July 26 2017, updated 5:53pm

Q&A: What makes Apple NZ's tax arrangements 'unique'?

TOM PULLAR-STRECKER
Last updated 12:46 20/03/2017
REGIS DUVIGNAU/REUTERS

Apple may be one of the companies affected by proposed changes to NZ's "permanent establishment" rules, but that probably won't mean a huge bill.

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Apple's NZ tax practices may seem unfair, but there might only be a few million dollars at stake.

Why are people talking about Apple's tax situation in New Zealand?

Apple pays no company tax in New Zealand despite selling hundreds of millions of dollars worth of products here.

Last year, Apple Sales New Zealand reported sales of $744 million and a tax bill of $3m, but it paid that tax in Australia rather than in New Zealand. 

How come? 

Inland Revenue has yet to explain, and in the past it has refused to comment on companies' individual tax affairs. 

But it is understood Apple's arrangement with the Australian and New Zealand tax departments is unique in New Zealand and reflects the fact the company has no management here. 

Since Australia's company tax rate is 30 per cent while New Zealand's is 28 per cent, the arrangement wouldn't seem to be lowering its overall tax bill. 

READ MORE:
Judith Collins announces crack down on multinational tax rorts
Government dragging its heels on Apple tax: Labour

How big is Apple's New Zealand business?

Apple Sales New Zealand paid $1.7 million in wages last year, so it looks as though the company probably only employs about 20 people in New Zealand.

But if Apple is selling so much stuff here. Shouldn't it be paying lots of tax here?

No. That's not how it works anywhere in the world.

By way of example, author JK Rowling has sold hundreds of thousands if not millions of copies of her books in New Zealand.

Yet she doesn't pay any income tax on profits from those sales here, while Kiwi authors pay local income tax on profits from every book they sell.

JK Rowling shouldn't pay tax here, of course. She doesn't live here or vote here and doesn't have any say in our social policies or tax rates. She pays tax in Britain where she is supposed to pay tax. 

Similarly, Apple designs and manufactures its products and services overseas and adds little value to those products in New Zealand. While that remains the case, it will pay almost all of its tax overseas and very little here.

The rule is that companies are taxed on the profit they generate from their economic activity within each country. That works in New Zealand's favour when it comes to the likes of Fonterra selling milk powder overseas.

The businesses that sell JK Rowling's books in New Zealand would be paying tax on their profits and the same goes for Apple. Its local distributors, such as Noel Leeming and J B HiFi, will also be paying tax on their profits selling Apple products.

So is the company being unfairly chastised?

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It's more complicated than that. Apple is one of many technology companies that have exploited tax rorts such as the "double Irish" to route profits that it makes outside the United States to tax havens.

New Zealand is participating in an international drive led by the Organisation for Economic Cooperation and Development to crack down on such rorts.

But those rorts don't have much to do with New Zealand and won't directly lead to much more tax being paid here.

In contrast to Apple, incidentally, JK Rowling has actively campaigned for "tax fairness" and criticised tax havens, explaining she is indebted to Britain's welfare state.

Even if we were just talking about $3m, it would be worth having. Are the Government's recent moves on multinational tax avoidance going to change the situation?

Quite possibly. Among the tax reforms proposed by Revenue Minister Judith Collins and Finance Minister Steven Joyce this month were measures that would change the rules relating to "permanent establishments", which dictate where companies are judged to be liable for tax.

It is understood the new permanent establishment rules may well impact Apple Sales NZ and oblige it to pay tax in New Zealand rather than Australia, but the sums involved will still be small.

What if Apple responded by axing its NZ office and just sold products here from overseas?

Then it would have no New Zealand tax bill.

Collins made it clear that if multinationals are simply shipping goods or supplying services over the internet and have no-one working for them in New Zealand, then they won't be deemed to be permanently established here.

Would Labour do things differently?

Probably not very differently, if we are being honest.

Labour's former revenue spokesman Stuart Nash has said the Government should give more consideration to a "diverted profits tax" which would penalise multinationals caught arranging their affairs to minimise their New Zealand tax.

However, it has not committed to introduce such a tax.

Labour's current revenue spokesman, Michael Wood, is critical of the speed at the which the Government has moved on its other more "technical" reforms.

Wood says Labour could consider changes that would see multinationals taxed on their revenues rather than their profits.

But as this would put New Zealand outside the norms of the international tax system and breach our international tax treaties, such talk may be best viewed as more politics than policy.

Wood does suggest one tweak that he believes could give the Government's reforms more teeth. "One of the things we have been looking at closely in the consultation documents is the transparency of companies' master accounts," he says.

Companies would have to release these "on request" if Inland Revenue flagged an issue, he says.

"That gives time, potentially, for there to be some 'massaging', and one of the issues we are looking at is whether the master accounts should be available at the outset, so we have more transparency."

And the Greens?

Green Party co-leader James Shaw gave a broad thumbs-up to the Government's tax reform package.

He says the proposals contain most of the elements of a diverted profit tax, in all but name.

Like Labour, his main beef appears to be that the Government has taken time to develop its proposals, and they are now unlikely to be drafted into legislation that can be passed before the next election.

- Stuff

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