Saturday, March 18, 2017

Company gets battered for paying higher rate of tax

The New Zealand Herald has a breathless story under the headline “Apple pays zero tax in NZ despite sales of $4.2 billion”.  The story takes the usual approach of linking sales and corporation tax regardless of the well-established principle that corporation tax is paid on profit not sales.  But this piece goes further and ignores the principle that companies pay tax to the country where their activities take place, not where their customers are located.

The Apple subsidiary at the centre of the piece made a profit of $113 million from 2007 to 2016 and its accounts show an income tax expense of $34 million.  On this the New Zealand Herald says:

The accounts also show apparent income tax payments of $37 million - but a close reading shows this sum was paid to Inland Revenue but was actually sent abroad to the Australian Tax Office, an arrangement that has been in place since at least 2007.

A close reading of this paragraph reveals it to be nonsense.  Companies pay corporation tax to the tax authority it is due to.  The company did not pay tax to the New Zealand Inland Revenue because it did not have a taxable presence in New Zealand.  There are no Apple activities in New Zealand to tax.  The company doesn’t have a subsidiary operating there; the company doesn’t have retail stores there.  There is no permanent establishment to levy tax on.

The piece makes a big deal about the amount of iPhones sold to New Zealanders.  But the number of iPhones that Apple sold in shops to New Zealanders is zero.  The sales in New Zealand are through third-party retailers.  Apple has a company, Apple Sales New Zealand, which acts as the distributor of Apple products to these New Zealand retailers.  The company name reflects the market it services; the company itself is based in Australia.

So the company paid the tax directly to the Australian Tax Office because that is where the taxable activities of the company are located.  And this principle has been in place since the 1920s not just since 2007.

The New Zealand Herald piece has all the information that points to this conclusion but chooses to ignore it.  It is pretty easy to see that the company pays its tax in Australia and not New Zealand.  Here is the tax calc from the 2016 accounts which the piece reproduces:

Apple NZ Tax calc

The tax rate applied to the profits is 30 per cent.  New Zealand’s corporate tax rate is 28 per cent; Australia’s is 30 per cent.  The tax is determined using Australia’s 30 per cent rate because that is where it does its business.  Some minor adjustments resulted in an effective tax rate of 32 per cent in 2016 and 33 per cent in 2015.

Maybe something should have clicked when the newspaper had to look to Australia to find someone from Apple to comment on the story:

In a statement issued from Australia, the multinational technology giant stressed it followed the law but did not directly address questions about the structuring of its New Zealand operations and the apparent lack of payments to Inland Revenue.

And the piece then lays it out straight:

Apple's New Zealand operations are wholly owned by an Australian parent and appear to be run from there.

If Apple had operated this subsidiary out of New Zealand it would have paid tax at 28 per cent.  Instead, it choose to base the company in Australia where it is subject to tax at 30 per cent.  So even when paying a higher tax rate companies can take a battering.

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