Apple's tax practice in China subject of fierce debate

Technology giant's income from its App Store subject of hot discussions amid US scrutiny over claims of sheltered US$100 billion stash

PUBLISHED : Wednesday, 22 May, 2013, 12:00am
UPDATED : Wednesday, 22 May, 2013, 2:11pm

While legislators in the United States put Apple under a microscope, the company's tax strategy in China has also become the focus of a lively debate.

The discussions have centred on whether Apple, the world's largest technology company, must pay taxes on the thousands of software applications that mainland consumers buy through its online App Store.

In the US, Apple is facing scrutiny over accusations of stashing more than US$100 billion in a network of offshore entities to avoid paying huge taxes in its home market.

Some pundits in China have said Apple's domestic operations of the App Store make the California-based iPhone and iPad maker an easy target for criticism as a possible tax dodger.

Watch Tim Cook's testimony here

You Yunting, an intellectual property rights lawyer at DeBund Law Offices in Shanghai, yesterday pointed out that the circumstances for Apple changed after November 2011.

"Before that date, domestic iPhone users could only purchase apps from the App Store site overseas if they had a [foreign-currency-backed] credit card from Visa or MasterCard," You said.

"But after November 2011, the App Store allowed domestic consumers to pay in yuan to buy apps directly."

He said the government tightly supervised the yuan, which means that a US company doing business in the local currency must set up an account in the country and directly pay taxes before it can transfer that revenue abroad.

Apple's alleged practice, according to You, was "not closely in line with China's regulation" since the firm uses an undisclosed third-party structure to oversee its local App Store sales and avoid the taxman.

Qiu Baochang, a lawyer at Beijing Huijia Law Firm, told local media last week that the online payment model of the App Store meant that as long as the purchase took place on the mainland and Apple profited from the deal, the company should pay taxes.

But an editorial on the NetEase news portal on the mainland offered a radically different take on the issue over local App Store revenue.

The editorial said: "The online digital services provided at the App Store are a typical example of cross-border supply defined by GATS (the General Agreement on Trade in Services). After China's entry into the WTO (World Trade Organisation), China cannot impose duties on such service."

It said the App Store served as an "intermediate platform and the technical facilitator for software developers around the world".

Apple takes a 30 per cent commission on each application that the developer sells through the online store.

"Domestic software developers, not the App Store, shall pay the VAT," it said.

Asked to comment yesterday, Apple's spokeswoman in Beijing referred to a recent US interview by chief executive Tim Cook as the company's stand.

"Apple has a very strong moral compass, and we believe in really good corporate citizenship," Cook told the Washington Post last week.

Cook was expected to propose a "dramatic simplification" of corporate tax laws in the US at a congressional hearing in Washington yesterday.