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Economics References Committee
Corporate tax avoidance

CARNEGIE, Ms Maile, Managing Director, Google Australia

KING, Mr Tony, Managing Director, Australia and New Zealand, Apple Pty Ltd

SAMPLE, Mr Bill, Corporate Vice-President, Worldwide Tax, Microsoft Corporation

CHAIR: I welcome Mr Tony King from Apple, Ms Maile Carnegie from Google and Mr Bill Sample from the Microsoft Corporation. I thank you all for participating in this inquiry. I believe two of you have made submissions. Thank you for that. I want to point out that, since the committee first made contact with your three companies, you have been incredibly willing to participate in any questioning we have. I know some of you have had to change travel and other arrangements to be able to be here today. We as a committee very much appreciate that. Committee members will obviously have a fair few questions for you. Before we get to that though I want to give you the opportunity to say a few brief opening remarks—please, I stress, 'brief'. That will be fantastic because I know there will be a lot of questions and perhaps what you are prepared to say in your opening remarks will get covered in questions anyway.

Mr King : Good afternoon, Chair and Senators. I am proud to represent Apple Australia here today. Apple have been operating in Australia for more than 30 years and we now employ over 2,000 people here. We also have 21 Apple retail stores across the country where we serve tens of thousands of customers every week. Our business model is simple: we sell and distribute the best products in the world to our customers here.

Apple Australia pays all taxes it owes in accordance with Australian law. Apple's product design, development and manufacturing all take place outside of Australia. All of the sales from our operations are included in Apple Australia's accounts. Apple Australia buys the products we sell here and we pay Australian tax on the profit on these sales. We also pay GST on every single sale in addition to corporate, payroll and fringe benefits tax. In fact, in our most recently lodged accounts our effective tax rate was above the Australian corporate tax rate of 30 per cent.

In addition to our Apple retail stores, we have a broad network of partners who are successfully selling our products to millions of customers around the country. Our reseller channel alone offers more than 6,500 places for our customers to buy and this has driven hundreds of more local jobs. Apple's introduction of the App Store created an entirely new industry. We have over 270,000 registered app developers in Australia, who have earned over $268 million. Many of these developers are individuals or small businesses, some of whom have grown to employ over 100 people and are competing head to head with the biggest names in the global software industry.

We also believe in leaving the world a better place. One example of how we put that into action here is by running all of our offices and retail stores around Australia on renewable energy.

We are committed to Australia's economy and its success. We are transparent and open with the Australian tax office and have worked through its advance pricing agreement program since its inception to determine how to confirm the prices on the products we buy from affiliates outside of Australia. Just as countless other Australian taxpayers have, Apple Australia sought these agreements as part of a formal and globally recognised program to assure certainty on compliance with all relevant Australian laws. These agreements are reviewed regularly in line with normal tax office procedures to ensure Apple Australia is in compliance with all of its Australian tax obligations. The ATO has confirmed on a number of occasions that we have a cooperative relationship and we remain willing to enter into further agreements in line with normal business practice here in Australia.

We are proud of our long history in Australia and the many contributions we make here. We look forward to continuing to serve our customers around the country. I would be happy to answer your questions.

Ms Carnegie : Thank you for inviting me here today. The way multinationals operate, particularly in terms of how we operate with tax, is an issue which is in a lot of conversation globally but also, as you know, in Australia. And a question that I get asked by friends, family and also my customers is: 'If Google generates a lot of revenue here, and they have a sales force which is based in Australia that helps to deliver that revenue, why does Google not pay more corporation tax in Australia?' Now before I answer that question, I thought that it might be helpful if I provided a little bit of context on Google globally but also on what we actually do on the ground in Australia.

Google is now a global company. We have operations in about 70 offices, both in terms of sales and R&D, across 40 different countries. Our users and customers come from all around the world. Google's global corporate tax rate is just over 19 per cent, and we incurred taxes of $3.3 billion last year. Almost all of those taxes were paid in the United States by our headquarters, Google Inc. In Australia, Google employs about 1,000 people and we perform two very important functions for Google globally. The first one is that we provide sales and marketing support services. What that means is that people on the ground in Australia help to explain our very new-to-the-world services, including advertising services, both to users but also to businesses. Because the services are new to the world, users often require a lot of education in terms of what they are, why you should use them, how you should use them, and when you should use them; and we provide a lot of education. We also provide a lot of work to drive awareness of what those new services are. Our team works with our regional head office in Singapore, and our regional head office in Singapore is responsible for serving advertisers across over 30 different countries in the region. So that is the first thing. The second thing we do in Australia is that we provide R&D services to Google globally. So we have about 500 engineers based in Australia, and they support the about 28,000 engineers Google has globally. In Sydney we work on products such as Google Maps.

So the way to think about us like an external agency. Google Australia gets revenue from two places. We get revenue from Google Inc. because of our R&D services, and we get revenue from Google Asia Pacific, based in Singapore, for our marketing and sales and service support that we give. Now, in order to calculate how much revenue and how much profit Google Australia should receive, we use something called the cost-plus basis, and we ensure that the revenue and the profit Google Australia gets is absolutely comparable to what an external agency or an external company would get if they provided the equivalent services. So, specifically for 2013, Google Australia was paid $358 million in revenue and we generated profits of just over $46 million, and as a result we paid $7.1 million in taxes. So that is the context.

So now let me answer the question, why is it that Google Australia does not pay more corporation taxes in Australia? And the answer to that is because, like many other multinational corporations, whether they are digital or otherwise, we pay the lion's share of our taxes to the country where our headquarters is based. That is because typically, head offices—and in our case, our head office in the US—are where we take the majority of our risk and where we make the majority of our funding in investments such as research and development. And that in turn is what drives our profits. So at Google, our success and our profits stem from our intellectual capital, and that is the technology that helps to drive things like the algorithm which provides what we think is the most relevant answer to whatever search you put into Google Search. It also drives things like the technology to help us do the auction that prices the advertising that you would see on YouTube or on Google Search. This intellectual capital was developed outside of Australia, and this intellectual capital is owned outside of Australia. It is very easy to underestimate the risks and also the costs that were required to today, to develop that intellectual capital. It is also very easy to underestimate the ongoing risks and investment required to develop the next type of innovation, such as driverless cars. For perspective, last year alone Google invested more than $9.8 billion in R&D. If you think back to when we made our first investment in Search, Google in the US funded that, even though there was already an incumbent well entrenched in the search space. When Google in the US made the decision six years ago to buy YouTube for $1.65 billion, that business at the time was generating virtually no revenue and was riddled with legal risk. In both cases, it was a very, very risky and a very, very expensive proposition for Google in the US to go after those business areas.

The explanation for why an Australian multinational, whether they be in mining or in biotech, is able to generate the majority of their revenue outside Australia but pay the majority of their taxes inside Australia is that the Australian based headquarters does most of the investing and carries most of the risk. The Australian headquarters invest in things like infrastructure and R&D, so it makes sense that the profits and the taxes made and paid are in Australia. That explanation is also why Google pays most of the taxes in our US headquarters, because the US is where the majority of our risks and our costs are borne.

I want to end quickly on tax reform. We believe that it is important not just for large companies but also small companies and particularly start-ups that we have reform in our taxes. We support reform to make our current system simpler and more transparent, but we do not believe that unilateral action by an individual country that basically puts at risk our tax treaties with other nations is the right solution. It will add more complexity and more uncertainty and will lead to less innovation and less growth and job creation. It is why Google believes international cooperation at the OECD level is essential.

However, we do also agree that there are areas where local action could be taken that does not undermine that OECD process. For example, there could be some thinking done on our existing R&D tax credits. My worry is that the system today is being used for business activity that would have occurred regardless of whether the tax credits were offered. Google currently both qualifies for and benefits from this R&D tax credit, and that is because our teams in Australia do very innovative work here. However, the R&D tax credits are not the primary reason we are investing in doing R&D in Australia. I do think those incentives, for example, could be better targeted to start-ups, and there are probably businesses all over Australia at the moment being started up in someone's garage that could be better served by getting them up faster and scaled globally faster, hopefully turning into the next Google or Apple or Microsoft, and those businesses could be headquartered in Australia.

Finally, thank you for inviting me here to participate today. I am proud of Google's contributions in Australia. There is always more that we could do. However, we are committed to Australia and we are committed to our users and our customers in this geography. Thank you, and I welcome your questions.

CHAIR: Thank you. Mr Sample?

Mr Sample : Thank you, Chair, and I thank the committee for the opportunity to provide evidence at this inquiry. I am the Corporate Vice President, Worldwide Tax, for Microsoft Corporation. I would like to make an opening statement about how Microsoft's business is structured. Our written submission provides more detail, but it might be helpful if I outlined the basic structure and where Australia fits in. Microsoft is incorporated and headquartered in the United States. Our mission is to enable people and businesses throughout the world to realise their full potential by creating technology that transforms the way people work, play and communicate.

I will take a moment to explain to you our business model in simple terms. Microsoft is a technology company. Eighty-five per cent of our R&D spend and headcount is based in the US, and the intellectual property is owned by Microsoft Corporation US. We deliver our hardware and software products and our services based on a regional operating model that has three distinct regions: the Americas, EMEA and APAC. We service our customers and our channel partners through local subsidiaries in over 100 jurisdictions. For FY14, our worldwide revenue was split evenly between the US and foreign locations. Our worldwide original equipment manufacturers, or OEM business, consisting primarily of the licensing of the Windows operating system to computer manufacturers for pre-installation on PCs, is primarily operated and supplied from our US regional operating centre, also known as a ROC. All resulting income is reported as taxable income in the US, fully subject to the US corporate income tax rate of 35 per cent. Our non-OEM or retail business is generally operated and supplied by our ROCs located in the following three regions: EMEA, APAC and the Americas. Each of these ROCs represents a significant investment in infrastructure and head count. The Singapore ROC group, organised in 1998, supplies products and services to the APAC region—also representing billions in customer revenue earned and operating expenses incurred, serving 18 countries throughout the Asia-Pacific, including Australia. The APAC group operating costs are funded by the Singapore ROC. The Singapore ROC groups employs nearly 2,000 workers and owns and operates data centre facilities that distribute software to APAC customers.

Regional production, marketing and G&A functions are performed by the Singapore ROC. The profits earned from the APAC business, after appropriate taxable payments to the US group for technology rights and other support, and the payment of support fees to the local subsidiaries, are earned primarily by the Singapore ROC group. Microsoft local subsidiaries, such as Microsoft Australia, receive an arms-length compensation paid by the ROC, which takes into consideration the functions performed, assets owned and the risks assumed by each entity. Local entities are generally required to act under the direction of Microsoft Corp. with regard to the marketing campaigns, pricing terms and conditions, and policies and procedures. The local subsidiaries provide very limited input into the creation of marketing or technology embodied in the material provided by Microsoft. Our foreign ROCs pay tax locally in the jurisdiction in which they operate, and Microsoft pays US tax on the earnings of the foreign ROCs when those earnings are repatriated back to the US in the form of dividends or included in income under other provisions of the US Internal Revenue Code.

Microsoft also pays US tax on royalties and cost-sharing payments that are received from the foreign ROCs. Microsoft Australia Pty has operated in Australia for over 30 years and currently has around 960 employees. Microsoft Australia has over 10,000 channel partners, of which 69 per cent are Australian small businesses. These partners employ over 230,000 people in high-skilled jobs and they contributed over $19.5 billion to the Australian economy in 2013. I am happy to take your questions.

CHAIR: Thank you so much, and thank you for your submissions. I am going to ask only one question, and then Senator Ketter, Senator Milne, Senator Milne and Senator Xenophon, and we will keep going round. Ms Carnegie, if we get the chance I would love to ask you a bit more about the R&D proposal. I know it was in today's press. I think it is a very exciting idea and I want to say: it is very positive when people come to these kinds of inquiries to participate with new ideas as well.

Let us take a step back for a second and unpack something. Firstly, let's get some terms on the table that we can all agree on. There is a big difference between tax minimisation and tax evasion. Tax evasion is illegal. Tax evasion is a matter between businesses and the relevant authorities—in our case with the Australian Taxation Office—and we are not here to make accusations or allegations about tax evasion. That is a legal matter between companies and the tax office. You are all obviously very aware of the criticism that is levelled at tech companies, and your companies in particular. This is not a new issue for your companies to be dealing with. There has obviously been an incredible amount of community, public and media interest in this, and I just wanted to put the question to you to give you an opportunity to answer. I know other senators will go into more detail. The proposition is effectively this: the Australian public do not accept that the structures that have been created by these companies are necessarily genuine, and there is a strong sense out there that companies such as yours, which do incredible work in terms of employment, which create fantastic jobs, which create innovative new products, also have a greater moral and social responsibility to give more back to this community and that the structures that have been created within your firms, be it through Ireland, through Singapore, through the US or through wherever, have been designed to minimise your tax obligation in this country. That is not a criticism of the incredible work that your companies do. It is a criticism of a corporate structure, as well as a sense amongst the Australian public and media that the structures have been artificially created and are not genuine. In saying that, I am not implying or saying that any of this is necessarily illegal behaviour. If it is tax evasion, it is a matter for the Tax Office, but the question is—and I am sure this has been put to you before—more about the morality of having these structures and whether your companies have a greater corporate and social responsibility that you are not meeting. I would like to put that one question to the three of you, starting with Mr King.

Mr King : Let me start by reiterating that we have a very simple business model. We book all of our revenues to do with our Australian sales here in our books in Apple Australia. We collect and pay GST on every single sale that we—

CHAIR: But the corporate tax is not the GST.

Mr King : Every single sale, including our online store sales—

Senator EDWARDS: iTunes?

Mr King : and iTunes. Apple in Australia and Apple globally is ostensibly a product company. So we make iPhones; we make iPads; we make Macs; and we have a smallish—in our revenue scheme of things—digital services business. We are ostensibly a hardware or product company, and so we book all of our sales in the books of Apple Australia—very clear, very transparent. We purchase our products on an arms-length basis from affiliates; we book all of those costs in the books of Apple Australia. We declare all of our income in accordance with Australian tax law and we pay all of our taxes that we owe. It is very simple—no offshore billing, no corporate debt, no fancy hybrid structures—a very simple business model.

Ms Carnegie : Google also has a very simple structure. We also use an arms-length pricing model to determine what the revenue and profit for Google Australia should be, but I think the question you are getting at is slightly more complex than that. As you said, it is the morality of the whole thing. I guess my answer to that is: fundamentally, Google does not structure itself based on tax; it structures itself based on being competitive. We are not opposed to paying tax; what we are opposed to is being uncompetitive. Just as Australia needs to compete with Singapore or Ireland or the US or the UK for various things, we need to compete with the people sitting at this table, as well as Tiensin in China and Alibaba, which is now incorporated in the US. We structure ourselves to be competitive.

When I think about morality, I do not think about it in terms of geographic boundaries. I also think it is a very qualitative statement. If I asked each one of you what is the appropriate and morally right tax to be paying, I would probably get as many different answers as the number of people sitting at the table. When you look at it internationally, the answer to that ranges from the UK, which says it is 20 per cent, through to Ireland, which says it is 12½ per cent, through to South Korea, which says it is 24 per cent, through to Singapore, which says it is 17 per cent—

CHAIR: And Bermuda says it is zero.

Ms Carnegie : through to Bermuda, which says it is zero. I do not know what the right answer is. As I said, Google globally pays a tax rate of 19.3 per cent. That was last year, but if you look at our five-year average it is closer to 20 per cent. If you look back at 2002, we were paying about 48 per cent tax. As I said, we are not opposed to paying tax; we are opposed to being uncompetitive. We have competition sitting at this table and all around the world. When I think about the morality of it, I think the people who need to give the right number are, quite frankly, the people sitting on your side of the room. What we need to do is to make sure that we are living up to that.

Mr Sample : Our Australian business is a direct result of business decisions made by Microsoft senior management decades ago. The company has been centralising its R&D functions in the US and we perform over 85 five per cent of our R&D in the US. In the early 1990s the company management decided to regionalise the production and distribution functions to reduce costs and improve efficiency in those operations. Microsoft develops products, produces software, distributes software and markets software. The R&D and development work is done in the US and the production, distribution and selling operations are done in the regional centres. As a result, in our market jurisdictions the Microsoft entities are marketing, service and support subsidiaries. That is the nature of our business in Australia, and I believe that the profit attributed to our Australian business and tax paid is in full compliance with the Australian tax law.

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.

Senator MILNE: I want to follow up on that question about Apple subsidiaries. We had evidence today from Professor Antony Ting. In his submission to the inquiry he said:

Another implication of the separate entity doctrine is that tax administrations are bound by the tax law and therefore in general have to respect intra-group transactions even if they do not have economic substance. Taking Apple’s international tax avoidance structure as an example, it has successfully shifted US$44 billion to its Irish subsidiary from 2009 to 2012. The Irish subsidiary was a shell company with no employees before 2012.

Do you accept that that is a true statement?

Mr King : What I can say is that we book all of our revenue and sales that we do in Australia in our books locally, we book all of the costs associated with doing business here, we buy our products from affiliate companies within the Apple group and we pay all of our taxes on our sales here in Australia.

Senator MILNE: No doubt—that is what you are saying. I asked you about the allegation that Professor Ting made in his submission ,which is that basically you have an international tax avoidance structure—'a double Irish sandwich with Dutch associations'. What is a double Irish sandwich with Dutch affiliations?

Mr King : I have no idea what you are talking about.

Senator MILNE: Oh come on, you have not come here today to say that!

Mr King : What I can say is that all of our revenue is recorded in our books here, all of our costs of doing business are reported in our books and we buy products from affiliate companies outside of Australia.

Senator MILNE: So why does this money go straight to Ireland and then through the Netherlands and then back to Ireland? What is going on with that?

Mr King : All of our business here is clearly reported in our books.

Senator MILNE: I am not asking what you are reporting. I am asking you about this arrangement that you have.

Mr King : The arrangement that we have is very clear in the business that we do in Australia. All the revenue and all of the costs of doing business are clearly reported in our books here in the Australian market.

Senator MILNE: Professor Ting goes on to say:

… when Apple’s Australian subsidiary sells an iPad for $600 to a customer in this country, it is estimated that about $550 (that is, approximately 90%) is shifted to Ireland. To make it worse, out of this $550, about $220 (that is, approximately 36%) is never taxed anywhere in the world. This is called “double non-taxation” in the tax world.

Are you involved in double non-taxation?

Mr King : I am not an international tax expert. I am not familiar with any of our tax activities offshore. I can talk clearly about our tax activities in Australia. When we buy an iPad, an iPad has a cost. Apple Australia pays the cost of that iPad when we purchase it from an affiliate within the Apple group.

Senator EDWARDS: That is the issue.

Senator MILNE: That is the point. What are you buying it for and what are you selling it for?

Mr King : We buy it for an arms-length price, which is determined in accordance with our advance pricing agreement, which has been clearly worked for many, many years on a consistent basis, transparent and open with the Australian tax office.

Senator MILNE: What I am asking you is: what are you buying it for and what are you selling it for?

Mr King : We buy it at an arms-length price.

Senator MILNE: Yes, I heard you say it is an arms-length transaction and your advance pricing agreement. What I am asking you, though, is: what is the actual dollar terms? What are you buying an iPad for and what are you selling it for in Australia?

Mr King : We are buying it at an arms-length price, which would be the same price—

Senator MILNE: I heard you say that. I said: how much?

Mr King : I do not have a specific dollar value for each one of our products here today.

Senator MILNE: Relative to what you buy and sell an iPad for in Australia, how does that compare with the price that you sell it for and the cost you buy it for in other places?

Senator EDWARDS: Say, America.

Mr King : I am not familiar with the tax practices in America. I can talk about the tax practices here in Australia. That iPad would be bought at the arms-length price, which would be as if Apple in Australia were an independent entity buying that product from an offshore—

Senator MILNE: Therein is the problem. You are acting as if you are a separate entity and you are not a separate entity; you are part of a global structure and you are fixing the prices around the world so you maximise your expenses here in this jurisdiction and then maximise your tax avoidance in a low-tax jurisdiction. Isn't that what Apple is doing?

Mr King : Senator, I reject that. We are following—

Senator MILNE: Why? What is wrong with that statement?

Mr King : We are following globally accepted transfer pricing principles. We are following Australian transfer pricing principles in everything that we do here in the Australian market.

Senator MILNE: I am not saying you are not following the law or you are not following principles. I am asking you as a matter of fact. You are sitting here saying that you are just familiar with the Australian tax arrangements of your Apple subsidiary here. What I am saying is that it is ridiculous to regard you as a single entity when you are part of a global company which is avoiding tax.

Mr King : We do not avoid tax. We pay all of our taxes that are due in the Australian market in accordance with the law.

Senator EDWARDS: You know where Senator Milne is going. It is getting painful again.

Senator MILNE: Yes.

Senator EDWARDS: If you buy an iPad for $550 in Australia and sell it for $600, you have tax on $50—that is your gross margin, right? Then you have costs out of that and that leaves your net profit. Your net profit might be $10, of which you pay 30 per cent, which is $3, on every iPad. However, in America or other more favourable tax jurisdictions, do you charge the equivalent of $550 or does your parent company charge $550 for the same iPad, or do they charge $220, which means your gross profit is much higher? Your costs may be similar, depending on the region you are in and therefore you have a much higher net profit. Am I helping you?

Senator XENOPHON: Very good questions.

Senator EDWARDS: I am going to go mad otherwise.

Mr King : I can only restate what we do here on the Australian market.

Senator XENOPHON: You are not answering the question.

CHAIR: You do not know?

Mr King : Senator, I do not know what we do elsewhere in the world.

Senator CANAVAN: How do you work out the transfer price? How do you calculate the arms-length basis for the iPad that you buy here?

Mr King : That is subject to the advance pricing arrangement with the ATO. And the transfer pricing—

Senator CANAVAN: But you do not have that agreement with them right now.

Mr King : For the worked example that we are talking about?

Senator CANAVAN: Yes.

Mr King : I do not have a specific number for every product that we sell.

Senator CANAVAN: But you said in your submission that you do not have an APA with the ATO any more.

Mr King : Our APA first started in 1991. Our most recent APA expired just recently—

Senator CANAVAN: Yes. So you do not have one right now.

Mr King : and we are just working on the basis—as if that APA were still in existence.

Senator CANAVAN: Mr King, we are mere senators—and you are not an international tax expert, I understand that. But you are responsible for a company that pays tax and is obviously involved in these arrangements to determine your tax. I think we are hoping for you to give us a layman's explanation of how you determine an arms-length price under these arrangements. It seems to me very difficult. It is not a simple business—you said your business is simple; this is not simple, because there is no alternative purchaser of iPads, there is no alternative market that we can go to to check this price and benchmark it. How do you determine the price, given it is an internal party or a related party transaction?

Mr King : So it is a function of a couple of things: first and foremost, the economic activity that Apple Australia undertakes here, and so we are a distribution business in the Australian market. We bring Apple product into Australia and it is sold. Second, when we look at specific products, we are looking at the arms-length test, and the arms-length test involves economists working through companies that would be similar in size, shape, and style to that of being a distribution company. And those comparables are pulled together, in conjunction with analysis that the ATO does on their side of the fence, to determine what an arms-length basis would be for imported products coming into Australia.

Senator CANAVAN: So is it a building-blocks approach then?

Mr King : It is a building-blocks approach from the bottoms up. It starts with, what does Apple do here? We do not do any development. We do not do any manufacturing. We distribute and sell products.

Senator KETTER: I just have a follow-up question on the issue of transport pricing. Have you had any adverse assessments in relation to your transfer pricing?

Mr King : No, Senator, we have not had any—we have never had any adverse assessments to the best of my knowledge, and I have been at the company for 12 years. And I do not believe we have had anything beyond that.

Senator MILNE: Are you under investigation currently by the Tax Office?

Mr King : Senator, I believe that approximately a dozen of the tech companies are being audited by the ATO—of which we are one—

Senator MILNE: Thank you.

Mr King : and we have been cooperating fully with the ATO in their audit of Apple.

CHAIR: Just before we move on, can I ask: is that the case for your companies as well, Mr Sample and Ms Carnegie? Are you all being audited by the ATO at the moment?

Mr Sample : Yes, Senator.

Ms Carnegie : I thought there were disclosure laws to say whether we can or cannot establish—

CHAIR: Parliamentary privilege, Ms Carnegie.

Ms Carnegie : Yes, we are.

CHAIR: Okay. So all three of your companies are currently being audited by the ATO.

Senator EDWARDS: And then some, by the sounds of it.

Senator KETTER: Mr King, you touched on the fact that your advance pricing agreement has not been renewed by the ATO. Do you have an understanding as to why that has occurred? Is it possible that the ATO believes that you are too aggressive in your tax planning?

Mr King : Senator, I do not believe that is correct. I believe our agreement expired, and we were in renewal discussions, and then an audit commenced with the technology companies about six to 12 months ago, and so those discussions are ongoing. Our desire is to renew our APA with the ATO. And the APA is a very rigorous and professional program.

Senator MILNE: I just want to follow up to the questions that have been asked in relation to Apple's cost of goods sold in Australia. Is it true that the cost of goods sold in Australia is much higher than globally?

Mr King : I do not have that data point today for you, Senator, but advance pricing agreements are very commonly implemented around the world.

Senator MILNE: Perhaps you could take on notice please to provide a comparison—

Mr King : I will take the question on notice, Senator.

Senator MILNE: We would be very interested to know the answer to that question. I want to now move on to Google. Perhaps you could explain to me what the double Irish sandwich with Dutch associations is since it is the thing that Google is particularly accused of. Nobody is going to accept the explanation that you have a simple tax structure so let us understand how starting from here we end up in Bermuda.

Ms Carnegie : I am not going to say that Google has a simple tax structure globally. What I would say is that we have a simple tax structure in Australia and Google Australia. Unfortunately, similar to my colleague, I am not a global tax expert. I can explain to you what I do know about Google's tax, but I will have to take on notice if you want to get into detailed international tax discussion.

The intellectual property of Google globally is owned by Google Inc., which is a US based company. Google Inc. then basically shares the cost and the risk of taking that intellectual property to market with another entity called Google Ireland Holdings. That is a company that is based in Ireland. There are then two operating companies underneath that structure. One of them is called Google Ireland Limited and the other one is called Google Asia Pacific. Google Australia, as I said, basically provides sales and marketing support services to Google Asia Pacific and also provides R&D services to Google Inc. That broadly speaking is how we go to market.

Coming back to your question, I acknowledge there is a lot more complexity to the Google global tax structure than that. None of that other structure impacts the tax that Google pays in Australia. I can take on notice and come back and explain what goes on more explicitly in Ireland and other places but, to be frank, I do not have those details today.

Senator MILNE: I find it extraordinary that you do not because the whole point of this inquiry is to look at whether companies like Microsoft, Apple and Google pay their fair share of tax in Australia. You have already established you get very generous R&D concessions in Australia. We have established that—so you maximise the expenses in a country that pays substantial rebates and then you minimise the tax that is paid through these structures. As I understand it, the money that gets to Ireland goes to the Netherlands so that avoids the European complexities and gets you into a low-tax jurisdiction in the Netherlands. The money is transferred straight from the Netherlands to an Irish company located in Bermuda, which has no tax. So at the end of the day we are seeing a strategy surely for Google in Australia to maximise the costs here and to transfer as much as possible overseas and end up paying no tax on it at all. Isn't that effectively what Google Australia is actually doing?

Ms Carnegie : No, it is not.

Senator MILNE: Why? Why do you say that is not what is happening?

Ms Carnegie : I say that is not happening because, as I said in the beginning, we get an external company to do an audit and say what another company would be paid, both in terms of revenue and profit, if that other company were doing the work we do in Australia—if they were providing advertising and sales support or were doing that R&D, that engineering, here—and that is basically what we are paid and we then pay tax on that. As I said in my opening, yes, we do benefit from the R&D tax credit. We get a $4.5 million benefit from that. If we did not benefit from that, we would be paying 25 per cent tax so I acknowledge yes, we do get benefit from the R&D tax credit because we qualify for that. But the revenue that comes from Australia is taxed in Singapore, so the revenue from Australia is taxed. It is taxed in Singapore.

Senator MILNE: It is taxed in Singapore. Thank you. Now we are getting somewhere. So what is the relationship between Google Australia, Google Singapore and Google Ireland?

Ms Carnegie : As I said in the beginning, Google Australia provides sales and marketing services to Google Singapore, and we get basically revenue for those services. The other revenue from the market—the money that Google generates from, for example, business in Australia is paid directly into Singapore and that money is then taxed in Singapore.

Senator MILNE: And the costs associated with what Singapore charges you for the cost of those services, which gets the money transferred to Singapore, which is a low-tax jurisdiction. Is that correct? And who determines those costs?

Ms Carnegie : The costs for the services we provide are determined by going to an external party who, on an annual basis, looks at what an agency or an external company would charge for similar services.

Senator MILNE: Who is the external agent?

Ms Carnegie : I actually do not know the answer to that. I can come back to you on notice on that. But that is how Google Australia revenue and profit are determined.

Senator MILNE: Yes. So the tax is paid in Singapore, not in Australia.

Ms Carnegie : The tax for Google Australia, which, as I said, is a combination of sales and marketing services and R&D services, is paid in Australia. The tax generated from, for example, our advertising revenue, is paid in Singapore.

Senator MILNE: So the tax from your advertising revenue is paid in Singapore. Exactly. So we will get to Microsoft, and Microsoft is also accused of the double Irish Dutch sandwich. Is that the case?

Mr Sample : Senator, we do not and have never used a Dutch sandwich. Although I have heard the term I am not familiar with it. We do have a—

CHAIR: What about the double Irish?

Mr Sample : We do have a double Irish structure that was set up years ago and is in decline and represents less than 10 per cent of our Irish regional operating centre earnings.

Senator MILNE: Is that because the Irish government is now cracking down on it?

Mr Sample : No, that is because the business line that flowed through the double Irish structure has been declining steadily for a number of years.

Senator MILNE: When you sell corporate services in Australia, where are the sales people primarily located?

Mr Sample : The products and services we sell to Australian customers are sold by our Singapore group.

Senator MILNE: Thank you. So the sales people are primarily located in Singapore?

Mr Sample : That is correct.

Senator MILNE: And where does Microsoft bill its customers? From which jurisdiction?

Mr Sample : Our customers are billed by the Singapore group.

Senator MILNE: And are the services provided from Singapore?

Mr Sample : Microsoft products and Microsoft services provided to third parties related to online and other internet or cloud services would be provided from the data centres in Singapore.

Senator MILNE: Is the revenue for these services that are provided in Australia accounted for in Microsoft Australia's financial reports or results as reported to the tax office?

Mr Sample : Consulting services revenue is billed and accounted for on our Australian books and reported to the Australian tax office. Non-consulting services and software product revenue is billed and accounted for on our Singapore group books.

Senator MILNE: Thank you. So let's distinguish between those two. Can you give me a dollar figure in splitting the things that are accounted for in the Australian tax regime, or even a percentage, of what is then dealt with in Singapore?

Mr Sample : For fiscal year 2014, we estimate our Australian product and our customer product and service revenue is nearly $2 billion.

Senator MILNE: I want the split, though.

Mr Sample : We probably book over $100 million of consulting services revenue on our local subsidiary books.

Senator MILNE: Just say those figures again.

Mr Sample : $2 billion in software products and services revenue booked in Singapore and a little over $100 million of consulting services revenue booked in Australia.

Senator MILNE: So $2 billion booked in Singapore and $100 million in Australia—and it just so happens that Singapore is a low-tax jurisdiction by comparison.

Mr Sample : It does not just so happen.

Senator MILNE: It is a happy coincidence, is it not?

Mr Sample : As I said earlier in my testimony, our management in the early 1990s decided to regionalise our product, production, distribution and sales activities. For the Asia-Pacific region, we decided that the location of our regional operating centre would be in Singapore.

Senator MILNE: I will go to a particular consumer service—for example, the Xbox platform. Where do you bill your customers from for that?

Mr Sample : The Xbox product will be billed out of Singapore.

Senator MILNE: Are the services provided from Singapore?

Mr Sample : That would be correct. I believe that is correct.

Senator MILNE: Again, is the revenue for these services accounted for in the financial results here or just in Singapore?

Mr Sample : They are accounted for in Singapore.

Senator MILNE: Just give me the relationship between Microsoft Australia, Microsoft Ireland and Microsoft Singapore. What is the relationship between those three entities?

Mr Sample : Microsoft Australia is not related in our legal structure to either Microsoft Singapore or Microsoft Ireland. Microsoft Singapore and Microsoft Ireland are not related, and there are no transactions between the two.

Senator MILNE: How extraordinary!

CHAIR: Who do you work for? Who pays you?

Senator MILNE: Who are you working for?

Mr Sample : I work for Microsoft Corporation in Redmond, Washington.

Senator MILNE: So why are you here, if you have nothing to do with this lot in this country?

Mr Sample : We decided, based on the nature of this inquiry, that we would try to answer your questions as best as possible, and I am the person in the company most familiar with the company's tax structure.

Senator MILNE: I am not suggesting that you are not welcome to be here, but I find it extraordinary that you are saying that these separate entities have nothing to do with each other—and here we are.

Senator EDWARDS: It is wholly owned by the mothership, is it?

Senator MILNE: Wholly-owned subsidiaries in each case.

Senator EDWARDS: Who are the shareholders of Microsoft Australia?

Mr Sample : Microsoft Australia is owned by a European holding company which is owned by Microsoft Corporation in the US.

Senator MILNE: So we are talking about the wholly-owned subsidiaries.

CHAIR: Did you fly over to Australia just for this inquiry today?

Mr Sample : Yes, I did.

Senator XENOPHON: Mr King, you have been with Apple for 12 years now?

Mr King : Yes, sir.

Senator XENOPHON: When was the last time you went to Ireland on business?

Mr King : I have never been to Ireland on business.

Senator XENOPHON: I find that strange, because, according to investigative journalists in this country, Apple in Australia has moved almost $9 billion in untaxed profits to its operations in Ireland. You have moved close to $10 billion to Ireland and you have never been there.

Mr King : Apple in Australia is owned by Apple Ireland. That is our parent company. I will reiterate that I have never been to Ireland for business purposes—only pleasure.

CHAIR: Do you FaceTime?

Senator CANAVAN: Do you FaceTime with Ireland?

Mr King : Not recently.

Senator XENOPHON: So you have shifted close to $10 billion in untaxed profits to a place you have never done any business with?

Mr King : We have not shifted any profits. We book all of our revenues here, all of our costs—

Senator XENOPHON: But you have shifted $9 billion from Australia to Ireland. Is that not the case?

Mr King : We have not shifted any profits outside of Australia.

Senator XENOPHON: No. I am asking: have you shifted $9 billion in revenues to Ireland, as reported?

Mr King : No, sir.

Senator XENOPHON: So what have you shifted?

Mr King : We have not shifted any profits.

Senator XENOPHON: Are you sure about that?

Mr King : Yes, sir, I am.

Senator XENOPHON: What do you say to this? Back in 2013, Apple reported pretax earnings in Australia of only $88.5 million, after sending an estimated $2 billion from its Australian sales to Ireland via Singapore, where Apple negotiated a secret tax deal in 2009.

Mr King : We are very transparent in everything that we do in the Australian market. All of our revenue, all of our costs, are clearly reported in our Australian business. We do buy products from affiliate companies outside of Australia, and we pay for those products.

Senator XENOPHON: Can I just go to a report of the United States Senate Committee on Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations. It reported on 20 May 2013. The US Senate concluded that Apple's tax arrangements have nothing to do with its business. Effectively it was highly effectively of Apple's tax arrangements. Do you know anything about that US Senate committee's findings?

Mr King : I watched the Senate inquiry at which our executive team presented, and they gave a very comprehensive description of Apple's tax affairs, not only in the United States but internationally, at that Senate investigation, and that is in the public domain.

Senator XENOPHON: As a consequence of that, the US Senate made quite significant findings against Apple about its activities—that it was aggressively minimising tax.

Mr King : I do not believe that there were any adverse findings against Apple from that inquiry.

Senator XENOPHON: We might dig that up. Ms Carnegie, when was the last time you went to Bermuda?

Ms Carnegie : I have never been to Bermuda.

Senator XENOPHON: Most of the profits of Google go to the tax haven of Bermuda. Are you aware of that?

Ms Carnegie : No, I am not. As I said in my opening, I believe that most of the profits are taxed in the US.

Senator XENOPHON: So, when Bloomberg Business reports that most of the profits went to the tax haven of Bermuda, which had a population, back in 2013, of 65,024 people, you are not aware of any of that?

Ms Carnegie : I am aware that Google has a relationship in Bermuda.

Senator XENOPHON: What is the tax rate in Bermuda? Remind me.

Ms Carnegie : I am not aware.

CHAIR: Zero.

Senator XENOPHON: If I said it was zero, would that be right?

Ms Carnegie : I would not debate it. I would take it on face value.

Senator XENOPHON: You are a senior executive for Google—their most senior executive in this country—and you are not aware that profits from Australia's operations somehow end up in Bermuda, where there is a zero tax rate?

CHAIR: It is a zero tax rate. It is actually zero.

Ms Carnegie : As I said, the profits from Google Australia—basically we pay them in Australia. The profits from the other revenue generated here are paid in Singapore. So those profits are taxed. They are taxed in Singapore.

Senator XENOPHON: What were your revenues last year in Australia? Can you tell us that?

Ms Carnegie : I am sorry; we do not disclose those.

Senator XENOPHON: And you do not disclose those either, do you, Mr King?

Mr King : We do disclose those. We reported revenues last year in Australia of $6 billion.

Senator XENOPHON: How much of that went overseas?

Mr King : We reported all of our revenue and all of our costs, and we—

Senator XENOPHON: No. I asked you how much of that went overseas.

Mr King : Our net profit was $250 million.

Senator XENOPHON: How much of the money went overseas? How much of that $6 billion paid by Australian consumers went overseas? Can you please tell us that?

Mr King : I will take that question on notice to give you a specific number.

Senator XENOPHON: Are you serious? You have come to this inquiry on tax minimisation and aggressive tax minimisation and you were not expecting a question like that?

Mr King : We pay using the 'arms-length' basis, which I have been into several times before. It is an established tax principle for the cost basis of all of the products that we bring into the country. All of this is clearly worked and disclosed with the ATO. It is very transparent in advance pricing agreement discussions with the ATO.

Senator XENOPHON: Mr King, I find it extraordinary that you cannot tell us that. I think it is important that this committee—and, Chair, as a voting member of this committee I will be asking that Mr King, and indeed all the witnesses, appear again. Maybe we can do it via FaceTime for you, Mr Sample.

CHAIR: That is not their product. It would be Skype.

Senator XENOPHON: Skype, sorry. So you cannot tell us how much of that $6 billion has gone overseas?

Mr King : We pay for all of our products—

Senator XENOPHON: No. Answer the question, please, Mr King. How much of the $6 billion that Australian consumers have paid for Apple products has actually gone overseas? It is a very simple question.

Mr King : We buy all of our products from international subsidiaries at an arms-length price—

Senator XENOPHON: You are not going to answer the question, are you?

Mr King : The purchase price of our products does go offshore. I will take that on notice to give you—

Senator XENOPHON: You were not expecting a question like that today, were you?

Mr King : I will take that on notice for the purchase price of our products last year.

CHAIR: To clarify for the purpose of the committee, do you not know or are you not telling us?

Mr King : I do not have the number.

CHAIR: You do not know the number?

Mr King : Correct.

Senator XENOPHON: Ms Carnegie, you cannot tell us how much money goes from Australia's operations to Bermuda, for instance, via a circuitous route?

Ms Carnegie : No. Again, because of US disclosure laws, I cannot declare what our revenue is—the revenue that goes directly from Australia to Singapore and that is taxed there. I cannot disclose that, but I can say that it does all go through Singapore and it is taxed in Singapore. It is a similar model, for example, to what an Australian multinational—pick someone like a Rio Tinto—does to its global revenue. For example—

Senator XENOPHON: Sorry to interrupt. The chair made the point that you are covered by parliamentary privilege. There is nothing to stop you from answering this question.

Ms Carnegie : Senator, I think this is going back to some of the issues we have that we need the OECD to help us to address. As I understand it, I am actually in—

Senator XENOPHON: You need them to help you, or you just need to pay—

Ms Carnegie : No. As I understand it, I would be contravening US disclosure laws if I declared what the revenue is in Australia.

CHAIR: I do not think that is correct but, anyway, it does not matter.

Ms Carnegie : I will take it on notice. But again, to be clear, if you look at someone like a Rio Tinto—

Senator XENOPHON: We will be looking at Rio Tinto.

Senator MILNE: Don't you worry!

Ms Carnegie : They have about 35 per cent of their customer base in China and they are paying less than one per cent of their tax in China because their headquarters in Australia bear the financial risks and the costs associated with that. Google has got a similar structure.

Senator XENOPHON: Mr Sample, have you ever been to the Cayman Islands?

Mr Sample : No, I have not.

Senator XENOPHON: You have not? Again, I am surprised, because Microsoft uses places such as the Cayman Islands, does it not? It funds a funnel from Microsoft to the Cayman Islands.

Mr Sample : Senator, to the best of my knowledge we have not used, and do not intend to use, the Cayman Islands.

Senator MILNE: Where do you use, then?

Senator XENOPHON: What about Bermuda?

Senator MILNE: Is it Bermuda, or where?

Mr Sample : We do have a licensing subsidiary in Bermuda.

Senator XENOPHON: Bermuda, I am sorry. They are close to each other. Are you the same William Sample referred to in a BBC article of a couple of years ago as Microsoft's vice president for tax?

Mr Sample : I believe so.

Senator XENOPHON: In Australia you are 'Bill'. We are more casual here.

Senator EDWARDS: You would have to thank Google for being able to find that.

Senator XENOPHON: I thank Google, and Apple for the device. Back in 2012 the US Senate Permanent Subcommittee on Investigations made findings on companies such as Microsoft and Hewlett-Packard. It criticised them for their use of tax avoidance schemes. The chairman of the panel said that their practices ranged from 'egregious to dubious validity.' Did you appear before that Senate inquiry?

Mr Sample : Yes, I did.

Senator XENOPHON: You are a sucker for punishment, aren't you?

CHAIR: How many inquiries have you appeared before, Mr Sample?

Senator EDWARDS: I suspect that they think Mr Sample is 'safe hands'.

Senator MILNE: The travelling witness!

Senator XENOPHON: You are not a novice in such things. You have appeared before Senate inquiries, a United States Senate inquiry where Microsoft was slammed for its behaviour. Yet Microsoft has not changed its practices since that 2012 Senate committee report with the findings made against Microsoft. Are still doing things as you were doing them three years ago?

Mr Sample : That is correct, Senator. Senator Levin did point out that everything we were doing was legal and in full compliance with the US tax—

Senator XENOPHON: It was just a 'dubious validity' and 'egregious'.

Mr Sample : That was the senator's opinion.

Senator XENOPHON: How much revenue do you take from Australia?

Mr Sample : Two billion dollars.

Senator XENOPHON: How much of that goes overseas?

Mr Sample : The revenue is in payment for products and services provided—

Senator XENOPHON: No, please answer the question. Please do not do this to me. How much of the $2 billion goes overseas?

Mr Sample : The $2 billion is billed by the Singapore group and it is paid to the Singapore group.

Senator XENOPHON: So all of it goes to Singapore?

Mr Sample : Of that $2 billion, that is correct, Senator.

Senator XENOPHON: Thank you for your direct answer.

Senator MILNE: I would like to follow up on this particular issue of how Microsoft has done this. In that US Senate inquiry I note that Microsoft sold the intellectual property rights to its subsidiaries in Ireland and in Singapore. Is that a matter of fact that the US parent company sold the intellectual property rights to those subsidiaries?

Mr Sample : All our intellectual property is owned by Microsoft Corporation in the United States.

Senator MILNE: I am sorry. It is not the IT; it is the licence to sell Microsoft in Europe and in Asia?

Mr Sample : Our Irish and Singapore regional operating centre groups have licensed the right to—

Senator MILNE: Thank you. They have bought the licence to sell those products in the regions.

Mr Sample : In exchange for significant licence payments back to the US made every year.

Senator MILNE: Those licences are paid back to the US and then those licence fees get passed on to the customers in Australia, et cetera, as part of the cost structure, which goes straight back to Singapore, which goes straight back to the US—or, more particularly, to Bermuda.

Mr Sample : The selling prices of our product and services to customers are in no way related to licence fees. They are not based on the licence fees that are paid by the regional operating centres to the US.

Senator MILNE: So why were the allegations made in the US that the licence fee arrangements have meant that they can essentially inflate the costs?

Mr Sample : I do not remember the PSI reaching that conclusion.

Senator MILNE: The headline article is: MICROSOFT: 3 YEARS - 6.5 BILLIONS IN AVOIDED TAXES. People can read that.

Senator CANAVAN: Mr King, Senator Xenophon asked you about the Homeland Security Senate committee in the US. Senator McCain put out a statement that:

Apple's corporate tax strategy reflects a flawed corporate tax system that allows multinational corporations to shift profits offshore to low-tax jurisdictions. For years Apple has opted to forgo fully contributing to the U.S. treasury and to American society by shifting profits and circumventing US taxes.

He concluded by saying:

The Subcommittee's investigation has uncovered a disturbing truth. Apple's three primary Irish entities hold 60 per cent of the company's profits, but claim to be tax residents nowhere in the world.

Furthermore, It is completely outrageous that Apple has not only dodged full payment of US taxes but has managed to evade paying taxes around the world 'through its convoluted, pernicious strategies'.

Senator XENOPHON: That is a Republican.

Senator CANAVAN: You are correct in that, Senator Xenophon. There is also a statement from Senator Levin, a Democrat senator, which I will not read but which made similar comments. They are pretty strong and bipartisan statements. How do you respond to those allegations?

Mr King : Senator, I watched the hearing at which our executive team presented to the US Senate. Our CEO and our CFO at the time and our head of worldwide taxation testified, and they provided a very comprehensive—I believe it was an hour and a half of testimony to the Senate—

Senator CANAVAN: Can you enlighten us at all?

Mr King : During those discussions, we were asked questions about what Apple's worldwide effective tax rate is, for example. And our worldwide effective tax rate is between 26 and 27 per cent. They were asked, what is the US effective tax rate for business done in America. And I believe the answer to that question was 30.5 per cent. Our executives at that testimony provided very, very detailed explanations on not only our US activities but also our international activities, and I believe that that testimony is available in the public domain for the committee to review.

Senator CANAVAN: Yes, I know; I have seen it. Those figures are based, obviously, on a calculation of taxable income; you know, tax paid on your taxable income gives you a proportionate figure. The question we have now is, how do you work that out? And what rules and strategies are you using to potentially minimise that amount—which it is your legal right to do, but which is obviously a public policy concern. I want to follow up on what Senator Milne was saying earlier, and take it really simple: I have been telling a guy called Joe Kelly, who is a journalist at The Australian, that I would buy his album on iTunes and I have not done it. So let's do it right here and now: I am online and I can see that that album will cost me $16.99 on your App Store. How much of that $16.99 do you report as income to the ATO? If I press that button right now—

CHAIR: This is the guy who forgot to bring his wallet, by the way—he is relying on all of us for cash at the moment!

Senator CANAVAN: Well, I have still got my iTunes account. How much of that $16.99 do you report to the ATO?

Mr King : That is all taken into consideration in the calculations that are in our advance pricing agreement. And so, whether it is the cost of a product coming to the country, that is, a piece of hardware; or content that is paid to a recording artist—and the tax that we pay in Australia is a function of the economic activity that Apple undertakes here in the Australian market, which—

Senator CANAVAN: So you report all of that $16.99. Is that in the $6 billion figure that you gave us earlier?

Mr King : The revenue is in there.

Senator CANAVAN: And I know you going to tell me you do not have the figure, but how much of that $16.99 is taxable income then, with the ATO?

Mr King : I would have to take that specific on notice.

Senator CANAVAN: If you could take it on notice, it would be very useful. It would help to clarify things for us. Because I obviously have made that transaction in Australia and, if I wanted—

CHAIR: You should have asked the question first, before you bought it!

Senator CANAVAN: Well, I am sure the music will still be good. If I move to you, Ms Carnegie, and if I instead now open Safari and google, say, phones, I am pretty sure it will bring up an ad for a Samsung phone—unfortunately, Mr King!—and I click on that. You will get some money from advertising revenue, presumably it is only in cents not in dollars, but how much of that do you report to the ATO? If I click on that ad, and you get AdSense money, how much of that do you report to the ATO?

Ms Carnegie : We do not report any of that. All of that revenue goes through to Singapore.

Senator CANAVAN: So even though I have clicked on that ad in Australia—and I have used Telstra's mobile phone network; it has all happened in Australia—none of that gets reported to the ATO.

Ms Carnegie : No. All of that revenue gets booked through Singapore, and gets taxed in Singapore.

Senator CANAVAN: What is the tax rationale for that arms-length transaction or that economic location? That transaction has happened here. I understand you have to pay costs for that, and for your IP, as you said earlier, that you would have to deduct from that income—but I have paid for it, I have clicked on the ad. It is for a shop in Australia—it is Harvey Norman, a Samsung Galaxy—I could go down there right now and buy it. Why is it that you do not report any of that income to the ATO?

Ms Carnegie : We have a bit of a different business model to other people in that we do not set any of the prices for that. That is all done via an auction. Price discussion is all basically done through technology, and the intellectual property and intellectual capital for that auction is very sophisticated. It takes hundreds, if not thousands, of engineers to create. It can all be run, quite frankly, outside of Australia. There is very little need to have people in Australia to be helping to look after that transaction.

Senator CANAVAN: Except for me, who is an Australian, who is effectively using your service and providing you revenue. The equivalent would be reading a newspaper or watching TV in Australia, and my eyeballs help provide them revenue, but we expect those media companies to pay taxes in this country. You are effectively a media company in one sense of the word, but none of that income is reported here. I find that extraordinary. From a public policy perspective, there is an issue there for us because it is economic activity that is occurring in Australia. It is leading to a store that is in Australia, but we cannot touch it.

Ms Carnegie : As I said earlier, if we look at how Australian multinationals are operating outside of Australia, for me it is not remarkably different—for example, an Australian mining company which is generating more than a third of its revenue in a market like China, yet is only paying China 0.4 per cent of its taxes. Again, these are international tax arrangements. What Google is doing in Australia is very similar to what Australian companies are doing outside of Australia. That is why, in my opening, I am not sitting here today trying to defend whether those practices by Australian miners or Australian biomedical companies or American companies or Google are right or wrong. It is simply the way the global tax system is currently working. We are trying to operate within that. If the government chooses to create a different system, then obviously we will abide by that.

Senator CANAVAN: I do not want to put you in too uncomfortable a position next to your alternative, Apple, there, but it seems to me that the iTunes store I just used is not that much different from the AdSense ad I just clicked on. Both of them have been created by companies away from Australia, yet Apple is reporting its income here and you are not. My question is: how much discretion do you have under the current law to make those judgements yourself, rather than the ATO saying you must report that here or that over there? Is it your choice as a company basically to say: 'That is our arrangement. We book it to an overseas entity'?

Ms Carnegie : It is a great question. To be frank, it is not one that I have asked, so I would like to take it on notice. I think it is a good question, and I will come back and give you an answer to that.

Senator CANAVAN: Mr Sample, I did not want to leave you out of this. I have already paid 12 bucks a month or something to access Microsoft Office. I have already done that. I cannot do it again. I think it was pretty clear from your answers to Senator Milne and Senator Xenophon earlier that that $12 a month goes offshore. That is part of the $2 billion.

Mr Sample : That is correct.

Senator CANAVAN: If I go into JB Hi-Fi and buy Microsoft Office, does all the money from that go to your Singapore entity as well?

Mr Sample : When you buy it from the hi-fi store, the money you paid the hi-fi store goes to an Australian business. The Australian business would have acquired that software from the Microsoft Singapore group.

Senator CANAVAN: So all that money goes to Singapore?

Mr Sample : Yes. Then there is a margin for the Australian business.

Senator CANAVAN: Yes. What they value-added here would be taxed. I just want to go back to what we were talking about before on the transfer pricing. I am mindful of time. I will try to keep this to five minutes or so. Mr King, you mentioned that you use a building blocks approach, but this question is for everybody. I am still interested to know how you come up with those costs and that building blocks approach?

For example, for an iPad for $600 or whatever it costs, how much of those costs are for physical wages you are paying people in China or for the aluminium or glass that you buy—things that we can pretty easily measure? What proportion is for a physical constraint and what proportion is for intangibles—marketing, fixed costs, overheads or IP et cetera?

Mr King : I will break that down into two portions. The economic activity that we undertake in Australia is very, very clear: wages for our people, all the buildings, leases, activities that we undertake and then an assessment of all of the value that the Apple team in Australia contributes to the distribution of our products in the Australian market. So a lot of that is time and costs of staff. The first part of the building blocks in an APA process is to ascribe value to the economic activity that is undertaken by a multinational such as Apple in the Australian market, then that is essentially worked up the stack to the product side. Each one of our products is intensely complex and is a mix of components, hardware, software and many, many years of research and development. I do not have the numbers for the split between intangibles and tangibles off the top of my head.

Senator CANAVAN: Presumably you are using some method of cost accounting to tally up all the costs of a global business and allocate those to different products. A lot of your costs would be overheads, I presume—or common, or fixed, costs.

Mr King : A great deal of the costs within Apple is for the procurement of components. The manufacturing processes associated with the building of our products is an enormous cost load in terms of operations and transference of products around the world, and a very considerable amount of money goes into research and development and all of those intangibles. All of that development activity is undertaken in our headquarters in Cupertino in the United States. That is where all product design takes place.

Senator CANAVAN: In this allocation of your costs to Australia—that is, the transfer price to Australia—so for the Australian who is buying an iPad from somewhere overseas to sell here, do you charge every Apple subsidiary around the world the same price for that iPad? Is the iPad you are buying here in Australia the same price as what a Singaporean or—that is probably not the best example—an Indonesian Apple would buy it for? Is it the same price across the world, or do you allocate your costs differently?

Mr King : To the best of my knowledge it is consistent around the world.

Senator CANAVAN: Could you take that on notice, and consistency from then what I mentioned was the same.

Mr King : I took that question on notice before. The APA process that we have in Australia is deployed in many of the OECD tax jurisdictions around the world. The process of determining the transfer price is consistent here with principles that would be deployed in other tax jurisdictions around the world. But I will take the overall question on notice to give you more specifics.

Senator CANAVAN: Thank you very much for giving us the figure for, I believe, the last financial year—that is $6 billion, is that right? I get a taxable income margin of 4.1 per cent, which is $250 million on $6 billion. It seems low. I know you have got other costs and you do not necessarily have all that much value added here in this country, but it still seems a relatively low margin. Could we get those figures for, say, the last five years for your organisation?

Mr King : Yes. They are published accounts—we can provide that on notice.

Senator CANAVAN: Ms Carnegie and Mr Sample, is there any possibility of doing the same for your organisations and your entities—your taxable income and your gross revenue. Obviously then it is a simple calculation to get the taxable income margin.

Ms Carnegie : Yes, Senator.

Senator MILNE: Ms Carnegie, where is the intellectual property for Google Maps now held?

Ms Carnegie : It is located in the US.

Senator MILNE: Where was it developed?

Ms Carnegie : Google acquired a start-up—that had about four people—from Australia. We acquired that—I believe it was back in the early 2000s. And, when we acquired it, we acquired the intellectual property. When I say 'we', Google Inc. acquired it and acquired the intellectual property of it. Again, it was a team of about four people.

Senator MILNE: So the intellectual property was developed here, with an R&D tax credit to Google?

Ms Carnegie : I do not believe so, because it was a start-up that we acquired. I have no understanding of how that start-up operated before Google acquired it.

Senator MILNE: Could you take on notice, please, the development of the IP for Google Maps here in Australia, the tax breaks that you got for that and then the decision to take it to the US?

Ms Carnegie : Just to clarify: do you want to know the tax break that the start-up did? I am not sure I can get that.

Senator MILNE: I want you just to provide what information you can about Google acquiring the intellectual property for Google Maps and then taking it offshore.

Ms Carnegie : Yes.

CHAIR: Just very quickly Senator Ketter has one or two follow-on questions, and then I will wrap up.

Senator KETTER: Earlier—I might have got these figures written down incorrectly—Ms Carnegie, you mentioned that you paid $7.1 million in tax.

Ms Carnegie : That is correct.

Senator KETTER: Can you just go back over those figures again for me? You also mentioned a figure of $358 million in revenue and $46 million profit. This is from your Australian operation?

Ms Carnegie : Yes. That is from Google Australia.

Senator KETTER: So you have paid $7.1 million in tax in Australia.

Ms Carnegie : Yes, for 2013 in Australia.

Senator KETTER: What effective rate of tax does that represent?

Ms Carnegie : On $46 million, $7.1 million is 15 per cent. As I said before, we did claim $4.5 million of R&D credit, so, if we had not claimed the R&D credit, then the tax rate would have been closer to 25 per cent.

Senator KETTER: Does your company have an advanced pricing agreement with the ATO?

Ms Carnegie : We do not. We tried to enter into an agreement, but then I think they were shut down in a similar circumstance.

CHAIR: Because of the audits?

Ms Carnegie : I am not sure why, but we did reach out and wanted to start that conversation.

Senator KETTER: But you have been in Australia for some time.

Ms Carnegie : Yes. We have been in Australia since about 2002.

Senator KETTER: And, since that time, you have not been able to secure an advanced pricing agreement?

Ms Carnegie : We only tried relatively recently. Again, when you think about advanced pricing, our price for our products is through an auction, so, outside of the services we provide, there is no kind of intercompany pricing negotiation, because we do not actually negotiate prices; it is through the auction, and whatever is paid through the auction goes directly through to Google Asia-Pacific. So, again, the advanced pricing arrangement would simply be for the marketing and sales services we provide and the R&D services we provide, and we only really approached the Australian tax office relatively recently about potentially putting that into an advanced pricing agreement.

Senator KETTER: Do you know what your ATO risk rating is?

Ms Carnegie : I do not.

Senator KETTER: Are you able to find out?

Ms Carnegie : I can try. If they will tell me, I will.

CHAIR: On this question of the audits, can I just touch on something? All three of you are being audited at the moment. We had the ATO here earlier. They said there are 12 or so tech companies—I think that is their figure; it is not a matter for you because you only know about yourselves. How long is this auditing period going to go for? Have they given you an estimated end date? How long is this going to go for before we get to the next stage?

Mr King : They have not given us an estimated end date. I think that would be a question for the ATO.

CHAIR: And none of you at the moment have an advanced pricing agreement?

Mr King : We have had an advanced pricing agreement—

CHAIR: You have had. It expired?

Mr King : which expired.

CHAIR: None of you have one?

Ms Carnegie : No, we do not.

Mr Sample : No.

Mr King : We are continuing to work under the assumptions of our old advanced pricing agreement in the way that we calculate and remit tax.

CHAIR: I want to wrap up, because I am very conscious of time. In wrapping up, there are a few things I want to put on the record. Firstly, I cannot thank you enough for making yourselves publicly available, making yourselves available to come here. I want to stress that you came very willingly and happily, and that is very much appreciated—Mr Sample, in particular, travelling all the way from the US just to be here. When did you arrive?

Mr Sample : Sunday.

CHAIR: So you took a few days.

Mr Sample : It is a beautiful city.

CHAIR: When do you leave?

Mr Sample : Tomorrow.

CHAIR: I do appreciate you coming all this way. You can come to Canberra tomorrow for our inquiry there. I do want to thank you, Mr Sample. In wrapping up, I want to take a step back for a second and say that I think there are some very legitimate community concerns about how your companies are structured and how your companies have engaged in what appears to be—as reported in media story after media story—tax minimisation. I am not making the accusation that the behaviour has been illegal at all, but the structure, when we break down your companies—when it came out that none of you had ever visited places like Bermuda and Singapore and Ireland, yet that is where all of the recipients of Australian sales are going—does nothing but raise those concerns. I also have to say it is pretty alarming that some of you would come to an inquiry like this without basic information about where revenue is going, where the Australian sales are going and what proportion of the Australian sales are going. I know Senator Xenophon is very strongly of the view—and he has had to catch a flight—that there are some questions that still need to be answered. They will continue to be pursued. I want to apologise to Ms Carnegie. I was very keen to ask you some questions about the R&D stuff you put out today. I think it is really exciting. I think it is a very positive development. I think Google should be congratulated for coming to an inquiry like this with a positive, new, big idea. I think that is a step in the right direction.

Senator EDWARDS: And also to point out that Google has a massive research and development commitment here. I think you have about 500 technicians here which, sadly, is not the case with all your peers. You have a massive R&D footprint, so you are quite credible on this.

CHAIR: The respect we have for your companies—I am sitting here with an Apple phone and an Apple iPad, getting notes on Microsoft Word, all of this—for your products and for your contribution, unfortunately, in my case—I cannot speak for other senators—does not extend to the concerns we have about how these companies have been arranged, particularly at an international level, for tax minimisation.

So where do we go from here? We had the Australian tax office here this morning. We have now been made aware that the tax office is auditing all of you going forward. We will be talking to Treasury and its Revenue Group. We believe, or I certainly believe, that the role of this committee is to explore opportunities that allow us to make sure there is a fair share of tax being paid in the Australian jurisdiction and that it is done in an appropriate way. We will be making a series of recommendations at the end of this process as part of the report to government. The objective is hopefully to try and make that as bipartisan as possible, but obviously that will come down to the detail and what the recommendations are. I do not think this is the end of it. I think Senator Xenophon is keen to pursue some of these matters. I am conscious of time. I think we will leave it at that, and we will return with representatives of News Corporation.

Proceedings suspended from 15 : 23 to 15 : 31