Apple, Ireland and the European Commission

The EU Commission is suggesting that Apple should have been paying more tax and that Ireland aided them in achieving that outcome. If Apple was compliant with legislation/regulation at the time they should not be thrown under the bus of inappropriate transfer pricing practices and being a poor global (corporate) citizen.

It has been noted by many in the tax industry, that every company (large and small) seeks ways to (legally) minimize their taxation outlay. If Apple adopted transfer pricing strategies that were in keeping with the law at the time then they should not be taken to task.

The G20 approach to a multi-lateral rather than a bilateral treaty environment combined with other OECD strategies is likely to result in different outcomes in the future. However looking back must be done through the lens of what the law and guidelines were at the time. The reality is that taxation law has not and is unlikely to evolve as fast as the ongoing and rapid change in the global business environment.

Both Apple and the EU Commission present their positions in the press with quiet confidence and no doubt there will be many companies awaiting the outcome but it will be quite some time before this issue is resolved.

Australian Budget May 2014 - what the tax industry is expecting: preliminary views

May 2014 Budget Australia – Background and what is likely

Overall no major tax hikes anticipated

Long term deficits are clearly a reality unless some realignment takes place. With current debt levels and long term deficits being a problem combined with our terms of trade and high cost of doing business in Australia, it is clear that action is needed.

One problem however is that the political system isn’t conducive to the long-term thinking needed to improve the tax system. So what is likely to be in store has been the subject of much debate but the general theme that is emerging from the economic observers is as follows:

Raising income taxes is not the issue especially if looked at on a global scale when comparing Australia’s revenue as a percentage of GDP with other economies. Australia is quite high which is why there has been a long time call for lowering Australia’s income tax .

Tax incentives in order to stay competitive on the international stage. By way of example employee share plans need a strong overhaul to stop companies exiting Australia as a corporate headquarters.

Large spending cuts are not considered likely but the pension and social security aspects are very much a target with the likely lifting of the pension age. In addition the level of services being provided is likely to be reworked.

Health care is a global issue and Australia is no different. There may be some changes here. One possibility is the change to the funding model for public hospitals. The suggestion is to move to a model that sees funding based on procedures.

Australian tax office audits of multi-nationals

In the wake of the G20 meeting in Australia last month and the Tax Office Compliance in Focus 2013-2014 publication of July 2013, it is no surprise that tax audit activity is on the rise.  As part of the global initiative to prevent BEPS the Australian Taxation Office has commenced audit activity on 86 multi national businesses. No doubt the usual names are considered to be on this list but the ATO are being somewhat guarded as to the targets .

The question that comes to mind is whether audit activity is the answer. It seems that the problem lies with the current law, as in many cases the multinationals (that have received press coverage about their tax payments)  have acted within the framework of what is the law.

The law it seems is what is out of sync with current business operations and dynamics. The forming of a global set of robust rules is where the attention is required but equally very challenging as evidenced by the recent response to the OECD transfer pricing recommendations).  It is relevant to note, as highlighted by the ATO , transfer pricing is not suggesting illegal activity unlike profit shifting.

What somehow seems to have gotten lost in translation, is that financial engineering does not mean that something has been done incorrectly. Inappropriate practices will get caught by these audits but it will be interesting to see if in fact the outcome will be matched by the ATO view that lower taxation has arisen due to inappropriate practices .

A significant part of the problem is determining how to tax online business, the digital economy. The business economists face a challenge in working through the modelling as to how to determine what revenues and costs are to be attributed to the various locations.

Into this mix comes the added dimension of different jurisdictions wanting to attract business and offering tax based incentives. How difficult will it be for all locations wanting to be pulled in the same direction while endeavouring to be more attractive than their global neighbours? In many cases, such jurisdiction based benefits have been the catalyst for corporations moving location.

Going back some 13 years, James Hardie Industries (unashamedly) moved to the Netherlands due to the change in global operations and tax inefficiencies. As cited on their website

“In summary, the establishment of a Dutch-based parent company and the restructure were driven by the group’s increasingly global focus and international financial tax efficiencies. .”

Such taxation considerations, including tax concessions as business drivers illustrates just how challenging these issues are. The R & D concessions are an example of how countries (appropriately) try to attract business.

Relocation of businesses and how they transact is clearly a battle zone, the rules for which shall take some time to develop. In the meantime the tax authorities continue to rely on audit activity to catch those parties that they feel have not been doing it correctly. It will be interesting to see the dollars raised against the cost of the recent audit initiative .

GST for on-line sales - What is the real impact?

There is much debate globally about taxing on line sales and no more recent than the treasurers ( Federal & States ) meeting this last week in Australia to look at the GST for on line sales with a view to cutting back the $1,000 GST free threshold on imports. As was noted by the Grattan Institute following the announcement and politics aside, the economic impact/benefit of lowering the $1,000 threshold does not appear to be a worthwhile exercise. Not at this stage anyway.

According to the Grattan Institute, Treasury estimates suggest a loss of $650 million in revenue in 2013, growing to $860 million in 2016 is not going to deliver a meaningful result. While making changes to achieve such savings are desirable, in context they would appear to be small in light of the overall budgetary savings that need to be achieved. The Institute suggests that the focus should be on more effective strategies that will yield greater economic benefits given that the budgetary hole is circa $60 billion. This argument is given further credibility when the savings noted by Treasury don’t take in to account collection costs. The debate is heading towards broadening the GST base which will yield far greater results even after providing certain safety nets to protect those sectors of the community that would be adversely impacted .