Then there is this exchange:
Senator KETTER: Mr King, it has been reported that Apple paid $80 million on income tax on revenue of more than $6 billion.
Senator EDWARDS: Revenue or turnover? Are you talking about turnover or profit?
Senator KETTER: It is revenue. Mr King, would you describe Apple’s tax planning approach in Australia as being aggressive?
Mr King : No, I would not. As I said before, our books and records are very simple. All of our sales and revenue are recorded in our books here, all of our cost of doing business is recorded in our books and our net income is clearly reported as well. Our tax is paid on our net income, and last year it was paid at an effective tax rate of just over 30 per cent.
Senator KETTER: Have I got those figures wrong?
Mr King : Our revenue in our most recently reported financial statements was approximately $6 billion—that is correct—and our income tax expense was around $80 million.
Senator KETTER: Can you explain how you get that effective rate of tax on a turnover of $6 billion?
Mr King : Yes. It is because the tax is paid based on the net profit; it is not based on the revenue. Every time we sell a product, there is a cost of doing business. A product like an iPhone is a very complex piece of technology that takes many, many years to develop and has enormous R&D expenditure associated with it. The cost of sale is in the books of Apple Australia; it is the cost of buying the product that we bring in and then distribute to our customers and to our partners in Australia. We pay our income tax on revenue minus all of our costs, which leads to an operating margin. The tax is calculated on the operating margin.
Senator CANAVAN: What is your operating margin in those accounts? Do you have that figure?
Mr King : The operating margin in the most recently published accounts was, I believe, approximately $250 million.
Senator CANAVAN: Out of $8 billion?
Mr King : Out of $6 billion.
Senator CANAVAN: Sorry, $6 billion.
Senator KETTER: What would you say is your effective tax rate in Australia?
Mr King : Our effective tax rate is 30 per cent. The worldwide tax rate for Apple globally is a little over 26 per cent. I believe it is between 26 and 27 per cent.
Senator EDWARDS: Let me try and help—because this is getting painful. Are you inflating the transfer price of all your goods to a point where you are lowering your gross profit to a point where you are minimising your income tax paid here? Is your transfer pricing being artificially inflated—
CHAIR: That is an allegation.
Senator EDWARDS: to gather profits in another jurisdiction?
Mr King : Not at all.
Senator EDWARDS: Okay, unpack that.
Mr King : Our product cost is determined on an arms-length basis. What is important to refer to in this discussion is the advance pricing agreement that we have had with the ATO for many, many years. Our APA experience with the tax office goes back to the early nineties. The APA process is a very rigorous and thorough process that is a framework to ensure the product cost in the transfer pricing concepts is fairly stated on products being brought into Australia by a multinational. That is a very, very rigorous process and it is reviewed annually. We have worked with the ATO since 1991 in establishing the costs of our products that we bring into Australia.
Senator KETTER: Are you saying you do not have strategies to reduce your tax in Australia?
Mr King : We pay our tax in accordance with the Australian tax law.
Senator KETTER: My question was: do you have strategies to reduce the amount of tax that you pay?
Mr King : No, we don’t.
Senator KETTER: Do you know what your ATO risk rating is?
Mr King : I believe we are a low risk rating but high consequence because of our revenue size.
Senator KETTER: Do you have any subsidiaries in tax havens or secrecy jurisdictions?
Mr King : Apple Australia has one subsidiary, which is Apple in New Zealand.
Senator KETTER: Which subsidiary do you have in New Zealand?
Mr King : Apple Sales New Zealand, which is our sales operation for the New Zealand market.
Oh dear – a Senator sitting on an economics committee participating in an inquiry into taxation needs to be told that tax is paid on profit and not revenue.