A previous post looked at what happened when representatives from Apple, Google and Microsoft appeared before the Australian Senate Economics Committee as part of their investigation into Corporate Tax Avoidance. That was the first public meeting of the inquiry and there have been three since. Here we will look at some extracts from the exchanges that are relevant to the debate on this issue in Ireland.
The Committee met for a full day on the 9th of April (programme). In the first session, Grant Wardell-Johnson of KPMG explained that the “double-irish” has more to do with US CFC (controlled foreign corporation) rules than anything else:
Mr Wardell-Johnson: There are 32 countries throughout the world that have CFCs. The US was the first in 1962. We were the ninth and we have one of the toughest CFC regimes throughout the world. So when you are asking about double Irish Dutch sandwiches or parking funds overseas or money in tax havens, our CFCs operate to attribute that income back into Australia. It is a fundamental point that the planning that was raised yesterday could not occur with an Australian holding company. Our CFC rules just take the passive income and say we are going to attribute that back. The US, which was the first country to introduce CFC rules in 1962, have defects in their rules. When you look at a double Irish Dutch sandwich, it basically has an Irish company, a Netherlands company and an Irish company with the IP in the lowest company, and royalty chains up the chains. Sure, there are Irish rules in relation to that which have changed. Basically, you could have an Irish incorporated company without tax residents in Ireland because the central management and control was outside of that. That was one of the plays in relation to that. The biggest play is off that page and it is the US CFC rules. The US CFC rules did not operate well to attribute income back in those circumstances. Australia's rules would do so.
In the next session David Richardson from the think-tank The Australia Institute referred to the attributing of Apple’s intellectual property (IP) to Ireland:
Mr Richardson: Another important point to make is that we heard KPMG talk about the international tax treaty system and that we do not want to put extra layers on top of that—arguments to that effect. But there is no treaty, as far as I am aware, that has ever said that countries do not have the right to tackle tax avoidance. Getting back to the country reporting, while I think we can all agree that there would be benefits there, if we still allow Apple Australia to pay licence fees to Apple Ireland for Apple technology, that may be more transparent but it does not really tackle the problem that this is basically a sham transaction. It surprises me, actually, that the United States are not more upset about the fact that they are losing revenue because Apple attributes all Apple's technology to Ireland.
Of course, Apple actually hasn’t attributed the IP to Ireland. It has attributed the IP to Irish-incorporated companies but the part that holds the IP operates in the US. The letter published by the European Commission outlining its state-aid case against Ireland clearly states this. Here are paragraphs 26 and 28 from the letter (emphasis added):
(26) AOE is party to a cost sharing agreement whereby, together with other Apple Inc. subsidiaries, it shares R&D costs and risks of developing certain Apple products. Apple Inc. holds the legal title to all Apple IP, while AOE has IP rights under that cost sharing agreement. No rights in relation to the IP concerned are attributed to the Irish branch of AOE.
(28) All strategic decisions taken by ASI, including in relation to IP, are taken outside of Ireland. As with AOE, ASI is a party to the R&D cost sharing agreement with other Apple Inc. subsidiaries under which the total costs of the group’s worldwide R&D are pooled. ASI’s Irish branch has no authority to make decisions relating to Apple IP or the cost sharing agreement. No rights in relation to the Apple IP concerned are attributed to the Irish branch.
A similar theme of transferring IP to Ireland was raised in this exchange with the EY representatives who appeared before the committee who weren’t shy about throwing some implicit accusations at Ireland.
CHAIR: Okay, I might start off. Let's talk about the broader issue here. We have had some really interesting evidence that was given to us yesterday. You know what a double Irish sandwich with a Dutch twist is?
Mr McLeod: We are certainly aware of what one of those is, yes—never having advised on one.
CHAIR: Did I say it wrong?
Mr Williams: I think you got it right.
CHAIR: As you are experts in terms of taxation—and, by the way, I understand it is not an illegal structure or may or may not be, depending on your jurisdiction, so put that aside—
Mr Williams: And it is certainly not a structure that would be effective from an Australian point of view. That is the critical factor.
CHAIR: But what is it? Could you very quickly explain that to me?
Mr Williams: It is an arrangement whereby US entities who sought to move intellectual property from the US arrange that in such a way that that intellectual property could be held in another jurisdiction—often in Ireland. If you wanted to move a patent or any other form of intellectual property there—
Senator EDWARDS: Because of the 12 per cent tax rate.
Mr Williams: Possibly, or possibly because of other incentives they might be offered there.
CHAIR: That is the allegation.
Mr Williams: Exactly—or to access markets in that region, for example. And the then the arrangement was that there would be a local company carrying out the services for that. They would obviously pay a fee for the intellectual property cost, and also there was the Dutch aspect of it, which is the insertion of a Dutch company to minimise any withholding tax when fees are moved between the relevant entities.
Senator MILNE: And then the next Irish company is domiciled in a zero-tax jurisdiction like Bermuda.
Mr Williams: Potentially like Bermuda, correct.
CHAIR: So, effectively, you are using Ireland, Holland and Bermuda.
Senator MILNE: Using a Dutch subsidiary in Bermuda. Mr Williams: That is the structure that is often publicised and spoken about.
CHAIR: And that is a well-documented kind of thing. You do not have to do that much research to realise the allegations.
We know the IP isn’t located in Ireland. Of course, talk of a ‘knowledge development box’ and the like to try and encourage the location of IP to Ireland (previously discussed here).
The last person to appear before the committee that day was Pascal Saint-Amans, the OECD’s point man on the BEPS project.
Mr Saint-Amans: Ireland is a good example, I think. Ireland has shown that they are part of the BEPS project. They are not resisting anything, but rather they are participating. You may have seen last year, even though it was largely symbolic—it was a good symbol—that they did put an end to what we call the 'double Irish' with a grandfathering clause. But the signal is here.
Ireland is changing. Ireland has agreed on the minimum standard on treaty shopping. Ireland is participating fully in that project and will implement—I have no doubt about that—the conclusions which will be reached. Why is it so? Because you have multilateral action. Everybody has to gain out of multilateral action.
If the small, open economies, which actually can be harmed by the BEPS project, do not participate in the BEPS project or try to block it, then other countries will take unilateral measures which will hit all the countries, in particular the small, open economy. That is the dilemma for all the countries. Do I participate losing something, or do I not participate but then I may lose even more?
What I see is not the risk of some countries being free riders and trying to attract investment by still offering this ability to host investment without the real activity, because, again, other countries will have the means to protect their tax base. What I see, and I do not know whether it is a risk or an opportunity, is the fact that tax competition will not go away.
What we are putting an end to is unfair tax competition or tax competition which does not make sense—in other words, the system where you can locate profits in zero tax jurisdictions, where nothing is happening. What is going to happen, I think, is that there will be some pressure to reduce corporate income tax in high-tax countries, from the high 30s, as is the case in the US, in France or in other countries, to probably the high 20s, and, for the small, open economies, probably between 10 and 20 per cent. But these will be nominal and effective rates. What was not fine with Ireland was that their nominal rate was 12.5 per cent but, through the double Irish, the effective rate was close to zero per cent.
The committee held another full day of hearings on the 10th of April (program) but references to Ireland in the transcript were few. On the 22nd of April three senior officials from the Australian Tax Office were before the committee.
- HIRSCHHORN, Mr Jeremy, Deputy Commissioner, Public Groups, Australian Taxation Office
- JORDAN, Mr Chris, Commissioner of Taxation, Australian Taxation Office
- KONZA, Mr Mark, Deputy Commissioner, International, Australian Taxation Office
One notable feature of these discussions was the willingness of the tax authority officials to discuss individual companies. Some of the useful exchanges between the committee and the ATO officials that have relevance for Ireland are reproduced here. The first is on the issue of effective tax rates:
Senator KETTER: Thank you. Just in terms of effective tax rate, looking at a specific example: in the questioning of Mr King, of Apple, he made the comment: Our tax is paid on our net income, and last year it was paid at an effective tax rate just over 30 per cent. That was the figure provided there. Would you like to offer an opinion about that comment?
Mr Hirschhorn: This is an example where indeed, if you look at an effective tax rate at an entity level, the Australian entity level, the effective tax rate is going to be in the order of 30 per cent. But it indeed begs the question: should those expenses, which are at a very high price, leaving a very small margin in Australia, be coming off the denominator, the accounting profit, in working out the effective tax rate applicable to profits from goods sold in Australia? So, from a group perspective, you might say: what is the profit for the entire Apple group of iPads sold in Australia? And you might then say: in that calculation, you would have a much lower amount in the accounting profit for costs of iPads purchased. You would not have inherently the price that was actually charged. So I think it is important to say that the effective tax rates which were provided were all in a sense correct but not, maybe, useful in giving the picture that the committee would be looking for, which is: what is the Australian tax paid on effectively the economic contribution on sales in Australia?
Mr Konza: Can I just add there that I think Mr Hirschhorn has just said that saying you are paying 30 per cent on your Australian profits does not tell you anything really. But, equally, commentary in the media saying that they are paying a certain percentage on their gross sales is ridiculous. Every business has to pay its expenses.
Senator EDWARDS: We should have a turnover tax then! That is the assertion, isn't it?
Mr Konza: No. Turnover tax penalises those who have very tight profit margins.
Senator EDWARDS: I know, but the media reporting just talks generally in these terms.
Senator KETTER: I think what the media was highlighting was the comparison with, say, Harvey Norman, a business retailing Apple products, amongst many others, and paying more tax on, I think, a quarter of the turnover. I suppose that highlights the issue for people.
Mr Jordan: I think, as Mr Hirschhorn said, perhaps a better way of looking at true effective tax rates is to take the sales income that is reported in Singapore, with very little tax on it, and add that back and say, 'There's the denominator; what's the numerator?' And the numerator is very small, with a very, very large denominator. That is perhaps a better picture of the reality.
And this theme was continued in a subsequent exchange (the Mr King referred to is the Apple representative who previously appeared before the committee):
Mr Hirschhorn: In one sense the statement is correct in that Apple does pay tax at a rate of about 30 per cent on it's Australian entity's profits. The question is: in working out that ratio, should it take into account all the purchases from Singapore at the price at which it claims to have bought them? If you accept that that is a fair price then the statement is correct. If you do not accept that that is a fair price then that statement is incorrect.
Mr Jordan: We said earlier that precisely one of the issues under dispute in the audit is whether the price charged by Singapore is a proper arms-length price and whether more of that profit should be taken back here into Australia.
Senator XENOPHON: I do not want to, as the chair said, traverse issues that have already been covered. But on 8 April I asked Mr King whether Apple had shifted $9 billion of revenue from its Australian operation to Ireland. Mr King said, 'No, we haven't shifted any profits.' This is at page 52 of the Hansard. Are you able to comment on the veracity of that evidence in the context of what you have just said?
Mr Konza: The question is: have they shifted any profits?
Senator XENOPHON: I asked Mr King whether they had shifted $9 billion in revenue to Ireland; it was broader than just profits.
Mr Konza: I think he would interpret that as saying: 'We moved $6 billion in costs to Ireland.' We are trying to see whether those costs were inflated so that Australian profits were moved offshore in that process That is exactly the contest in the audit.
Although not referred to Ireland is interchangeable with Singapore in this exchange:
Senator MILNE: You mentioned the issue about Microsoft determining their $2 billion in Singapore as opposed to $100 million in Australia, and I thought Mr Jordan made a comment that licence fees is one of the issues here. I specifically asked them that question, and I wondered if you had a comment specifically in relation to the answer that they gave in the light of the fact you have identified that as one of their vulnerabilities.
Mr Konza: The only observation that I had was that, in answer to a different question, Microsoft said that the income was accounted for in Singapore. When I looked at that as a lawyer and as an accountant, the words 'accounted for' can mean virtually anything, to the extent that people might have taken it to mean that it was taxed in Singapore. That would be a misconception. Our observation, and the observation of others in the media who do general analysis of their accounts, is that the great majority of that income is immediately moved out of Singapore. So Singapore is used only as a staging place.
Senator EDWARDS: That is not what I got. I got that it was accounted for in Singapore. I am not an accountant, and I am not a lawyer, but the inference was that it was accounted for in Singapore—meaning it was taxed in Singapore.
Mr Konza: There was a witness for Google, for example, who said it was subject to tax in Singapore, and that is why the commissioner directly addressed that question, On the Microsoft side, they said it was accounted for in Singapore; so at one level you would say: yes, it was in the accounts for a moment.
Senator MILNE: We have had Apple talking about appropriate pricing in relation to their products, and clearly you are disputing that and investigating that. We have Microsoft with the issue you have just raised. We have Google now, and you are questioning whether they pay tax in Singapore. So it is pretty clear that they do not pay tax in Singapore, that this is all on its way out of Singapore to a tax haven somewhere else. Is it the tax office's view that the three—Apple, Microsoft and Google—are not paying tax in Singapore, that they are transferring the money through Singapore to tax havens, where they pay no tax?
Mr Jordan: They may be paying a small amount of tax in Singapore on a margin. But at a high level, what you have said is correct.
Ireland is directly referred to here:
Senator KETTER: Turning to Google, I think there was some evidence—and I am not sure if somebody from the tax office was there at the time—from News Corporation that there is an amount of revenue that Google is sending overseas. Do you have some views on that?
Mr Konza: It is widely public knowledge that, with the types of arrangements Google are involved in, they do not land the income in Australia in the first place. Now, these companies—
Senator KETTER: Can you verify the amount that is being reported?
Mr Konza: We would have to take that on notice because I do not have those figures in my head. When the companies were here, you spoke about the double-Irish Dutch sandwich with them. I might just make the general observation, because it might help explain things, that the industry trend over the last few years has been either to move from Ireland or to more generally split their worldwide earnings through both Ireland and Singapore, still using basically the same sandwich approach to get money to, as in some of the cases we have identified, Bermuda, because it has a zero corporate tax rate.
Senator KETTER: But the Netherlands is in the middle there somewhere, as well.
Mr Konza: The Netherlands is used for treaty shopping, to allow you to move money around the world without a transaction cost as you go. They are just insuring against change in treaty and law arrangements around the world and hedging their arrangements.
And to conclude, this exchange neatly summarises some of the different strands in the on going corporate income tax debate:
Senator EDWARDS: We have not gone down the well-worn path of the multilateral requirement of the OECD and the G20 countries—and I know that you, Mr Konza, are working very actively in that space. It adds a layer of complexity which, I can see from a helicopter view of this situation, is something of a restriction for you; you have got to operate in that space. Needless to say I am sensing today that you are hungry for some definition in transfer pricing that will provide you with a test case so you will then be able to pursue the new legislation and be able to extract from those companies involved in transfer pricing what you believe is Australia's true and correct taxation amount from those companies.
Mr Jordan: That is right because there are two very distinct areas here. One is the pure transfer pricing issue where companies do report their sales here, like Apple do, but the transfer pricing issue is the amount charged to them by their affiliates for that product. So that is transfer pricing. We are really keen, as you say, to get something up to test those provisions in the courts. No doubt that will go fully through the whole Federal Court, the full Federal Court and perhaps even the High Court and it will take a while but we really want that to happen. We are working with the Federal Court to be able to do things in a quicker way. It is not just us; sometimes the court system itself is a very lengthy process to even get the thing to the hearing. So we have to do that. The second element is not a transfer pricing one as such but it is more the Google scenario where they claim the income is never even here.
Senator EDWARDS: I was going to get to that.
Mr Jordan: That is the OECD one. That is the G20 one. That is the one where I have said in an earlier hearing that the best outcome there is to have a new set of clearer international rules that all the major countries adopt domestically that has a better allocation of taxing rights rather than the design that was done in the 1920s that all has to do with where the contract was signed and where the permanent presence is—things that are just not appropriate in the digital delivery of products and services anymore.