NZ Herald smears against Apple have no foundation

The NBR tears apart the shoddy journalism of the NZ Herald in their constant attacks against multi-nationals.

Highlighting the potential dangers of merged media dominance, the NZ Herald went big last Saturday on accusing Apple of paying zero New Zealand tax over the past decade, a line that was quickly picked up by the likes of RNZ and Newshub.

Had Fairfax?s Stuff been part of the same stable ? as proposed in its merger with Herald owner NZME ? you have to wonder whether the understandably sceptical response from Stuff?s Tom Pullar-Strecker would have been part of the package.

To recap, since Apple established a New Zealand subsidiary in 2006, the local entity has reported cumulative sales of $4.21 billion. Over that time the subsidiary?s accounts show tax expenses of $33.9 million and tax payments made by related parties on its behalf of $45.5 million.

The Herald story said Apple NZ?s?taxes appeared to be paid to Australia and the company had paid zero tax in this country.

The accounts don?t say that specifically?but such an arrangement is possible under a tax treaty between Australian and New Zealand. Basically, the deal is that if an Australian-owned company in New Zealand is managed in Australia, then Australia gets first dibs on its tax ? and vice versa. ?

Curiously, Apple NZ is an unlimited company but this status has no bearing on its New Zealand tax and is probably to do with the differential treatment of unlimited companies under US tax law.

However, it would be wrong to infer from this that New Zealand?s tax base?is being ripped off by a dodgy corporate, as some might be tempted to do.

Strange that the NZ Herald has never done a story about their own dodgy tax arrangements.

The Herald also said: ?Had Apple reported the same healthy profit margin in New Zealand as it did for its operations globally it would have paid $356 million in taxes over the period.?

This may be hypothetically true?but only hypothetically. In the real world there is no reason Apple should be expected to report the same profit margin in New Zealand ? a fact well understood in the OECD discussion paper on base erosion and profit shifting last year. Here?s why.

Everything is hypothetical. The NZ Herald always runs stories about revenue and tax that should have been paid, but never how companies actually pay tax…which is on profit.

Apple?s products originate primarily with their designers in the US, although hardware is made in various factories around the world, mainly the US, Ireland and Asia. None of it is produced in New Zealand.

To sell its stuff in New Zealand, the company has a choice of structures. If it expected only a low level of sales, it could simply ship directly to New Zealand customers, whether individuals or retailers, in which case no revenue would accrue, it would have no ?permanent establishment? here and no tax would be payable in this country.

This is scenario one in the government consultation paper and is unproblematic.

Where tax issues develop is if the overseas company appoints a local distributor. The implications differ depending whether, for example, the agent is just a liaison who facilitates transactions but never takes title to the goods?or actually buys the products and takes the risk of on-selling them.

Scenarios three and four in the paper discuss potential tax issues in this situation and they quickly become complex.

However, we can avoid getting too down and dirty with details by considering what would happen if Apple used a third-party distributor in New Zealand.

In this case, the distributor would buy stuff from Apple, sell it on to a retailer such as Noel Leeming, say, and pay tax on the profit.

Would we expect the distributor to make the same profit margin as Apple? No.

It is acting merely as a conduit, adding little value, so a distributor margin in the single figures would be no surprise.

A sense of the slim margins in distribution can be gained from Renaissance Corporation, which was an authorised Apple distributor until 2006.

Although it had other business interests beyond Apple, its net margins were in the low single figures.

So what if Apple itself owned the distributor? The economic relationship between the two entities would be similar, so it should be expected that Apple?s New Zealand sales subsidiary has a much lower margin than the Apple group.

Looking at the New Zealand subsidiary?s accounts for the past 10 years, its gross margin ? the difference between what it pays Apple and what it gets from customers ? averages 5.5%. Subtract costs such as local personnel, premises and so on and you arrive at a relatively low taxable profit.

Those are pretty low margins, something that idiots at the NZ Herald wouldn’t understand when they cherry pick figures for their hit piece articles.

The big problem involving Apple and its ilk is in their ability to use?structures in low-tax jurisdictions, such as Ireland, Singapore and Luxembourg, to shift profits around.

Apple says its products originate in the US and ?that?s where the vast majority of our tax is paid.?

Unfortunately, it seems likely that a chunk of Apple?s income is side-tracked to low tax countries and never makes it to the US. The amounts could be significant ? about 65% of Apple?s net sales are outside the US.

The EU?s ?13 billion move on an alleged sweetheart tax deal in Ireland last year shows how much money could be involved.

However, even under conventional business arrangements, New Zealand?s tax take from sales of Apple products would probably be between zero and not a lot.

Yes, we should be vigilant about and sceptical of multinational company tax arrangements?but we also need to keep it real.

It might help if we didn’t have grandstanding politicians making equally stupid statements that the NZ Herald makes.