Transfer pricing rules won’t affect Google tax

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Transfer pricing rules won’t affect Google tax

June 21st, 2012

FAKE NEWS for the Zionist agenda

news New legislation introduced by the Federal Government to stop multinationals such as Google from transferring profits out of Australia and evading local taxation won’t have much effect on the search giant and similar Internet firms, it appears, despite statements by Communications Minister Stephen Conroy that they would.

In early May this year, Google revealed it expected to pay just $74,000 in corporate income tax for the 2011 calendar year in Australia, off claimed local revenues of $201 million, despite the fact that industry estimates have continually pegged the search giant’s Australian income at closer to $1 billion.

The publication of the results immediately led to an outcry in the community, with politicians such as Shadow Communications Minister Malcolm Turnbull expressing concern over the issue. At the time, in a major speech, his opposite, Communications Minister Stephen Conroy, said new so-called ‘transfer pricing’ legislation would be introduced by the Federal Government shortly to deal with this kind of behaviour by multinationals operating in Australia.

However, according to the text of the legislation introduced into parliament recently, and the Government’s own explanatory statements on the issue, it appears that Conroy may have been incorrect, with the new legislation not expected to substantially effect Google and similar Internet companies.

The text of the Tax Laws Amendment (Cross-Border Transfer Pricing) Bill (No. 1) 2012 (PDF here) states that the object of the legislation is to ensure that profits would be brought within reach of the Australian taxation system which would have accrued to an Australian entity if it had not been dealing at proper arm’s length terms with its foreign associated entity.

In addition, a statement by Assistant Treasurer Bill Shorten in November last year stated: “Transfer pricing refers to the prices charged when one part of a multinational group buys or sells products or services from another part of the same group in a different country. The prices charged will impact their level of profits, and therefore the amount of tax they have to pay, in the respective countries. These rules require multinational firms to price intra-group goods and services to properly reflect the economic contribution of their Australian operations.”

However, in Google’s financial results documents, it appears that the reason the company is able to report relatively smaller revenues locally than the revenues it is expected to earn is that it does not appear to deal in the way the new law covers with respect to its foreign parents. In short, it does not buy products from its overseas divisions, and the new transfer pricing laws do not apply.

In its financial statements, Google Australia did not list its activities as being the provision of advertising and software services, both of which it charges Australian customers for. Instead, it noted that it has agreements with its US parent, Google Inc, and a company called Walkway Technologies for the provision of research and development services, and with Google Ireland and Google Asia-Pacific for the provision of sales and marketing services. Consequently, almost all of Google Australia’s revenues were listed as being for services thus rendered to those companies.

In turn, it appears that Google’s customers in Australia bill the company’s Irish division directly for the advertising services the company performs on its global network; often dealing directly with that company in placing advertisement orders over the Internet.

This approach differs markedly from the way which other technology companies such as Apple, HTC, Cisco Systems and so on deal with local companies. Those companies generally (on paper) buy goods and services directly from their international counterparts, and then resell those goods in Australia. It is believed that it is this kind of behaviour that the new transfer pricing laws are designed to target; forcing such companies to list commercial pricing for the purchase of such goods and services from their parents.

In parliament this week during a debate on the transfer pricing legislation, Turnbull raised this point. “Regrettably, this bill, whatever its merits, even having regard to its prospective merits, really does nothing about the critical problems faced in Australia and in many other countries as a consequence of globalisation of commerce and the way in which so many transactions nowadays are occurring in the cloud, the internet,” said Turnbull.

“The vice of transfer pricing that legislation has sought to address is the circumstance where the multinational, no doubt from a tax haven, is selling its products to its local subsidiary in Australia ata very high price so that there is very little profit made in Australia, perhaps just enough to pay the overheads here, and such profit is racked up in the tax haven.”

“I am not suggesting that Google is breaking thelaw—far from it,” Turnbull added. “But the fact is that what Google is able to do, and this applies to many other companies in the digital realm, is to sell advertising to Australians online from an entity—until very recently it was an entity located in Ireland which, I might say, was generating well over €11 billion of revenue out of Ireland, just in that entity alone; obviously, that plainly was not coming out of the Irish market.”

“And it can transact directly with customers in Australia, from Ireland, over the web. It arranges its affairs so that its business in Australia, its permanent establishment in Australia, has no effective connection with that transaction and, therefore, there is no basis for the transfer-pricing rules to apply. Of course the same thing can be said about Amazon. You go onto the web, you order some books or whatever you want from Amazon or another online vendor, and again there is no local connection.”

Turnbull suggested that a goods and services tax could be levied on companies like Google to resolve the issue, stating that this would be within the Federal Government’s powers, as the search giant’s Internet ad sales were to Australian customers. “It is perfectly feasible for them to collect GST in Australia,” Turnbull said, pointing out that this issue had previously been raised by local retailers, who had to collect GST, while overseas Internet retailers did not.

Labor MP Ed Husic, who has closely tracked the technology pricing issue in general, criticised Turnbull for highlighting the Google example, alleging that Turnbull had unfairly criticised Google on a number of occasions — with relation to the search giant’s support for the NBN, for example.

However, in this case, it appears that Turnbull is correct, in that the Federal Government’s transfer pricing legislation would not affect companies such as Google. Google is currently the most high-profile example of an Internet company paying only a small amount of Australian tax, compared with its local revenues.

opinion/analysis
After reading the legislation and the various comments on this issue from the various political parties, I have come to the conclusion that Turnbull is right on this one; Labor’s new transfer pricing legislation does not apply to Google and will likely not apply to other major Internet companies such as Amazon. Furthermore, Turnbull is correct in his comments that much of the revenue these companies used to make was made by Australian companies and taxed in Australia; not it is not.

Based on his parliamentary comments, in which he skirted around this issue, I believe Husic understands this fact. I also believe Conroy may have had this fact rammed down his throat by the Treasurer’s office since he made his original comments about Google. At the time he made them, I don’t believe he understood the precise application of the laws to Google’s situation.

You can hardly blame Conroy for this; to a layman, the legislation is almost unreadable. But if you read it and then read the explanatory statements, and read the various media releases and associated parliamentary debates, the meaning does become pretty clear. And the meaning is that Google isn’t going to be bothered much by these new laws.

I would suggest the Government take another look at the situation, and that the Coalition continue agitating on the issue and push for further amendments to the legislation. This issue is not going away any time soon; in fact, it is increasing in importance as Australia’s Internet economy grows.

Image credit: Robert Scoble, Creative Commons