Astonishing ignorance at the Senate Tax Inquiry III

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.

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41 Responses to Astonishing ignorance at the Senate Tax Inquiry III

  1. Procrustes says:

    According to his bio, Senator Ketter has a BCom and a B Arts (Economics) from the University of Queensland. Gawd help us.

  2. Judith Sloan says:

    Ketter a union hack.

    Here is the blurb. I think he should spend more time with his family playing the guitar and quit the Senate immediately. He is clearly out of his depth.

    Chris was born in 1961 in Brisbane to Ron and Judy Ketter. He is married with four children and lives in Brisbane.

    Chris considers it a great honour to have been elected as a Senator for Queensland, to be able to serve the people in our nation’s parliament and to work with other senators and members for the good of Australia.

    Prior to commencing as a Senator for Queensland, Chris was the Queensland Secretary of the Shop Distributive and Allied Employees’ Association from 1996 to 2014. Prior to this he worked in various roles in the organisation from 1982 onwards. He has a Bachelor of Commerce and a Bachelor in Arts (Economics) from the University of Queensland.

    Chris believes that Labor in government has a proud record of looking after the interests of Australian families. It has achieved this over many years by establishing a fair industrial relations system and a fair social welfare safety net, at the same time pursuing policies that lead to job creation and sensible economic growth.

    He is a strong supporter of the Australian industrial relations system, which ensures a fair go for workers. The defeat of the appalling Work Choices legislation and the establishment of the Fair Work Act are proud Labor achievements. He believes that Australia’s world-class occupational superannuation system as a crowning achievement of Labor which enhances the capacity of Australian workers to retire with financial security and dignity.

    In his spare time, Chris enjoys spending time with his family, playing guitar, exercise and reading.

  3. Barry bones says:

    Don’t get too smirky Sinclair.

    $80m tax on a business that generates $6b in revenues – a high margin business (~30% from their broader group accounts) – is astonishingly low.

    They are obviously using international transfer pricing actions to whittle down their Aussie tax obligations.

    So why should these companies get to reduce their tax to buggery, whilst the pay-as-go-common folk get screwed. Those for liberty should speak up on this issue.

  4. Judith Sloan says:

    Keep it coming, Sinc. This show trial needs to be exposed for what it is – a stunt on the part of Dastyari, Milne and Xenophon who are completely witless when it comes to anything sensible in this space.

  5. Judith Sloan says:

    Hang on, what about the car companies that screwed Australia for so long. They designed transfer pricing and never paid any company tax here. Never a peep from those who should have been concerned.

  6. Combine Dave says:

    Don’t get too smirky Sinclair.

    $80m tax on a business that generates $6b in revenues – a high margin business (~30% from their broader group accounts) – is astonishingly low.

    They are obviously using international transfer pricing actions to whittle down their Aussie tax obligations.

    So why should these companies get to reduce their tax to buggery, whilst the pay-as-go-common folk get screwed. Those for liberty should speak up on this issue.

    Absolutely right.

    The average Joe in Oz is being taken for a ride paying huge taxes to fund welfare churn to others they’ll never see any benefit out of.

    Best to slash government spending and cut taxes so that the common folk may be both freer and more prosperous.

    Then we can afford more quality products from Apple, Google and Microsoft.

  7. Combine Dave says:

    Hang on, what about the car companies that screwed Australia for so long. They designed transfer pricing and never paid any company tax here. Never a peep from those who should have been concerned.

    Haha great minds think alike.

    I was just thinking this.

    Not too mention the hypocrisy of Holden and Ford paying little tax whilst raking in the subsidies.

  8. Gab says:

    Hang on, what about the car companies that screwed Australia for so long. They designed transfer pricing and never paid any company tax here.

    No need to when the locals were being goven free money from taxpayers for decades. No rort at all. 😕

  9. everton weekes says:

    Apple in Australia is nothing but a wholesaler/retailer. It doesn’t add any value at all to the product, which is why Apple Australia is low margin and by consequence, pays tax on what appears to be a low taxable income.

    All of the value in an iPad or iPhone is in the design and branding, and none of that is done in Australia.

  10. Village prefect says:

    What surprises me is that the good Senator did not get appointed to the Fair Work Commission where other economic union illiterate types go.

  11. Gab says:

    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.

    That and he also needed to be schooled in transfer pricing regulations. Clearly he had no clue about the APA.

  12. will says:

    That and he also needed to be schooled in transfer pricing regulations. Clearly he had no clue about the APA.

    Neither, it would appear, does ‘Barry bones’.

  13. Judith Sloan says:

    Liberal senator Edwarsds also a complete dope. He misused parliamentary funds, remember.

  14. duncanm says:

    All of the value in an iPad or iPhone is in the design and branding, and none of that is done in Australia.

    Somewhat sadly… because some of it is done by Australians.

    At least Google has a local R&D group.

  15. entropy says:

    $80m tax on a business that generates $6b in revenues – a high margin business (~30% from their broader group accounts) – is astonishingly low.

    That’s $250 million in profit. Seems pretty good for a business that is little more than an importer that is also operating expensive stores, which is all Apple Australia is. Considering the large numbers and its big marketing bill, four and a half percent isn’t too bad.

  16. stackja says:

    ALP Senator for Queensland Chris Ketter. Another apparatchik.

  17. Tel says:

    If the iPhone was counted as a toy for customs and duty then they would get 5% of the $6 billion, but if it counts as a phone then it’s a duty free import. I don’t think anyone can blame Apple for our ridiculous and arcane customs system.

    Since income tax is a tax on work effort, think of what Apple as a company does in Australia… runs stores, takes orders and packs/unpacks boxes, applies shipping label. Maybe they handle some warranty claims and organizes advertising. It’s a bog simple business model, any idiot can do it, the profit should rightly be close to zero.

    If Apple decided to pull out of Australia, they would simply sell their stuff to importers and online stores like Kogan who would do exactly the same thing. There wouldn’t be an “Apple Shop” as such, there would just be iPhones in JB HiFi selling at the same narrow margin.

  18. Aussieute says:

    Why not lower all taxes to 15% and think of all the additional tax we’d get?
    15% of something is way more than 30% of nothing

    Two of our businesses have relocated for that exact reason including no red tape and no bullshit Union heavies to deal with As well employes don’t have an I’m ENTITLED attitude

  19. Tel says:

    Speaking of JB Hi-Fi, from their 2014 report…

    Total Sales $3,484 million
    Earnings Before Interest and Tax (“EBIT”) $191 million.
    Net Profit After Tax (“NPAT”) $128 million.

    Presuming the tax is around $60 million, that means tax as a percent of gross sales is 1.7%

    For Apple (based on Senate figures) it comes to 1.3%

    So Apple in Australia is running at a similar rate to other companies doing the same operations, probably I would guess that Apple in Australia spends more on advertising and promotion of their brand, probably also slightly higher drain in processing warranty claims, repairs, etc. Maybe (total guesswork) Apple could have the choice to squeeze slightly higher profits out of their repair side (i.e. make the customer pay for every little detail except the exact letter of the warranty) but companies doing that end up with a bad reputation … which can very quickly get onto the social media and spread worldwide. You can see why Apple might be just a little bit generous to their customers in certain situations.

    You could say there’s a cost transfer because Apple advertising in Australia effectively promotes the brand worldwide… but that applies back the other way as well, so promotional spending in the USA promotes the brand in Australia, etc. It would be impossible to quantify.

  20. Dr Faustus says:

    Let me try and help—because this is getting painful.

    Contrast Apple Australia with another well-known retailer of consumer products, Woolworths 2014:

    Sales $60.8 bn … (cf Apple $6 bn)
    EBT $3.4 bn – i.e approx 5.6% ‘margin’ … (cf Apple $250m ~4.2% ‘margin’)
    Tax Paid $1.0 bn – i.e. approx 30% effective … (cf Apple $80m ~30% effective)
    Tax paid as proportion of revenue 1.6% … (cf Apple 1.2%)

    Fairness demands there should be an immediate Senate inquiry into the transfer pricing and tax minimisation rorting that must surely be going on in the Australian retail industry. WOW must pay 30% of its gross sales into consolidated revenue without any further delay – Australian working families are losing $17.2 bn in tax concessions.

    Or something.

  21. Michael of Oberon says:

    As American comedian Ron Whites says, “You can’t fix stupid”.

  22. Dr Faustus says:

    As American comedian Ron Whites says, “You can’t fix stupid”.

    Certainly true. But you could fix the over-representation of stupid in parliament by not electing quite so many obvious planks. You couldn’t do any worse by flagging down six taxis at random in each capital city and offering the job to the driver.

  23. Karabar says:

    The fools are more than likely to ignorant to even be embarrassed.

  24. GK says:

    What the government should do is set up a senate hearing into why those sitting in senate hearings are paid extra on top of their large salaries. I beleive they get approx an extra $30,000 per committee they sit on. Now I wonder if I tell my boss that the same rules should apply to my salary when I do something similar in the private industry. This is one of the biggest rorts politicians are doing that never gets any attention.

  25. David Brewer says:

    If these Senators want to focus on the tax share of a company’s total revenue, then how can they be so ignorant as to leave out all the taxes other than company tax collected in the process of generating that revenue?
    All the income taxes paid by the employees out of the company’s salaries. All the payroll taxes on those incomes. All the GST paid by the company on its inputs. Plus property taxes and any applicable FBT, CGT, import duties and so on. Focusing only on company tax gives a completely distorted picture, vastly understating the contribution of a company’s operations to the tax base.

  26. Tel says:

    Faustus: yeah seems Woolies is very similar percent to JB-HiFi which is totally not surprising, and Apple is just a touch low. That makes me think Apple are not quite squeezing the profitability out of it they could do, and are perhaps buying a bit of goodwill and making the brand look good.

    What isn’t grabbed by government, ends up going towards happier consumers… not exactly a disastrous outcome.

  27. Natural Instinct says:

    A few Cats above have done in 10 mins
    (A) a bio check of Senator Ketter
    (B) a financial analysis of some retailers, i.e. tax to revenue (%)
    .
    Now let’s put 2 and 2 together
    = Research Officer/Organiser, Shop Distributive and Allied Employees’ Association (Qld) 1982-92.
    = First Assistant Secretary, Shop Distributive and Allied Employees’ Association (Qld) 1992-96.
    = Secretary-Treasurer, Shop Distributive and Allied Employees’ Association (Qld) 1996-2014.
    .
    So in 32 years of “serving” his members he has not learnt the most basic things about retail businesses, i.e. the “top line” and the “bottom line”.
    .
    THAT IS WHY THE UNIONS MUST BE REFORMED – THEY ARE RIPPING OFF THEIR MEMBERS WITH DUD MANAGEMENT AND QUESTIONABLE MONEY USE.
    .
    Unfortunately no-one will step up to do it. Where is Australia’s Maggie Thatcher?

  28. Dr Faustus says:

    That makes me think Apple are not quite squeezing the profitability out of it they could do, and are perhaps buying a bit of goodwill and making the brand look good.

    Tel: I suspect you may be correct. Apple kit is designed, built and priced for the premium market – and it is distributed and serviced in a high-end way which surely doesn’t come cheap. No sweaty little shop in the ‘burbs staffed by nerds who live in mums’ spare bedroom. It’s prestige CBD stores, loads of staff and high speed service (via Singapore, also not cheap).

  29. Roger says:

    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.

    If we were smart, we would be looking to lower Apple’s effective tax rate in Australia to below their global average, so they might move more of their business here.

    More jobs, more tax revenue.

    Win-win.

    If we were smart.

  30. notafan says:

    Ketter also ignored the fact that Apple had sat down with the ATO apparently every year since the early 1990s and had their ‘ transfer pricing’ ratified.
    Doesn’t that mean that the ATO has regularly scrutinized the effective ‘wholesale’ price of Apple products and found them reasonable?
    Ie that the price is the same as what a hypothetical arms length transaction between two unrelated parties would have been.
    But sure let’s tax all businesses 30% on the basis of gross revenue rather than profit.
    I suggest Australia would be out of business in less than a few days.

  31. Rohan says:

    It’s a shame that King didn’t ask Ketter what he thought what would be a fair price to pay for the goodwill component of Apple Australia. If Katter then came back with a stupid figure between $1 – 6 billion, you could really have fun making mileage out of that.

  32. Village prefect says:

    So I guess those with negatively geared property should be paying tax on gross rent received according to these turkeys.

  33. nerblnob says:

    At least Google has a local R&D group.

    Do they? Or is that just counting independent app developers based in Australia?
    Otherwise they’re just a shop window. A distributor employing 1000 Australians and paying plenty of rates, levies, payroll taxes and local taxes before they even get to income tax. They would collect more in GST for the various state governments than they make profit.

  34. Diogenes says:

    Nerblnbob,
    Yes they do have local r&d . You may be interested to know that google maps came out of the local r&d. No they are not counting indie app developers ,which considering, unlike apple the tools are free and a developers account is free is not bad value for money. Two of my students have developed a small game which they have made $50 from. They are pleased as punch

  35. mundi says:

    Ketter knows the difference, he is just trying to get them to say something stupid that they can use as quotes and sound-btites. A single quote from one of these execs would be enough to plaster all over a white-paper as proof of the need to hike up taxes.

  36. Combine Dave says:

    If we were smart, we would be looking to lower Apple’s effective tax rate in Australia to below their global average, so they might move more of their business here.

    More jobs, more tax revenue.

    Win-win.

    If we were smart.

    I wish.

    Sadly this is more likely –

    let’s tax all businesses 30% on the basis of gross revenue rather than profit.
    I suggest Australia would be out of business in less than a few days.

  37. Fred Lenin. says:

    What are the qualifications for being a senator? Obviously very very low standards of education and no obvious skills,apart frontage usual political ones ,lying deceiving cheating ,totally dishonest behavior ,and backstabbing time this “human” cesspit was scoured out ,a nd its denizens consigned to the garbage bin of history . The seNITS !

  38. Hydra says:

    That’s $250 million in profit. Seems pretty good for a business that is little more than an importer that is also operating expensive stores, which is all Apple Australia is. Considering the large numbers and its big marketing bill, four and a half percent isn’t too bad.

    This. This is consistent with the sort of numbers I expect to see in my clients and is very reasonable.

  39. kate says:

    Most amusing to see the old bogeyman of transfer pricing rear its
    head. Transfer pricing was an absolute obsession of the Accounting/Economics faculty of Sydney Uni in the 1980’s when I did the world’s only left-wing MBA there.
    Wheelwright and others explained with great drama that wicked multinationals inflated their import costs ie transfer prices in order to evade tax.
    When I subsequently had a 20 year career with aforesaid evil multinationals I never saw any evidence of artificially raising the
    imported component of cost of goods sold.
    Funny how transfer pricing continues to feature in left-wing debate.

  40. Ray says:

    The Mice & Pixies at the bottom of the garden make the expensive phones for free, as they don’t have a union; then the ugly company sells them for a motza. The money, actually the profits, are going to develop a new planet and the rest of us won’t be invited to live there. So there!

  41. Roland Geitenbeek says:

    International tax planning is not new and neither is transfer pricing (refer submission to the senate future of the automotive industry at

    http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Automotive_industry_2014/Submissions

    In Apples case, they operate a super business and utilise the services of the very best practitioners that money can buy in order to legally structure the companies affairs. The hypocrisy of Labor knows no bounds, the labor party does not hesitate to use competent advisers to negotiate and set up structures to obtain desirable or preferred outcomes, which is exactly what Dan Andrews recently did after cancelling the East West Link when negotiating the exit, he engaged the services of John Wylie and Leon Zwier…as the Godfather would say, ….”it’s just business”.

    In a country of only 24 million in the fastest growing regions of the world, we need to learn from Switzerland and Singapore and leverage our advantages. Business needs a level playing field, no help, no handouts and no protection and then let them get on with the job and create real wealth rather than argue about taking it away and squandering it.

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