The Global Tax System !

The Australian Tax office is holding an enquiry to investigate why giant global companies that sell their products in Australia pay mere pennies in tax in comparison to their global earnings - and they have Google, Apple and Microsoft directly in their sights.

Welcome to the mysterious world of the global tax system, and the many revolving doors that are open to interpretation when deciding how the tax pie is shared - and these three companies have a host of similarities that work in their favour.

Firstly, their product is basically intellectual property which in most cases devolves into an actual physical form and is producing in China.  It is shipped to Australia from a foreign country and probably invoiced from a totally different country in another part of the world.   It is subjected to patent laws and the disclosure requirements of the United States, and it is therefore almost impossible to dissect the cost structure that applies to each and every part of the assembly and sales process.

There is ambiguity in the actual location of the company that owns the product. It's production facilities may be in one country and the bulks of it's research and development in another, but legally it is registered in a third with a low corporate tax rate - such as Singapore or Ireland.  That raises the issue of the right of sovereign countries to set the rate at which they collect taxes - and in Australia the corporate rate is set at thirty percent while low cost Singapore levies at just seventeen percent. There is a distinct advantage in paying corporate tax where the level is lower.

Within each company structure there is a wide variance on how costs will be determined and allocated at each stage of the products journey from manufacture to arriving in the hands of the end customer.   There have been many accusations that transfer invoicing is used to lower the value of imports and thus lower the tax margin that applies - and at what stage associated costs such as those of research and development are added.   This compilation has a direct bearing on the profit margin claimed - and on which corporate tax will apply.

Accounting is dominated by the "big four " firms with global reach and they employ an army of legal and technical people tasked with providing the best advice on how to structure  corporations to avoid paying higher  taxes.  In some instances, this avoids paying the GST by shipping and invoicing from a foreign source to take advantage of the concession that applies to in-line sales.

This enquiry is currently grilling the top executives of the firms involved and they will have the backing of their legal and accounting staff to determine how they answer questions.  It is becoming clear that there is a vast difference in the global interpretation that can apply to matters such as transfer invoicing and cost allocations that apply when tax matters are determined, but it is also clear that there is an advantage in locating the head office of a profitable firm in a country with a low tax take.

No doubt the Australian Tax office will, extract some concessions that improve the tax flow but it is also clear that any country with what is considered a high corporate tax rate will be at a distinct disadvantage from regimes that set a low tax take to attract corporate business.