IRD says anti-BEPS bill may stoke sales booked in NZ
Apple Sales New Zealand, the local unit of the iPhone and iPad maker, tripled its profit last year as revenue growth outpaced cost of sales but there's a question mark over how much tax it paid locally because most of Apple Inc's business activities are offshore.
Inland Revenue declined to comment on whether Apple NZ actually pays any tax here, citing taxpayer confidentiality provisions, but a backgrounder for international tax issues on IRD's website says the ability of a country to tax non-residents on business income "depends largely on the extent of their presence in that country."
IRD "is often asked why they (multinationals) aren't paying more tax, especially considering many of their products are so popular here," it says. "It's a fair question but often, most of their business activities are actually taking place outside New Zealand."
Tax has become a huge global issue for Apple, which in December agreed to pay Ireland US$15.4 billion in back taxes to appease the European Union, which said the US company had managed to pay almost no tax on its European profits between 2003 and 2014 because of a tax deal with Ireland. Apple has also pledged to pay US$38 billion in US taxes over eight years under a repatriation levy Congress imposed on multinationals.
US multinationals have an estimated US$3.1 trillion in total untaxed overseas earnings, held as both cash and illiquid assets, Bloomberg reported last week, with Apple alone sitting on an offshore cash pile estimated at US$252 billion at Sept. 30 last year. The company is scheduled to release its first-quarter results on Feb. 1, with revenue forecast to rise 11 percent to about US$86.8 billion. Analysts will be looking for an update on sales of its pricey iPhone X as well as comment on tax.
Apple NZ's profit jumped to $19.5 million in the 12 months ended Sept. 30, 2017, from $6.5 million a year earlier, its accounts show. Sales climbed to $811 million from $744 million, while cost of sales rose to $771 million from $729 million. Much of that is purchases of inventory from related parties - paying for the iPhones, iPads and other products produced elsewhere in the Apple Inc empire. Such purchases rose to about $763 million in its latest year from $676 million a year earlier.
Its income tax expense rose to $10.2 million from $3.1 million, although Fairfax reported that the bulk of that tax went to the Australian Tax Office (ATO). Fairfax based that on the $8.9 million of income tax expense in Apple NZ's accounts that was calculated using the "statutory tax rate", which implied a corporate tax rate of 30 percent as in Australia, rather than New Zealand's 28 percent. Apple NZ's immediate parent is Sydney-based Apple Pty Ltd. Apple didn't immediately respond to requests for comment.
Revenue Minister Stuart Nash told Fairfax that IRD appeared to be in dispute with the ATO. However, he later told BusinessDesk he hadn't been briefed on any dispute with Australia and was unable to discuss the affairs of an individual taxpayer.
"I have previously expressed concern about multinationals who artificially reduce the tax payable on New Zealand business activities, because it erodes confidence in the fairness of the tax system," Nash said. "The Taxation (Neutralising Base Erosion and Profit Shifting Bill) introduced in December 2017 will address some of the avoidance techniques used by multinationals. Tech companies are included in this."
The bill includes measures against tax avoidance strategies such as avoiding a taxable presence in New Zealand, stripping out New Zealand profits through high-priced debt or mispriced dealings, and the use of highly structured hybrid instruments to take advantage of differences in the tax laws of New Zealand and other countries, an IRD spokesman said. The bill will also make it easier for IRD to assess multinationals.
"We expect some multinationals with a physical presence in New Zealand will want to restructure their business operations here in response to the measures," spokesman Baden Campbell said. "This should lead to more sales being booked in New Zealand and as a consequence more revenue. The measures will also prevent multinationals from shifting their New Zealand profits offshore under artificial arrangements."
Multinational companies in New Zealand pay more than $6 billion a year in tax, making up almost 55 percent of the total corporate tax base, IRD says. They present "a unique set of challenges" because they operate in different tax jurisdictions around the world and it "can be a complex matter to determine if a given company is paying the tax here that it should be," IRD said in its note last July.
It cited a hypothetical example of a multinational tech company: "Gary's Gadgets International sells a popular mobile device that New Zealanders have been buying in their droves. The company has a head office in Europe and its manufacturing base in South-East Asia. In New Zealand, Gary's Gadgets (NZ) Ltd is a small sales operation run out of an office in New Plymouth, employing five people. It services a network of independent retailers in New Zealand that sell Gary's devices to consumers here."
"So in thinking about how Gary's Gadgets is taxed in New Zealand, Inland Revenue is likely to determine that most of the company's business activity and value-add, is offshore so that's where most of its tax will be paid," IRD says.