Bringing web transactions home for their just deserts
AN AUSTRALIAN business buys an advertisement on Google Australia, aimed at luring Australian customers to its Australian website.
According to Google, this transaction takes place in Singapore.
It used to take place in another low-tax jurisdiction, Ireland, but in May last year Google switched to Singapore ''to provide a better online advertising experience''.
Revenue reaped from Australia and other countries in the region, including Bhutan, the Philippines and Pakistan, flows directly to Google Asia Pacific, headquartered in the Lion City.
Estimates of Google's Australian advertising revenue reach as high as $2 billion a year, but none of that money passes through its local subsidiary.
Instead, Google Australia subsists on services income from a head office in the US and Google outposts in Singapore and Ireland.
It declared a loss of $3.9 million in 2011, and paid just $74,176 in Australian tax.
However, there are signs that tax authorities, desperate to shore up revenues since the global financial crisis and the European debt crisis, have begun to fight back against tech multinationals such as Google, stepping up bids to claw back tax dollars.
BusinessDay can reveal that the Australian Tax Office has hit Apple with a $28.5 million bill for back taxes, and in Europe global technology companies are under intense pressure to justify their complex ownership structures that rely heavily on tax havens.
Paperwork filed with corporate regulators around the world reveals the Australian arms of Apple, Google and eBay form part of these structures, held at arm's length from their US parents through intermediary companies located in tax havens.
Apple declined to comment on the tax issue and it is illegal for the ATO to comment on individual cases.
While Apple's Australian arm reaps billions in revenue by selling computers, iPads and iPhones, neither Google Australia nor eBay Australia and New Zealand admit to dealing with customers here.
Instead, according to its most recent annual report, Google Australia provides ''research and development services'' to its US parent and ''sales and marketing services'' to Google companies in Ireland and Singapore. For its part, eBay Australia and New Zealand's annual report discloses its principal activities as ''the recommendation of market penetration strategies and advertising and promotion activities''.
Despite the enormous scale on which the internet behemoths operate, these seem not to be lucrative activities. In the same year that Google made a loss, 2011, eBay Australia and New Zealand made a profit of $1.5 million and paid about $555,000 in tax.
In a statement, an eBay spokesman said it ''works with tax authorities in Australia and complies fully with all applicable tax laws and regimes''.
''The rules surrounding corporate taxation are ultimately a matter for policymakers,'' he said.
Apple's tax bill may be a sign that the ATO is joining the tax push led by European governments.
The French government this week demanded $US252 million ($A244 million) in back taxes from Amazon, adding to pressure on the online trader to justify its network of subsidiaries in Europe, which incorporates tax haven Luxembourg. In Britain, a public accounts committee this week grilled executives from Google UK, Amazon and Starbucks about strategies to minimise their tax in Europe.
Britain and Germany have called on European economies to do more to collaborate to fight tax evasion, particularly in online commerce.
Bricks and mortar retailers are also up in arms, with the head of Britain's largest department store group John Lewis saying this week that governments should examine tax advantages enjoyed by multinational online retailers.
''You have got less money to invest if you are giving 27 per cent of your profits to the exchequer than if you are domiciled in a tax haven,'' managing director Andy Street told Sky News.
''So, they will out-invest and ultimately out-trade us and that means there will not be the tax base in the UK. So, I do think it is an issue that needs to be examined.''
In Australia, bricks and mortar regulators have concentrated on the advantage given to online retailers because customers who order goods from overseas online competitors such as eBay and Amazon generally do not pay GST.
But, speaking after announcing Myer's first-quarter sales results on Thursday, chief executive Bernie Brookes said his online foes enjoyed additional unfair benefits.
''Not only do they escape the GST but they also escape duty, and that duty on product coming into Australia can be as much as 5 to 10 per cent on top of the 10 per cent GST that they escape,'' he said.
''Obviously any return or profit that they make goes back to paying corporate taxes in their own country rather than to the Australian consumer through the tax benefits that they receive.''
However, Brookes believes governments are starting to plug the loopholes that give online retail a leg-up.
''I read almost every day that another state in the United States or another region of the world has introduced a tax, some call it an Amazon tax, on the basis of trying to level that playing field and [end] the large seepage of GST,'' he said.
While Brookes is focused on the GST, in Europe the dispute between tech companies and European tax authorities centres on industry's heavy use of Briefkaestchengesellschaft - as the Germans call it - companies that exist in a particular place only as a letterbox.
The ATO has already made clear its dislike of some of the techniques used by technology groups to reduce tax by using intermediary companies.
Its key ruling was issued in 2009, following an unsuccessful attempt to stop the $1.4 billion reaped by private equity group TPG from the float of Myer leaving the country without being taxed.
In its ruling, the ATO said the use of intermediary companies in tax havens such as the Netherlands, Luxembourg and the Cayman Islands to attract favourable treatment under tax treaties could fall foul of its wide-ranging general rule against tax avoidance.
And the ATO hit back at the view that such arrangements were simply ''industry practice'', rather than being put in place for tax reasons, noting that its critics could not provide commercial reasons for the interposition of the postbox companies.
''This kind of structuring is discussed widely in the literature as being 'tax efficient'' and just because it might be 'standard' practice does not mean that it is not explicable by a dominant purpose of obtaining a tax benefit,'' the ATO said in an appendix to the final ruling, issued in 2010.
In Apple's case, the Australian company is owned by Apple Operations International, a subsidiary in Cork, Ireland, which is in turned owned by Apple companies in Britain, the US and tax haven the British Virgin Islands.
Google's structure also uses Ireland, which enjoys a low corporate tax rate, in addition to tax haven Bermuda; while for eBay's Australian-NZ company, ownership is split between companies in the Netherlands and Switzerland.
Professor Jason Sharman at Griffith University said tech companies had been quick to pick up tax evasion strategies due to the elusive nature of the services they provided.
''A lot of the wealth in companies now is in intangible things,'' he said. ''You can legally put that thing in any country in the world by setting up a company in that country. Given you have that freedom, you may as well pick a place with lower taxes than Australia.''
He said they posed an urgent threat to the economy because of their ability to put ''losses in high-tax jurisdictions, and profits in low-tax jurisdictions''.
''Australia has a mining boom, but services and technology are going to be increasingly important,'' he said.
''If you can't tax these companies at the same time as they are making squillions of dollars of profit, then either the public has to put up with much less in the way of public services, which doesn't look likely, or someone else is going to have to make up the difference.''
Google's decision to run Australian AdWords revenue through Singapore demonstrates how revenue that originates in a high-tax jurisdiction can be brought to account in a tax haven.
Financial accounts filed with the Singaporean authorities show that in 2011 Google's subsidiary in the city state, Google Asia Pacific, booked revenue of almost $US312 million from ''advertising and information management technology services and related products''. It made a profit of $US3 million.
Google Australia booked revenue of $201 million for services it provided other companies within the global group yet still made a loss of $3.9 million.
Despite paying only $74,000 in Australian taxes, Google has lobbied the government for more spending on infrastructure.
Speaking at an event in Sydney in May, Google Australia chief executive Nick Leeder joined other tech leaders in calling on the government to do more to support start-ups, such as developing a ''silicon beach''.
''Just as New York created 'Silicon Alley' and that entered into the lexicon, I think that should be an ambition for us,'' he said.
He accused Australia of being a ''conservative thinking country'' that was not comfortable with failure. ''If you take a big risk in this place you can face-plant very quickly and get punished for it.''
Shadow communications minister Malcolm Turnbull has accused the internet giant of being disingenuous.
''Google would be more credible if it actually put its money where its mouth was,'' he told Parliament in June.
''It's all very well for Google, paying $74,000 of tax in Australia, to be encouraging the Australian taxpayer to spend $50 billion on an NBN, of which Google will be an enormous beneficiary. But it is not contributing anything to the tax base here to enable that investment to be made.''
A Google Australia spokesman would not comment directly on its tax paid, but said in a statement that Google complied with relevant taxation laws.
Apple's use of subsidiaries to dodge US corporate tax was highlighted by The New York Times in April, prompting Apple to defend its tax obligations.
In a statement from its American arm, it claimed its US operations had generated $US5 billion in federal and state taxes for the country. It also said it conducted all its business ''with the highest of ethical standards''.
Apple's Australian revenue reached $4.87 billion last year. Its most recent tax bill was paid on a $190 million profit.
Last month, the federal government announced changes to its transfer-pricing laws, making it harder for companies to shift profits from high-tax regions to low-tax ones.
A spokesman for Assistant Treasurer David Bradbury said the new regulation made sure that tax obligations were not avoided through profit-shifting.
''Profit-shifting by multinational companies is a serious issue and having robust rules to deal with it is important because about half of Australia's international trade is between related parties,'' he said.
But Frank Drenth, executive director of Corporate Tax Association, which represents the interests of top Australian companies, said transfer-pricing and profit-shifting laws were irrelevant if the company's intellectual property was in a low-tax jurisdiction from day one.
''It's more a question of how you set your arrangements up in the first place,'' he said.
''So all this chest-thumping that you hear from politicians about having to apply the transfer pricing - it's not a transfer-pricing issue, except at the very early stages.
''Once the intellectual property is legitimately sitting in a place like Ireland, you can run most of your business from there by having your servers there.''
Mr Drenth said the only way to fix the problem would be to move away from a source-based taxation system. ''And you'd have to get all the countries in the world to agree to do that.''
An ATO spokeswoman said a portion of tax could be claimed from multinationals depending on the make-up of the business.
''Assuming there is a permanent establishment located in Australia which provides assistance of value to the foreign parent in the form of, say, after-sales service, a portion of the internet sales income may be attributable to the local operations and taxed appropriately.
''If, however, the services provided in Australia are in no way connected to the internet sales revenue, then the existing law is unlikely to tax any part of the internet sales.''
But Mr Drenth said this process was fraught with difficulty.
''If an Australian advertiser made a payment to Google, and she went through a contact entered into with someone who had an Irish server, then it would be difficult under the Australian tax law to prove that the sources of those profits were in Australia,'' he said.
''That's the challenge that lawmakers and revenue authorities in most developed countries are facing.''