Let’s talk about tax.
Or more particularly let’s talk about Apple and their taxes.
Your correspondent is currently in Sydney – family stuff nothing glamorous or exciting – and had started to put together a post on Donald Trump and his 2005 tax return. Coz the Sydney Morning Herald had actually explained some stuff behind it and there were some issues that I thought – dear readers – you would find interesting.
But Saturday morning I opened my Herald app to find the latest on multinationals and tax. Apple this time. And yeah that is me. Apparently they have paid no tax in New Zealand. Whether that is 100% true only the Department would know but from looking at the accounts and how it has organised itself – looks pretty damn likely.
So how did they do? Now dear readers – you are ready for this – you know about:
So let’s go!
Tax residence
Apple appears to sell products to New Zealand through a New Zealand incorporated company called Apple Sales New Zealand. Note no Ltd at the end. It is owned by an Australian company Apple Pty Ltd.
Now normally a New Zealand incorporated company means New Zealand has full taxing rights on all its income. No need to consider whether income has a NZ source or not . If it has earned income it is taxable. Well that is unless a tax treaty would take away some of those rights. And how could that happen dear readers? Yes that’s right – if it is managed or has directors control in another country.
And is Apple Sales New Zealand (not limited) controlled offshore? Yup the directors are Australian. Ok so then not a New Zealand company for tax purposes.
Source rules
Now all the income comes from New Zealand so it should be taxed here – right? Well yeah if it has a New Zealand source. And remember that trading in v trading with thing again. Now once upon a time if you wanted to sell almost a billion dollars worth of consumer products you would kinda need to be here. But now http://www.apple.com/nz/ does the business. So thanks to the internet trading in can morph into trading with meaning bye bye income tax base.
Limits of diverted profits tax
Oh but the new things announced by Hon Judith should fix it? You know the diverted profits tax – NZ style? Well not really. The NZ diverted profits tax has some use if there really is stuff happening in New Zealand but clever things have happened to make it look like there isn’t. But here there isn’t stuff happening in NZ. Just people buying stuff from a website.
And remember how all the things a diverted profits tax would help with? Remember how trading with v trading in wasn’t one of them? Yeah this won’t save us.
Tax Avoidance
But the pretending to be a New Zealand company when it is an Australian company. That is a bit cute isn’t it and doesn’t tax avoidance stop cute stuff. Yes it does so what are the facts?
- New Zealand incorporated company
- Australian directors with Australian control
- US website
- Shipping from Australia
- GST registered
- No presence or activity in New Zealand
So taking away any clever stuff. What is actually happening?
An Australian company is selling products to New Zealand via the internet shipping from a warehouse in Australia. What is the tax consequence of this? No tax – as Apple is only trading with New Zealanders not trading in New Zealand.
Compare to current outcome – no tax. Soz nothing for tax avoidance to bite on.
Could it be fixed?
Yup.
Of course it is possible Apple will get shamed into paying tax here. Putting in New Zealand directors would do the trick. Not holding my breath though. There are also plans by the Government to strengthen our source rules – but nothing proposed tho that will bite on this issue.
What would need to happen is an extension of the ‘contracts made in New Zealand’ rule to say it is deemed to be made in the country of the purchaser for online sales.
So technically not hard.
But here’s the thing. If we do that for Apple – other countries might then do it to Fonterra; Zespri; Fisher and Paykel; Fletcher Building; and Rank when they trade without a footprint. And in this case Apple NZ seems to be paying some tax in Australia. So that will be an interesting discussion with the Australian Treasury.
And it won’t just be the nasty multinationals that get caught. Your correspondent has an extensive vintage reproduction wardrobe. All purchased online from the US and UK from relatively small companies. Risk is such suppliers would see NZ as not worth the effort and stop selling to us. But then now I live in active wear not such an issue for me.
Oh and the not limited thing? It will be a US check the box company as will the Australian Pty company meaning it is an entity hybrid and Apple Inc can choose how to treat it for tax. Cool – but don’t think it impacts on us. Phew.
Andrea
Update
Thanks to a comment below – I missed a point I really shouldn’t have.
Even if we do change our source rules every treaty we have requires there to be a permanent establishment or fixed place of business before business income can be taxed. So if our source rules were expanded to make income prima facie taxable in NZ the treaty would then allocate taxing rights to Australia.
So short of resinding our treaties – or shaming Apple into paying tax here – we have to suck it up.
There is also the issue of whether it is right to expect tax given Apple isn’t using anything that taxes have paid for. But currently that seems like an argument from another time given the public outrage.
So while taxes are inherently unilateral – this is something that has to be sorted multilaterally. Except I am not aware of any real work on it. And on that I would love to be proved wrong!
Let's Talk About Tax NZ 
Pithy post Andrea on a major meaning of life tax-wise issue, where there is a real risk of populism supplanting coherent tax policy. For me the clincher was the comment that Apple has no activity in NZ. The long-standing policy position is that income taxing rights should be allocated where economic activity is situated (aka where economic value is created). This policy position is reflected as you have emphasised in the trading with/in distinction. You’re right that with technology changes it is now possible for non-residents to derive significant income from NZ customers without having a taxable presence in NZ – mail order writ large. But it seems like NZ has to suck this up if we accept that income tax rights should continue to be allocated on the basis of economic activity. One could argue for a paradigm shift and base income tax rights on market jurisdiction. But I’m not convinced we should. And of course it cuts both ways as our exporters trading with the world would become subject to foreign income tax. What we should be enforcing with the Apples of the world is a consumption taxing right, so roll-on extending offshore supplier registration to goods. If people inherently sympathetic to NZ’s taxing rights, such as yourself Andrea, are wary about demonising the Apples of the world, then hopefully the populists take note.
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Thank you. However as always there are limits to my powers. Nuff said. Cheers
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Would the PE definition in the NZ/Australia DTA prevent NZ imposing tax, even if we changed our source rule domestically?
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Of course Casey what was I thinking. Yes even with a source rule change we are screwed vis a vis any treaty country really. I vaguely remember something about a server being able to be a PE but as I don’t have access to the commentary. I’ll bow out now.
Unfortunately even though I am wrong on this – this just confirms my general implicit point – that there isn’t anything we can do really. Unless the general international taxing rules were to change.
I’ll update the post right now. Thanks for pointing this out!
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I bought my iPhone at a Spark outlet here in NZ. Does this change the tax calculation or the trading with/trading in argument any?
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Yes and no. The Spark outlet is likely to have bought via a website but at a wholesale price so the margin will be taxed. That will be trading in.
The purchase from the website tho would be trading with.
However including the income is just the first step. Whether tax is paid by the spark outlet depends on how it is structured.
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Very useful post thanks. of course, were to shift more fully to a consumption tax system, the issue would go away.
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Except we would of course get an entire range of different issues. ‘Fairness’ among them. Interestingly Apple is now GST registered and I paid GST on my recent Apple purchases.
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Consumption taxes can be made progressive – I’d have no problem with one that was.
It would be interesting to know – and you allude to the issue – how much overseas tax Fonterra pays on its dairy exports. I assume the answer is “little” and rightly so.
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It wasn’t progressivity that I was thinking of. The fairness aspect I had in mind was that the poor spend all their income on GSTable products in the way that the rich don’t – savings overseas trips etc. Although currently with no CGT the rich won’t be paying tax on all their economic income anyway.
My issues are more second order that have the ability to derail any benefits of moving to such a tax. Most of which involve the higher rate that would be necessary
With that comes pressure on the base. I can’t see fruit,vegetables, books etc staying in the base for very long. International norms and all that.
With a higher rate you get a much higher incentive for avoidance behaviour which – while at times intellectually interesting to counter – is resource intensive in terms of investigation and continuous law changes. This is particularly an issue given our GST system actually gives money out when payments exceed sales. Higher rate means higher risk. On one level this can be dealt with with notional offsets instead but exporters get actual cash paid out to them so an offset wouldnt cut it for them.
Finally even tho I am a lefty – having spent a lot of time inside the tax system – am not wild about progrssivity and the issues that causes – $70k salaries and secondary tax to be but two. Albeit for income tax.
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And in principle what I had in mind wasn’t just a GST, but a consumption tax (declare income and assets at the start and end of year, and pay based on the extent to which assets have increased less than total income). GST might serve as some sort of “withholding tax”, but the final liability is determined by your annual return (which I’m sure sounds awful to a tax practitioner – well, perhaps not one earning fees preparing them). Anyway, that deals with the overseas spending point. As for savings, everything is spent eventually and income taxes (esp in NZ) double-tax savings.
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Lol you’re right it does sound awful to this tax geek. If you ever get traction with a political party let me know and I’ll try and help with the second order issues. Of which there are loads!
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I think some in Treasury were keen back in the 80s. I guess i see us being pushed towards something like it by the pressures on eg the company tax base. in principle, presumably GST and labour income taxes would cover most people most of the time.
But, yes, I wasn’t expecting political progress….
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