes).
    But how do you get the end user to volunteer as the Googles/facebooks are overseas entities and arent legally touchable.

    Comment by ghostwhowalksnz — March 19, 2016 @ 10:51 am

  34. The server is one part of many in the chain, the advertising is published in NZ though. I’m well aware that that is the current state of affairs that they cannot currently get visibility of the transactions, but it is still evasion as far as I am concerned.

    I can’t set up a shop and say “oh my efpos machine routes through Romania, I’m not going to collect GST”. Nor can I say my billboard signs are printed overseas so I am not going to pay GST.

    Comment by Mike — March 19, 2016 @ 12:19 pm

  35. There are very good reasons why revenue isn’t taxed. That would be massively distortionary and would push us toward vertical integration. For example: you have a company that makes widgets, another one that distributes and a third that retails. The distributor and retailer each mark up 10%. If the output of the manufacturer is valued at x, the total combined revenue of the three companies is 3.31x. If they were all one company the revenue would be 1.21x for exactly the same output. So if we taxed revenue the vertically integrated company would pay just over a third the tax.

    Revenue is a bit meaningless as an absolute number.

    Comment by Matthew W — March 19, 2016 @ 8:36 pm

  36. Numbers – I think there’s a degree of false security with numbers.

    With pen and paper try adding e and Pi.

    We try and map elements of our experience onto numbers but they may not be all that well
    defined.

    Comment by NeilM — March 19, 2016 @ 9:28 pm

  37. Matthew W – your vertical integration example seems to miss an important factor of price. The market pays want the market will bear (3.31x). It doesn’t really matter how the revenue is sliced up between actors on the supply side as presumably, the price to the end consumer wouldn’t vary without the producer voluntarily giving up surplus.

    Comment by Gregor W — March 19, 2016 @ 11:01 pm

  38. Gregor,

    The end users are paying 1.21x (x with two 10% mark ups applied). So with the three companies revenue is “inflated” because of the inter company trading. The point is – revenue isn’t sliced up, it is doubled up (or tripled up in my example). Value add /profit is sliced up.

    Comment by Matthew W — March 20, 2016 @ 7:27 pm

  39. Gotcha. I misread aggregate revenues as price.

    Given the state of our consumer market though, how much vertical integration is genuinely possible (aside from obvious examples where distribution/networks are entrenched and products aren’t substitutable e.g. Petrol, electricity)?

    Comment by Gregor W — March 20, 2016 @ 7:49 pm

  40. Comparing businesses to households is rather immature, I would have thought, Danyl. If a CEO is taking a $2million salary, then he or she is taxed on their revenue and not their profits, the same as a worker earning $30,000 a year. And what companies spend money on holidays and jewels? Legitimate operational expenses are tax deductible as they should be, and some assets are depreciable which does have tax benefits to some assets but not as much as used to be the case.

    Comment by Daniel Lang — March 30, 2016 @ 1:34 pm


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