Not quite. In your example, the distributor who paid £40 in VAT to buy the tablet from Asus will recover that VAT with it's next monthly VAT return. So net actual cost is really only £200. In your example, it gets marked up to £220 by the distributors in both America and the UK. The UK distributor charges 20% VAT (so additional £44 added on to the retailer). So the UK retailer's initial out of pocket is £264. But the retailer also recovers the £44 in VAT that it paid with its next monthly VAT return. After that refund, it has the same £220 cost as the American retailer. Now the both retailers mark up the cost by £28.6 in your example to get a 13% profit (220 + 28.6 = 248.6). The UK retailer now includes 20% VAT so the total price to the UK customer is £298.32. The American retailer now includes applicable sales tax (anywhere from 0% to 12%). The UK will always be higher, but not as much as your example. Your example assumes that the UK distributor and retailer are marking up the VAT which they get back. It may well be the case, but that is unconscionable (legal but immoral).
Ok. A short explanation of the actual tax law theory in play - you can agree or disagree as you choose, but this is the actual legal thinking.
1. Australian subsidiary does nothing more than distribution (that was the testimony at the hearing)
2. Completely unrelated distribution companies have a net profit margin of x% of revenue (assume 4% for explanation purposes). See economic studies attached to the tax returns or read the public financials of Australian companies which are solely distribution companies.
3. Australian subsidiary negotiates the highest price it can from Australian customers (including the government)
4. The price the Australian subsidiary pays to its supplier get the drugs is adjusted monthly so that the subsidiary gets a 4% profit margin - the same as unrelated distributors would net.
5. The Australian subsidiary's management knows the monthly price for them but they don't know the monthly price to e.g. the Japanese subsidiary because they don't know the Japanese subsidiary's sales price to Japanese customers.
From an international tax theory standpoint, there are two questions:
(i) Is is really true that the Australian subsidiary doesn't do anything more than an unrelated distributor (and if that is true, then why set up the Australian subsidiary) (ii) What is the appropriate return that should go to other countries: the country where the drug is developed, the country where the strategic resource decisions are made, etc.?
If the Australian subsidiary really does not do much more than an unrelated distributor and Australia wants to tax the embedded profit in the drug, then the parent will simply close the Australian operations and sell through unrelated distributors and won't have anything in Australia to tax.
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(untitled comment)
The UK distributor charges 20% VAT (so additional £44 added on to the retailer). So the UK retailer's initial out of pocket is £264. But the retailer also recovers the £44 in VAT that it paid with its next monthly VAT return. After that refund, it has the same £220 cost as the American retailer.
Now the both retailers mark up the cost by £28.6 in your example to get a 13% profit (220 + 28.6 = 248.6).
The UK retailer now includes 20% VAT so the total price to the UK customer is £298.32.
The American retailer now includes applicable sales tax (anywhere from 0% to 12%).
The UK will always be higher, but not as much as your example. Your example assumes that the UK distributor and retailer are marking up the VAT which they get back. It may well be the case, but that is unconscionable (legal but immoral).
Actual Theory
1. Australian subsidiary does nothing more than distribution (that was the testimony at the hearing)
2. Completely unrelated distribution companies have a net profit margin of x% of revenue (assume 4% for explanation purposes). See economic studies attached to the tax returns or read the public financials of Australian companies which are solely distribution companies.
3. Australian subsidiary negotiates the highest price it can from Australian customers (including the government)
4. The price the Australian subsidiary pays to its supplier get the drugs is adjusted monthly so that the subsidiary gets a 4% profit margin - the same as unrelated distributors would net.
5. The Australian subsidiary's management knows the monthly price for them but they don't know the monthly price to e.g. the Japanese subsidiary because they don't know the Japanese subsidiary's sales price to Japanese customers.
From an international tax theory standpoint, there are two questions:
(i) Is is really true that the Australian subsidiary doesn't do anything more than an unrelated distributor (and if that is true, then why set up the Australian subsidiary)
(ii) What is the appropriate return that should go to other countries: the country where the drug is developed, the country where the strategic resource decisions are made, etc.?
If the Australian subsidiary really does not do much more than an unrelated distributor and Australia wants to tax the embedded profit in the drug, then the parent will simply close the Australian operations and sell through unrelated distributors and won't have anything in Australia to tax.
Techdirt has not posted any stories submitted by bemrys.
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