Why You Should Be Worried About The Australia Tax Inquiry Now More Than Ever

Hell hath no fury like a Government scorned. At least that's the message that came out of Parliament both last week and yesterday afternoon when the government slapped legal orders on Apple, Microsoft and Adobe to force them before the Australia Tax inquiry. Before we all collectively congratulate the government for showing its teeth to the private sector for a change, we need to understand what a gamble this is for the inquiry.

More: Beating The Australia Tax: Can The Government Do Anything To Stop It?

For those out of the loop, the Australia Tax Inquiry — or the IT Pricing Inquiry as it's known in government — is a direct response to the high prices charged for products sold locally by some multi-national tech giants. Specifically, a committee, spearheaded by Nick Champion and Federal MP for Chifley, Ed Husic, wanted to find out why the prices being charged in Australia for tech were higher than prices being charged in territories like the US for exactly the same products.

Several companies and IT industry groups have already testified, but the big guns at the centre of the inquiry — namely Microsoft, Apple and Adobe — stayed silent on the issues presented. Apple, for example, staunchly refused to even respond to the existance of the inquiry, only showing compromise once when it offered a closed-door, off the record briefing to government officials. For those of you playing at home, that's not exactly how open government is meant to work.

So now the inquiry has no choice but to slap subpoenas on companies to get its way and have them appear to testify. The government doesn't want to be in this position, and for good reason, too.

The legal summonses issued to the three companies in question yesterday compels them each to appear before the inquiry, but don't let the presence of legal orders fool you: this is no courtroom. Nobody is on trial (although you could be forgiven for thinking they were) and there's no jury, judge or prosecution to speak of. To satisfy the legal orders, all Apple, Microsoft and Adobe need to do is send a communications professional well-versed in the art of "no comment", and they win.

As far as we understand it, the companies aren't compelled to spill the beans on everything the inquiry wants to know. Nobody is under oath here and "trade secrets" will probably be respected. All the tech giants really have to do is blame the price disparity on the stock-standard excuse that seems to underpin this inquiry: the high cost of doing business in a territory like Australia.

It's a classic excuse, but not one that really explains anything to do with the fact that it would be cheaper in some cases to fly to the US and back to buy the products in question, rather than buy them in Australia.

If these companies show up under legal orders and say approximately nothing to the government about why the so-called Australia Tax exists, then the government is in a worse position than it was before when the tech giants refused to appear.

Subpoenaing and summoning the worst offenders of the Australia Tax before government is a one-use only play. It can't be repeated without making the whole process look foolish. If these companies continue to BS the inquiry even before its very eyes, then it undermines the legitimacy and objective of the whole process. The government is looking for results here, and it's taking a gamble to get them. I just hope it plays out the way the government wants it to.

Roulette image via Shutterstock


Comments

    So why should i be worried?

      Because if the gamble doesn't work you'll likely end up paying the Australia tax forever because the government can't help you.

        Don't be naive, there is nothing the government can do, other than make it cheaper to do business here (which they can't do either). It's a free country and anyone can charge whatever they want. The thing is, if their competitors charge less than they do, they'll lose marketshare to teh better value product. Given that, you'd think someone who is struggling a bit might be tempted to lower their prices to lure buyers but none of them seem to do it, which surely indicates that they don't have much room to play with their margins and still be profitable. i.e. Maybe their "excuses" are really valid explanations?

        Or more to the point, some companies may get even more brazen with it because if they get away with it here, it's effectively one hurdle they'll never have to worry about again and extends the hypothetical line in the sand.

        That's what I personally have never liked about this inquiry. It's too much of a knee-jerk reaction without enough preparation and thought put in to it first. Due to this, if anything it will probably just make things worse rather than better.

        Last edited 12/02/13 12:40 pm

    Adobe CS6:

    US$2599 or AU$3949.

    That's a difference of $1415 (as per todays exchange rate). Surely the "cost of business" isn't THAT high?

      Isn't that also download rather than hard copy?

        Yep would be a download. Adobe CS6 Cloud subscription is a similar story it's $50USD/month in the States or $63AUD in Aus.

        $63 AUD is charged to Adobe in another country so there is no GST charged, they say there are support costs, and additional cost of business operating in Aus, etc... however who uses support when you are on hold for hours and the operator isn't in Australia and rarely helpful anyway, support is usually done via email and forums.

        So how can they justify $13 a month, they really can't.

        P.S. I'm happy to pay $63 just if you see it cheaper elsewhere you want to buy it cheaper!

      Not to mention that most adobe products are software that would be downloaded, so not like they have to worry about shipping costs and localized packaging and stuff. I cant say personally for Adobe, but I doubt support is a big cost either, most companies just redirect you to an off-shore call center regardless. I doubt there'd be much involved with advertising either, not like they would need to make up Australia specific ones unless they just want to.

        But they do have local support and an office in Macquarie Park on Sydney's North Shore, so they are paying Australian rents and wages. They also have local product specialists and undertake capital city product tours and other marketing exercises here. I'm sure it all costs them a reasonable amount, which they have to recoup from a fairly small customer base. They also sell through value-add resellers, who require a decent margin that is wholly based on high Australian prices. Even the margin for big retail has to be substantially higher here than in the US, to cover the substantially higher cost of doing business here.

          Having to "recoup marketing" is a bullshit excuse, marketing wouldn't be done if it didn't increase the bottom line.

            Seriously? You seem to be having a lot of trouble seeing past your own self-interest. Customers buy upgrades when they are shown fantastic new features that will help them with their work. That's why vendors of pretty much all pro software do product launch tours. It's what I did for Autodesk for 5 or 6 years and I can tell you that the marketing budget for Australia was about 10 times that for India, for example, as a percentage of revenue. And if yo don't do it, you don't get customers upgrading. Things are slowly changing to subscription based models but they can be even more labour-intensive.

          The Productivity Commission has already stated this argument did not justify the increase in costs between Australia and US, and that in most cases the wholesale prices were set in the US and then imposed on Australia.

            Well in that case, as was the case when I worked at Autodesk, you have to understand that there needs to be a safety net to cover variations in exchange rates. No-one would stay in business very long if they didn't take currency fluctuations into account and in their favour. And it works both ways because when the dollar was only worth 54c, we weren't paying double what we are now. It just happens that we currently have a very strong dollar but that won't last forever.

              well thats a pretty big safety net considering we were already paying through the nose when the exchange rate was that low in their favour

    They should say that. It's their right.

    That said, if they DO say that, the government should take steps to make the protectionism used by these companies illegal.

      Uh, protectionism is pretty much the polar opposite of what you are suggesting.

    Should do this for cars if you want to make any real difference to the cost of living...

      I think you are more than a little uninformed about the taxes charged on imported cars, and the money thrown at multi-nationals making cars locally.

        Exactly. It takes a lot of tax dollars to get that many lay-offs at Holden.

    Heh, i would not be surprised if they just cite Australia as having higher piracy rates with no data to back it up and try and make a deal for cheaper software IF the government will make them a deal to find and handover lists of "offenders"

      If they did the simple response would be to point at their pricing structure in Russia or China. If they don't take the no comment route then I think the other option would be a stream of fluid bullshit rather than one or two excuses, any single excuse can be easily countered but if you give 15 weak excuses even while you can make cases why each individual problem couldn't cause a large cost increase they can simply say you can't prove that the combination of each one adds up too a major cost increase.

      Basically spew enough crap on the spot that they actually need to go away and research it to provide a reasonable counter argument and they win because by that point the representatives have gone home and as was stated in the article recalling them would be...troublesome

      Hopefully though they have included a nice break in the proceedings to allow for some quick research for intelligent counter arguments. I do love the fact that this inquiry has gone as far as it has (and honestly it surprises the hell out of me) but I'm not certain it will accomplish anything voluntarily and forcing price changes through legislation would be problematic to say the least.

    i think the main focus of this inquiry is for digital goods - nothing to do with the 'cost of doing business in australia' when you download the product from servers overseas, is it?
    if the government can compel a coherent response beyond 'no comment' in legalese from their spin doctors then well done, but i dont see it happening.

      Especially as due to the exchange rate, iTunes songs should be CHEAPER than the US ones at the moment.

        They've actually got good standing for the songs: They're licensed by regional labels. That's why it took Aus a lot longer to get a lot of streaming services.

      But there is a cost for doing business here, even for digital goods. I can guarantee you the price differences at iTunes are a direct result of having to do licensing deals with the local arms of the multinational record companies, who need to make a profit to keep their doors open here and therefore expect a royalty rate to cover the higher cost of doing business here.

    I reckon the companies would be much better off creating a level playing field.
    Crank the price up to the higher tide mark in the Americas, India, China and Australia...
    Then - slightly lower volume at ridiculously higher prices.
    Corporates still buy (tax deductible), pirates still pirate, and individuals take their smaller market segment to open-source.

    Everyone wins. The software companies get a spike in revenue, governments everywhere get their hit of increased tax, corporate customers unaffected, plebs like you and me still have freedom of choice.

    Sounds like the perfect commercial solution.

      Gee, because MS and Adobe don't understand basic microeconomics and just set their prices at random.

      You should get them on the phone and explain this incredible r=pq breakthrough.

        I think @lastchancename is Keynes reincarnate.

      Gawd - I hope you didn't think I was serious :P
      OTOH - Globally high prices on everything would soon remove some of the crap products from our shelves... people would buy on 'need' rather than 'want'
      Pay more get less - that's what I mandate ! (joking!)

    I'm not sure this opinion piece is fully thought through...

    If they come before the committee and say nothing they look guilty.

    If they come before the committee and try to justify it they will be pulled apart in public.

    This is a no-win situation for these companies, hence the reason they haven't fronted up voluntarily.

    And finally, where did this come from; "Subpoenaing and summoning the worst offenders of the Australia Tax before government is a one-use only play. It can’t be repeated without making the whole process look foolish..."

    I don't know why you think it is a one-use play. They will keep pulling people in until they get what they want. They don't want to legislate. They want to shame companies into reducing prices.

    Ultimately this opinion piece come ill-informed. Can I ask what you have based it on?

      Indeed.. they didn't even want to go this route.. but the tech giants forced this action. So the next time, and of course there will be a next time, they will start off politely requesting again.. and then if it comes to it, they'll summons again. It's the same old cat and mouse game..

        Not if the government forced companies to prove that the money they send overseas to their parent company is not for tax avoidance.

        The enquiry could also claim that the higher prices charged by tech companies are set in consort with one another, and therefore the tech companies are acting as a cartel.

          That is the one and only hope they have of changing anything but, from what I've seen, there is absolutely no evidence, or even a suggestion, of collusion.

          Except they are selling different products, so that doesn't make sense.

    Come on guys, give these manufacturers a break.

    It costs much more than the advertised price to swap out all the z's for s's, and not to mention the extra data load with all those u's back in.

    The cost of spelling things correctly is quite expensive.

    These company's may have no reason to spill the beans, but in the eye of the consume it will be a slap in the face and poor judgement on their behalf. I for one will not be impressed if they do not do something about it. I also feel the recent price drops are a great feat for the price inquiry, not everything but certainly a lot of things seem to have been becoming more competitive in this area. If Adobe Australia wanted better sale to pay for support then maybe lowing the price and having people pay through the Australian Store might help them. I couldn't see US dept sending money to Australia for all the Australia's paying for the software through the US store. The only people missing out are Adobe Australia in this case.

      Lowering the price would increase their support costs as more idiots would start buying their software. Adobe don't have to compete with anyone, they have all the industry-standard products and nobody has any choice but to use them if they want to get on in their chosen career. I'd be happier to see the government trying to force Adobe to make their products at least half-decent, tehn they might be worth what they charge for them.

    surely with a summons like this the companies in question cant just send a "no comment" man, as you said it kinda defeats the whole purpose, i would like to hope our government and legal system would know that obviously they wont say anything helpful on their own, so ye surely this summons is the one that says come and say something better then "no comment" or we are going to start handing out fines etc

    Luke, there is still one last card the Government has to put on the table, and it's an ace. Remove the restrictions on parallel importing. Allow consumers and retailers to purchase products from whatever market they can source it from and resell those products here. This would, by extension, invalidate all contract clauses which force a reseller to source supply only through "authorised" channels. Admittedly the law would need to be carefully worded to remove any and all loopholes that the big three could use to circumvent the "spirit of the law" by ensuring that the "letter of the law" gives no leeway.

      Those laws already exist but they only really work for commodity manufactured products.

      Companies like Apple, Adobe and Microsoft use their brand/IP to tightly control supply of products. Anyone caught supplying to an Australian parallel importer will have their agreement terminated.

      Parallel importing is entirely legal in Australia and happens all the time.

      Allowing retailers and consumers to purchase goods from overseas is fine (and sensible - the whole restriction on parallel importation was stupid protectionism to appease whinging industries). But it doesn't mean the company has to sell it to you.

      It certainly doesn't invalidate any sole supplier clauses. It would simply be a breach by the reseller, who would then stop being supplied by the overseas company.

      Last edited 12/02/13 10:55 am

    I missed the part where we suddenly decided that companies are not, in fact, allowed to set their own prices for the goods and services they sell. You know, the opposite of the way that a mixed market economy like Australia operates - and has operated for the best part of two hundred years. Did it happen while I was on holidays?

    Or is this just bluster from a no-name minister trying to boost his public profile, and you are all lapping it up because you think you might save ten bucks on World of Warcraft?

    Here is a hint: the government cannot regulate the prices for goods and services, outside specific situations like natural monopolies - and that's a specific economic term, so please don't start blabbering about Micro$oft or Photoshop (which 90% of you pirate to touch up your cat photos anyways).

    Nor should they, because it's retarded. How many products do you think get sold in Australia? Who is going to monitor said millions of products, to make sure we (for 'fairness') have pricing parity with... wait, who in the world do we now have the magic right to pay the same amount as? US? UK? Switzerland? Brasil? Lesotho?

    Here is another hint, while I am being generous: companies set the price of their goods and services at $x. You, the consumer, choose whether to purchase them for $x. What I pay, what Nelson Mandela pays or what the Ewoks pay have nothing to do with your decision. It's just whinging.

    The only time it even comes into the equation is when you can buy the same goods elsewhere for cheaper. Just like beer, eggs or Darth Vader action figures.

    If you can - do it
    If you can't, and the price is higher than you value the goods - don't buy it

    Either way, the local business will see sales dropping, and will only be able to respond with lowered pricing or higher quality product. Congratulations on being a grown up consumer, instead of someone whinging on the internet about how 'its not fair'.

    Stop giving juice to Ed Husic, cause Ed Husic don't buy the music.

    Last edited 12/02/13 10:53 am

      There is nothing sweeter to watch than arrogance combined with ignorance. It is a heady cocktail.

      Please tell us more...

        I am sorry you don't understand basic economics or trade practices law.

        Feel free to come up with an intelligent counter argument as to why Australians have the 'right' to buy things at a price they demand and how the gubment is going to legislate that. Or should we stick to glib ad homs because thinking = hard?

        Last edited 12/02/13 12:40 pm

          I tell you why.. because it's blatant abuse of the free trade and flies in the face of the principles that we established between Australia and the US in 2004. Items that are subject to question under the Tax Enquiry include those that were meant to establish equity and balance in the market between the two countries. The fact that we get charged up to double the price for identical products without explanation, begs the question - why did we set up the free trade agreement in the first place? The reason we are being treated as "Chumps" by the corporate giants from Yankee-land is because there is no consumer power here to do anything about it. Companies are of course driven by the greed of their stock market shareholders and if they see any opportunity to "screw you over", believe me, they will do it. No one, not even the ATO, will deny any company reasonable grounds for setting localised pricing, but to say it's fine to do so only because you can is, and should be, wrong! There's lots of perks under free trade and the US government should put equal amount of pressure on those companies that seem to take advantage of consumers in other countries purely because of their market power to do so.

            'Free trade' relates to Government protectionism; tariffs, quotas and subsidies. It has nothing to do with the pricing decision by private businesses.

            Your argument would make sense if the US was forcing Adobe to pay a $800 export tax on every copy of CS6 sold to Australia. But they aren't. All that is happening is that Adobe has determined that Australians are willing to pay $800 more for their product.

            It's really no different to a supermarket selling something for $2 in Darling Point and $1 in Mt Druitt.

            Ironically, what people above are proposing - that the Government impose price controls on certain imported products - is the opposite of 'free trade'.

            Last edited 12/02/13 1:40 pm

              But they aren't. All that is happening is that Adobe has determined that Australians are willing to pay $800 more for their product.

              So willing that they launched a parliamentary inquiry into why they should have to. "Willing", I do not think that word means what you think it means,

                And you are being suckered in if you think the 'inquiry' is anything more than cheap political grandstanding.

                  Inquiry, grandstanding... None of these things are really indicative of a population who's delighted to pay hundreds of dollars more for a product though eh?

                  Keep going... I'm really enjoying it so far. You've obviously taken your recently completed economics 101 course very seriously. We all want to hear more... just so I'm clear, private companies are allowed to set whatever price they want for products? How insightful!

                  You've given us a great lesson in pure market economics. The best bit was the air of superiority with which you delivered it.

                  That said, the ability of governments to influence pricing is significant. Keep in mind that in June 2012 Apple already began the process of "harmonising" pricing on their products for the Australian market. You think they did that out of the goodness of their hearts?

                  Market economies are driven by a multitude of competing forces of which governments, consumers and other interest groups all contribute.

                  While we all appreciate you have a text-book understanding of free-market economics can I suggest you deliver your messaging in a more appropriate manner or you'll continue to look like a dope.

              Your argument is based on the assumption of the market being contestable - it's not, and Adobe, Microsoft, etc are in effect acting as coercive monopolies.

              Ironically your example above about supermarkets engaging in price discrimination is just further proof that an oligopolistic (or monopolistic) market leads to a lack of competition and results in higher prices for the consumer.

                Not sure how you come to the conclusion that adobe, msoft etc are effectively coercive monopolies. How do these companies eliminate competition? Not by high prices, that's for sure. And there are plenty of options (including open source) that offer similar functionality. There's nothing to stop you using open office at home and office 2013 at work.

                  From good ol' Wikipedia (emphasis mine): A coercive monopoly is not merely a sole supplier of a particular kind of good or service (a monopoly), but it is a monopoly where there is no opportunity to compete through means such as price competition, technological or product innovation, or marketing; entry into the field is closed. As a coercive monopoly is securely shielded from possibility of competition, it is able to make pricing and production decisions with the assurance that no competition will arise. A coercive monopoly has very few incentives to keep prices low and may deliberately price gouge consumers by curtailing production.

                  In this case curtailing production equates to preventing customers from purchasing anywhere else other than through local distributors (this happens predominately with Microsoft and Adobe's corporate licensing models) at inflated prices.

                And a question for Technoguest (for some reason the reply button is greyed out on his comment). Have you any examples of how the Australian (or any other government) has influenced product pricing by means other than regulation / taxes or being a major purchaser or potential purchaser of the products in question. In particular, how is your apple pricing example indicative of the Australian government's influence as opposed to other forces (foreign exchange rates / competition / market saturation etc)?

                  That's exactly my point. This isn't a silver bullet scenario and the Federal Government is not going to legislate on something as complex as pricing determination for goods as complex as technology software and hardware.

                  What the government can do is ask questions and force sellers into the public domain where they are required to answer tough questions. This has a follow on effect of influencing consumer behaviour on how they purchase.

                  And Apple's pricing harmonisation commenced after the announcement of the enquiry but at a point where the Australia Dollar had maintained near parity with the US dollar for a sustained period.

                  I'm not saying there is a single solution to this issue but I believe the Federal Government is acting correctly by having a public enquiry that will generate media and public interest in the issue and create a more informed public.

                  Technoguest - While I applaud the government's initiative to have local prices at sensible levels, I doubt very much that it can compel these companies to publicly reveal their internal cost structures which go to the core of the inquiry. If there are issues with transfer pricing then this is the domain of the tax office to investigate (with all its commensurate powers).

                  We'll have to agree to disagree on your apple example though - to ascribe causality with the inquiry is a bit of a stretch for me to accept - yes the inquiry may have hastened apple's decision but I very much doubt it was the main factor, but we'll never know!

      Finally, someone who actually makes sense, rather than just whinging that because someone else somewhere on the planet pays less, they suddenly have a "right" to pay the same.

        Gotta agree. If anyone expects any price reductions (token drops don't count) to happen as a direct result of this enquiry without regulation or the threat of regulation then they're running down the garden path with the proverbial.

          The reality is pricing drops are already occurring. This isn't specifically attributable to the Pricing Enquiry.

          One of the biggest drivers is local bricks and mortar retail putting pressure on supplier to lower their prices as consumers are going to international online providers (i.e. Amazon)

          And no-one is claiming a "right" to a particular price. They are asking the question "Why are prices higher in Australia?"

          If the answers aren't plausible (which in many cases they aren't) then consumers will make their own choices.

          We shouldn't expect to see any significant legislation come out of this enquiry. But the Federal Government has put some of them on notice that they'll take a look hard look at their taxation arrangements... This is just another example of leverage in a complex market economy.

    I don't agree... if the govt plays this right, it could be an excellent exercise in public shaming.

    Better idea. On downloaded items. take the US price and adjust for the conversion rate. Then tax 95c on every dollar over that figure.

    We should be worried that it took so long. The Government has to do something. If they don't it further encourages moves to online shopping, eroding bricks and motar retailers. Plus, who wants to pay more for no good reason. Good on you government!

    If the government can't force these companies to lower their Australian prices (and I'm not sure if they should have that power), and aren't prepared to block the sale of overpriced goods either, surely the smarter route would be to publicly shame them? As in, create a big media campaign aimed at lowering the reputations of these companies in the eyes of the general public, which would then create a big incentive for them to respond by doing what everybody wants them to do in order to save face and not lose sales.

    I mean, that's exactly the kind of advertising the government excels at, what with all of the slamming they do in the election season. Perhaps it might be seen as defamation, but I think if you just present the facts as they are, and encourage national media to focus on it as well, it might be a way of flexing the national muscle without having to take legal or legislative action.

    Last edited 12/02/13 12:50 pm

    I believe the idea that they can just give "no comment" and walk away is wrong.

    The ABC are reporting they will be held in contempt of parliament if they do not provide reasonable answers to the questions posed.

    I wonder what would happen if someone like Apple just said "You know what? You're right. It's not worth it" and shut down the itunes store in Australia?

    Australia being such a tiny market they might see it as not worth it.

    Anyway I believe Microsoft will be a bit more frank than the others. They have their future riding on Windows 8 and Windows Phone 8 so they can't really afford a huge amount of negative publicity which would reverberate around the world very quickly.

    If the government has no leverage over these companies then its all a complete waste of time. Any penalty we apply will just be passed on to consumers, and even if we forbade that (in fairy land) they would still charge whatever they wanted. Australians are screwed because we literally have less political power than Microsoft and Apple.

    Australia versus USA. Taxes higher, wages higher, shopping centre rents higher, telecommunications costs higher, postage and courier costs higher, fuel and energy costs higher, transportation costs higher, compliance costs for huge government red tape on OH&S, environmental matters, tax matters etc higher. Insurance higher and so on and so on. It costs a shipload more to run a business here than in the USA. Why doesn't the Gillard Government explain that to the people instead of trying to raise a smokescreen and crucify Apple for charging $20 extra on an ipod. We get ripped off in almost every key business operational cost area through years of pathetic and ineffective government policy. One can only hope that Apple etc detail comparitive business cost inputs in Aus and USA and highlight to the Aus population that their pathetic, lying government is seeing them ripped off in every area, that's why the ipod costs $20 extra.

      Which is all true but also completely irrelevant to this discussion. All of those costs do not impact apps/software, games, music, movies, TV shows and books which are downloaded from a US data centre, after the customer pays.

    http://www.lifehacker.com.au/2013/02/adobe-surrenders-vows-to-cut-australian-prices-following-government-pressure/

    And this is exactly how the process should work.

    While not a complete victory Government pressure has led to a price decrease for Australian consumers.

    No doubt other factors contributed (Adobe has dropped the price of their subscription service only) like the commercial drive for ongoing subscription revenue.

    Also, don't rule out the halo effect of pricing drops on particular services like this. Pricing is relative. As the subscription service drops then there will be natural pressure to drop the price on other items as well to keep the value in line.

    A good result that didn't require any legislation.

    Hell hath no fury like a poorly drafted mining tax.

    Those companies are laughing at the Australian government....all the way to the bank.

    Only documents Gillard will be drafting is her name and address on a dole form.

    Last edited 13/02/13 5:23 pm

    I am a particular fan of the Soviet economic model from the 20th Century whereby the government sets all prices centrally, and personally feel we should adopt similar, with China's success in getting Google to operate locally under it's jurisdiction a case-study for how Multi-nationals are willing to take instruction from Governments.

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