Summary Of The Case
Summary of the case
Apple has been charged of applying a "double Irish sandwich with Dutch associations" structure that allows it to alter profits through Ireland and lessen its tax significantly (Khadem, 2017). Apple Australia managing director Tony King said that the company did pay all taxes it owes in accordance with Australian tax law. Apple discloses an outstanding set of figures about how its Australian operation has managed over the past 12 months in its annual financial results documents. The company’s total revenue from its Australian operation has increased by 29.5 percent in that period which means that it made an extra $1.8 billion in its 2015 financial year compared with its 2014 financial year. In other words, it earns $7.8 billion in 2015 financial year from Australian customer. However, Apple’s Australian financial results reveal it only paid a further $4.5 million of corporate income tax expense making a total of $84.9 million in the period despite the massive gain in its revenue in 2015. Nonetheless, Tony King insists Apple Australia pays all taxes it owes in accordance with Australian tax law. This is because even though all sales from its operations are comprised in Apple Australia’s accounts, Apple’s product design, development and manufacturing all take place outside of Australia. Also, the company pays GST on each sale in addition to corporate, payroll and fringe benefits tax. Furthermore, according to the most recently lodged accounts, Apple’s effective tax rate was above the Australian corporate tax rate of 30 per cent (LeMay, 2017).
Explanation of transfer pricing
The fact that Apple only paid further $4.5 billion of tax is resulted from the company has been using secretive tax rulings to profit shift through transfer pricing. It has been taking benefits of existing regulation which result in situations that do not reflect economic reality (Sadiq, 2017). Transfer pricing indicates the ”internal” price at which one company division agrees to exchange goods and/or services with another division, reflecting arms-length terms (Cripe, Harmon & West, 2016). Tax law requires those transactions to be at an arm’s length price which is a price that an independent business would pay for the goods or services. Transfer pricing is also a well-known profit-shifting method adopts by international business organisations. Tax rulings are typical practice and are meant to be letters given by tax authorities illustrating how corporate tax will be determined. For instance, tax rulings are usually used to acknowledge the treatment of transfer pricing arrangements. Rulings are not intended to be an instrument by which countries provide business organisations with a major diminishment in their tax liability. Ireland has provided tax rulings to Apple which approved the transfer pricing method that permitted Apple to distribute its profit privately. Hence, it can prevent from tax in a way because it did not reflect economic reality (Sadiq, 2017). To avoid transfer pricing misuse between wholly owned subsidiaries, most countries including Australia presently depend on transfer pricing rules based on arm’s length principles. This permits tax authorities to modify transactions to what it would be if the two entities involved were possessed respectively and dealing in a transparent market (Lanis & McClure, 2017). In particular, Apple profits were assigned to the ‘head office’ in a state that does not belong to any country which had no employees and no premises. In other words, since the head office does not belong to any authority, those profits were not be taxed (Sadiq, 2017).
Issue of the case
Consequently, the main issue that the government face in this case is Apple participate in unethical tax practices. The company used transfer pricing to shift their profit away so that they can reduce their tax payment significantly. However, this does not comply with the Australian tax law although Tony King claims that they did pay all the taxes. This means that Apple has not paid relevant tax in the countries where the sales aggressively took place. It leaves the door open for other countries such as Australia to request Apple to pay more taxes on the sales made in their country but recorded in Europe. Similarly, Apple structured its business so that its sales were reported in Ireland rather than in the country where the products were sold (LeMay, 2017). This will result in government decrease in tax revenue and other companies will also imitate what Apple is doing right now. Thus, the government has paid attention to any company that is involving in aggressive transfer pricing and ready to examine (LeMay, 2017).
Shareholders Theory’s Perspective
Shareholders are known as the owners of the business. Friedman supposes that shareholders as principals possess the company’s assets despite the fact that they are not in physical possession of them. They can decide upon the purposes for which the assets of the business are used. According to Friedman, there is no such thing as ‘corporate’ social responsibility. This is because an individual has the free choice at the basis of his moral principles thus only individuals can be said to have moral responsibilities. For company, the only social responsibility for business is to utilize its resources and take part in activities which will increase its profits as long as it does not cross the legal border (Manshell, 2013).
Managers who act as agents of the shareholders owe a fiduciary duty to the principals. They are required to carry out the business operations in accordance with what the shareholders wishes. This means that the managers are required to make as much money as possible and minimize the costs to shareholders while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom (Manshell, 2013). This is due to shareholders had invested a significant amount in a company and owned a comparatively high voting power. They must bear the responsibility for the activities of the company that they have invested in (Maitland, 1985). Thus, the only responsibility of those who are running the business is to achieve the desires of shareholders which is maximise profit of the business (Manshell, 2013).
In this case, Apple has used tax rulings through transfer pricing to transfer its sales out of Australia. It has used an alternative way to diminish its corporate tax because this can increase company’s profit. This can be said as cheat to government because it engages in unethical tax practices which will result in its tax reductions. Based on shareholder’s perspective, it is likely appropriate as the management need to maximise company’s profit as long as it is comply with the rules. This is due to manager has to minimize the tax liability as much as possible to increase shareholders’ wealth as they have invested a large number of money in the company. They think government as stakeholder should not collect their return on investment which is collect tax based on profit earned as government does not invest in anything. However, the company is nevertheless bound to take seriously its addition legal obligations not to harm or deceit to the stakeholders although it is quite apart from the shareholders’ interests (Goodpaster, 1991).
Stakeholders Theory’s Perspective
Stakeholder theory denies the duty that agents owe to principals. According to Freeman, a stakeholder is simply any group or individuals who can influences or is in any way affected by the achievement of the organization’s objective (Sternberg, 1997). Examples of stakeholder groups are employees, suppliers, customers, creditors, competitors, governments, and local communities (Goodpaster, 1991). Stakeholder theory is the doctrine that business should not only be run for the financial benefit as the owners wish, but also for the benefit of all their stakeholders. Business organizations should be conducted for the benefit of all their stakeholders as well (Sternberg, 1997).
Government is the major stakeholder in this case. Government is different from all other stakeholders and organization as it owns monopoly power of legislation. It is also because government has the power forcibly to deprive the governed of their lives, liberty and property that it is vital that those subject to its power have a say in how that power is used. Business organisations are apparently affected by and affect government (Sternberg, 1997). They are unable to neglect any stakeholder interest especially government because that might influence its capability to develop long-term owner value. The responsibilities of every taxpayer including corporations is to comply with the taxation law of the states that relevant to them as well as to pay the taxes they owe which defined by the spirit of the law (Manshell, 2013).
From stakeholders perspective, Apple behaves in an immoral way by participate in unethical tax practices. Apple is responsible to pay all taxes they owed for government. It is inappropriate to used transfer pricing technique to avoid tax which will lead to government decrease in their tax revenue. It is clearly reveals that the tax avoidance by multinational businesses such as Apple in this case hurts the economics of the country and also unfair to all other taxpayers (Bucks & Mazerov, 1993). Hence, it puts government in a disadvantage. Apple must treat all its stakeholders ethically (Sternberg, 1997). However, it does not mean that the management assumes extra fiduciary duties to the third parties (Goodpaster, 1991).
Solution to this case
The public will still purchase Apple’s product despite the fact that they knew Apple has contributed that little to government. This is because in a world of voluntary contract no one has to buy the goods so those who select to buy it must get benefits corresponding with the price. The meaning is that every individual in business including managers or other stakeholders have a duty to respect the rights of all individuals with whom they enter into transactions (Manshell, 2013). Therefore, it is argued that the representation of the firm’s net contribution to the social good is profit and it should then be made as large as possible (Arrow, 1973).
In my opinion, Apple will not rectify its way on paying tax until the law alter. Thus, the government should strengthen the law or create a new legislation. One of the solutions to this case is direct government regulation. It is a form of regulation that most generally used. Direct government regulation happens when the government formulates and enforces legislation that specifies the necessary featured of organisations or individuals. The main advantage of it is its dependability as long as there is sufficient monitoring and enforcement (Australian Public Service Commission, 2009). However, the impulse to maximise company’s profit and the selfish behaviour are so great that any type of control is likely to be ineffective. This is because legal action required going through a long and complicated process (Arrow, 1973). Furthermore, the relevant authority such as Australian Taxation Office should request Apple to disclose all its proved documents or evidence to support their tax position. This is to enhance the transparency in the information they provided to the government and also public. If they are unable to do so, penalties should impose for the company. On the other hand, from government perspective, they might consider to decrease the tax rate in order to encourage those multinational corporations pay all its taxes. Therefore, the company like Apple might less likely to use alternative way such as transfer pricing technique to shift their sales as they will pay less tax. When the company think they are in benefit, they must willing to collaborate with government to achieve the win-win situation. This is because government owned the monopoly power on legislation as mentioned before.
Strengths and Weaknesses of both theories
It has showed some strengths and weaknesses of both shareholders and stakeholder theory in this case. The strength of shareholder theory is the company has to maximize their profit as that is the primary purpose of doing a business. The weakness of shareholder theory is the public might slowly change their purchase preference to the company which practice in ethical way and concern for all its stakeholder. If Apple still carry out the unethical tax practice, it will lead to their sales tend to decrease.
On the other hand, the strength of stakeholder theory is to encourage people including corporations to behave in socially responsible ways as they think it is the ‘right thing’ to do rather than because they are instructed to do so (Maitland, 1985). The weakness of the stakeholder theory is the regulation implemented by the government is not flexible enough to fulfil each type of situations and yet simple enough to be enforceable (Arrow, 1973). It takes time for government to investigate in Apple case and enforce the law because Apple is surely participated in unethical tax practice for some times. Thus the government need to find out more evidence to request Apple repay its taxes that have been avoided in illegal way. However, it is important to look for a balance between both theory to achieve the maximum benefits for both shareholders and stakeholders.