Lack of Action on Tech Company Tax Evasion

Bernard Hickey

It’s the topic every tax official and finance minister in the developed world is talking about and acting on, yet we hear very little about it in New Zealand.

Cracking down on tax avoidance by the world’s biggest technology companies — among them Google, Facebook, Apple and Microsoft — is at the top of the agenda of the OECD and the G20.

In mid September, British Chancellor of the Exchequer, George Osborne, flagged new tax avoidance rules and the European Commission announced Apple faced having to pay billions of euros in back taxes because of the way it used Ireland’s tax rules to lower its tax bills.

“Some technology companies go to extraordinary lengths to pay little or no tax here,” Mr Osborne said.

“If you abuse our tax system, you abuse the trust of the British people. And my message to those companies is clear. We will put a stop to it. (We want) low taxes, but low taxes that are paid,” he said.

The use of tax havens and Ireland’s extremely low corporate tax rate is a common theme for companies such as Google and Apple. One common tactic is the “Double Irish with a Dutch Sandwich,” whereby an American based company has a subsidiary in Ireland that owns the company’s intellectual property. Revenues for the product or service are then paid to the Irish subsidiary, which is then able to route the profits to a tax haven, often via the Netherlands, because of some quirks in Irish and European tax law.

It’s like magic. Hey Presto, and the revenues for a product or service designed in America, manufactured in China or hosted in Finland, but bought and consumed in New Zealand, are routed through Ireland and end up as profits untaxed in a tax haven. It is, of course, all perfectly legal.

But it is deeply unsettling for Governments, particularly as more and more products and services are being bought from such multi-nationals, often through a an apparently stateless and ever shifting ‘cloud’ of servers and companies.

Where previously, a product or service might have been produced in New Zealand, the company that made it paid corporate taxes, the employees paid wages and GST was paid when it was sold.

Now, the revenue goes straight to Ireland and no GST is paid, while little or no corporate tax is paid.

For example, Google New Zealand Ltd reported revenue in calendar 2013 of NZ$10.1 million and paid NZ$227,074 in tax. New Zealand companies, meanwhile, are estimated to have spent more than NZ$200 million on advertising with Google last year, aiming to reach other New Zealanders using Google in New Zealand. That revenue was routed through Ireland.

Meanwhile, Apple Sales New Zealand reported revenues in the year to September 28, 2013 of NZ$564.6 million and paid NZ$3.9 million in tax.

New Zealand is not alone, and it cannot act alone, but it will have to soon think about how to act. Yet there is very little political discussion or Government focus on the topic.

It has snuck up on everyone focused on the election campaign, but the topic of tax avoidance by multi-nationals will be the main topic of discussion at the G20 leaders meeting on November 15 and 16 in Brisbane, where Prime Minister John Key will attend as a special guest of the host, Australia’s Tony Abbott.

The G20’s finance ministers met in Cairns on the same weekend as New Zealand’s election and agreed to work on a sweeping range of cross-border tax avoidance plans.

However, the success of these plans will depend on Governments, which means politicians, cooperating with each other and avoiding the temptation to poach international business off each other or turn a blind eye to please their corporate backers. Only political pressure will keep them honest and this problem is not going away.

If anything, it is getting worse. A recent rash of corporate ‘inversions’, where US companies buy smaller rivals in lower tax countries to cut their tax bills, has forced an immediate reaction by Barack Obama.

In New Zealand, GST revenues have been weaker than Treasury expected for much of this year, part because of the growing amount of online buying from offshore sites. BNZ’s Online Retail survey shows online buying from overseas sites has risen 140% in the last four years, while domestic online sales have grown at less than half that rate. Online sales now make up almost 10% of retail sales, excluding grocery and liquor sales.

Also, significant sectors of the New Zealand economy are about to be ‘internationalised’ in the same way as manufacturers, many of whom saw their supply chains migrate to China and elsewhere. Education, health, banking and insurance will face competition from rivals in the ‘cloud’ who will be able to offer cheaper and better services because they don’t pay much tax.

For example, the launch by Apple in September of its new iPhone 6 was notable for its include of a Near Field Communication (NFC) chip that can be used to make payments at contactless terminals. Apple, which already has the credit card details of over 800 million customers, not so quietly launched its Apple Pay service with the iPhone 6 and could extend its dominance into the whole new area of payments systems. Along with being New Zealand’s most profitable companies, they are also New Zealand’s biggest corporate tax payers.

The likely continued erosion of GST and corporate taxes is a big deal for the way we fund public services, given the NZ$29 billion collected each year from these taxes make up more than 43% of New Zealand’s total tax take. This would increase the burden on PAYE tax, or put even more pressure on spending or services. Our broad base and low rate tax system works well when taxpayers are grounded here, but is less effective when those taxes migrate into the cloud.

The lack of urgency or public concern about the issue is surprising. The Government delayed its review of charging GST on overseas purchases before the election and comments about cracking down on multinational tax evasions from senior ministers are lukewarm and sporadic.

If they’re looking for an indication how concerned they should be, they need look only across the Tasman, where a confidante of Prime Minister Tony Abbott, Liberal Senator Bill Heffernan, warned in September of the dangers of ignoring the evasion.

“If you’re willing to turn a blind eye to billions of dollars going out the door and offshore, you’re doomed in terms of providing what people expect from government: roads, schools and hospitals,” Heffernan said.

“This is the greatest financial challenge facing the Western world and if not addressed it could redefine sovereignty in the Western world.”

The Labour and Green parties are talking about it. Labour’s then Finance Spokesman David Cunliffe said before the election Labour would look at imposing some kind of transactions tax on the likes of Google and Apple.

He used the example of the withholding tax that visiting rock bands currently paid on the revenues earned from concerts.

The most detailed comments from Prime Minister John Key came in February during a joint news conference with Abbott in Sydney.

“We live in a very globally connected world now and that’s only going to intensify and the only way to actually resolve the fact that multi-nationals should pay fair tax in each country they operate in and not use loopholes or tax havens to book revenue and deprive our countries of the appropriate level of tax, is for us to work together collectively,” Key said.

“We’re much stronger if we hold hands on this issue but in the end we’ve got to leave it to our tax directors and the likes to work through it,” he said.

“The message I think is very clear: if you’re going to come as a multi-national and operate in Australia and New Zealand and other countries, the expectation is that you’ll become a good corporate citizen and that means actually honouring your tax obligations.”

The proof will be in the pudding of what those tax officials cook up. So far, in New Zealand at least, they have been able to do their work without too much political noise or pressure from the wider taxpaying public or politicians.

Expectations in New Zealand’s tax community are remarkably low for any substantial change.

Commenting after the mid-September release by the OECD of its first round of so-called Base Erosion and Profit Shifting (BEPS) measures, PwC Tax Partner Geof Nightingale said he did not expect any wholesale changes to New Zealand’s tax system.

“While the importance of today’s milestone should not be underestimated, the success of the BEPS project will depend on cooperation between governments and tax authorities across the globe,” Nightingale said.

“The next part of the BEPS project is likely to be more controversial, with different tax authorities likely to have different views on what’s acceptable and what’s not.”

There lies the rub and the reason why global tech companies have been so effective so far in avoiding national tax nets. They can count on feuding politicians and competing national interests to create the loopholes they can dive through with ease.

Categories: Globalisation, Tax policy
Bernard Hickey
About the author

Bernard Hickey

Financial Commentator
Bernard Hickey is a financial commentator based in the Parliamentary Press Gallery in Wellington. He worked for 18 years for Reuters, the Financial Times Group and Fairfax Media in Wellington, Canberra, Sydney, London and Singapore. Bernard is currently the editor of and publishes a daily economic and political newsletter at Hive News. Hive News is an online subscription news service based in Wellington: Hive News, Press Gallery, Parliament Buildings, Wellington, 6011