By 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.
This week 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. 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, 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.
G20 crucial
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.
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 on 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.
A lack of urgency
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.
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, this week warned 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."
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A version of this article first appeared in the Herald on Sunday. It is here with permission.
44 Comments
As a starter stop any allowance/expense deduction for tax on payments to Google. That will make the seller question the value of the pitch. Apply the same to royalties etc.
OK it has a potential to reduce access to a market but we need the tax to balance the Budget here.
I used to work as a nurse in Guernsey a tax haven. The Barclay brothers the owners of Barclay bank owned a island not far away. Guersney used to proclaim its independence and the foreign firms justified the low low tax paid because they did business in an independent jurisdiction.
But practically they are not in an independent jurisdiction. The state of Guersney would collaspe in months if the surrounding bigger countries of France and the UK stopped co-operating with it. Guernsey for instance sent a lot of specialist healthcare cases to the UK. Would an executive, computer technician, office worker... be willing to be based in a tax haven if they knew they might die of a treatable cancer that they would survive elsewhere?
The point is if these companies refuse to pay their public dues then the public should refuse to extend the protections of state to them. Whether it be legal, policing, healthcare, transport (Guernsey has port and airport access) and so on. Guersney and other tax havens know this and that is why immediately after 9/11 they quickly changed their financial transactions laws for terrorists. The public is not as powerless as our handwringing wimpy politicians portray us.
Should old people stay in asia or third world countries if they know they'll get subsidised medical treatment in NZ, Australia or Canada that will save their lives?
Would NZ last long (or Vatican City) last long as an independent nation if all its neighbours decided to protect them.
You can't have organised crime without policemen and laws. It is because they are being extended courtesies of State that they can operate these havens, otherwise they would not have independent/sovereign recognition for tax.
Do you think it should be illegal for NZ citizens to seek specialist medical treatment in Hong Kong or Singapore (or similar areas)???
If I create an IP product, license it, and retire to a warm Carribean Island, should I lose natural rights that are protected through agreements in civilised countries?
For a guy who calls "social contract" your message is very self-serving, very "Gimme, we're enittled to their munny".
The process is rather simple when you strip away the baggage. What services do those companies use? Where is the trade actually occurring? what are the relevant points of taxation? Where are the transactions taking place?
Multinationals don't use a lot of local services, so not much tax owing there.
The trade occurs at the point of purchase, the customers location - not where the goods or IP is located, certainly completely independent of the where the suppliers head orfice is registered (the latter is a clear and deliberate manipulation of social contract (eg law) to gain what is otherwise an un-entitled monetary benefit (aka "rort"))
Relvant point of taxation, is that the natural point of taxation, is at the point of sale and point of acquisition for consumption....ie it is the customer that should be taxed - not the supplier, this means all citizens are responsible for the country in which they are carrying out the trade. This makes even more sense when one considers that the local market governance is the one that dictates the contract laws and jurisdiction of any contracted trade.
Where are teh transactions taking place? Electronically, usually through creditcards and foreign exchange, or tokens purchased by that means. Obvious point of taxation, is therefore the foreign exchange transaction on the credit card. Place your GST there, make the bulk trader the responsible party (ie the bank in the currency conversion) as this is the most efficient point of exchange for all parties invovled in the transaction.
I personally don't think it should be a tax to citizens on New Zealand of 45%, I consider it crippling to economic and social development. But the government are the ones making the decisions (and strangely enough the ones spending the profits...)
But if the consumer buyer of a locally produced product has to pay "30% + 15%".
or a PAYE payer has to pay "PAYE + 15%" (includeingPAYE rebates).
Then purchasing off shore should also reflect that 30% + 15%, and the PAYE earner should still pay their "PAYE+15%". If New Zealand sociery is going to give tax breaks to retails/sellers they should give it to their own citizens and economy first! And not just for social reasons, as has been proven, by offering the tax advantage to foreign purchases it just makes sense to import privately (and almost now, to carry stock or build locally.)
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Another Anecdote: For my birthday I went through a few local stores looking for a LEGO Mindstorms product. A lcoal supplier who had one early said it sells really quickly (even at over $700NZD) and they one get a drop every few months, so they were usually out-of-stock. I asked if other branches or their warehouse might have stock, and they told me I'd have to wait until November when they might get their next drop, and that everyone else in town is likely to be out of stock too.
I pointed out to them...Amazon is NEVER out of stock... and can deliver before November.
Typical NZ attitude...lets not buy fast turnover stock, because customers just keep coming in and buying it....
PAYE? Should be PAYB (pay as you buy). But I don't agree.This would make the buyer a tax collector. As a business owner I am already a tax collector (I collect GST and hand it over to the IRD every couple of months). And anyway, it should be the business paying their tax. You seem to be saying they should increased their prices by 30% to account for the taxes. I say they make record profits every quarter - there's plenty of dough in the kitty to pay their fair share of taxes. (I am thinking Apple, Google, etc. Don't know about Lego :))
The government has made the Aussie banks register in NZ. They could do that with Apple et al as well?
You are correct Dave from the unlucky country. What do they say about assumptions being the mother of.... The other parts of my post seem to be correct. David and Frederick Barclay are very wealthy, they own extensive firms in retail, shipping and media. They do own a small island called Brecqhou off the slightly larger island of Sark which is near Guernsey, which they built a castle like home. They are very controversial tax avoiders using tax havens that has been debated in public over many years in the UK.
Companies are taxed upon their profits , Bernard , not on their gross revenues .... do you have any idea how much profit Apple and Google earn in NZ ?
... you'd best stop taking lessons in finance and economics from Mad Russel Norman and the Groans ...
Hey , nice bit of baiting the local loonies with your Hickeysterical " they're not paying their fair share " piece ...
... you're such a wag , Bernie !
... as usual , what Aussie primary producers excel at is having a good old whine ...
But look on the shelves in Dan Murphys or Liquorland , and the only Kiwi bottles you'll see are Sauvignon Blanc , and a few Pinot Noirs ... we do them better than Australian vignerons and vintners ...
... on the wine racks over here in PaknSave NewWorld or Countdown , there's Australain Shiraz , Chardonnays , and Cab.Sauvs ... which they produce so much better than we do ...
Win/win for all of us Kiwi and Aussie tipplers who love a little wine/wine ...
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.
Hmmmmm - the political temptation to pass fiscal responsibility to the money printing G3 + UK related central banks has allowed politicians to avoid the fiscal limitations of financing deficits with debt funded solely by growth collapsing taxes imposed on corporations and citizens alike. Unfortunately the citizens lack the funding apparatus to evade their fiscal responsibility.
How else to explain?:
About 36 months ago Ireland’s two-year notes were yielding 14% and its government and the Brussels apparatchiks were scrambling with tin cup in hand to stave off disaster. Now their yield is negative 0.01%. Read more
Others have noted the illegality of such actions in the EU.
The [Rick] Santelli Exchange segment “Politics vs. Central Banks,” CNBC, September 30, 2014:
“…Everyone on the floor is passing along a [Financial Times] article – interesting title ‘Merkel has a Duty to Stop Draghi’s Illegal Fiscal Meddling,’ by [prominent German economist] Hans-Werner Sinn. Now, think about what that says, and let’s think back, whether it’s our central bank, or the European Central Bank, the Japanese. The issue is central bankers have moved from being nudgers on monetary policy to basically [operators of] fiscal policy. In the U.S. it’s every bit the same. And there’s lots of talk and even comments by Ben Bernanke, Janet Yellen and many commentators – that the central bankers need to dabble in that direction, for an obvious reason: because of the politics, whether it’s the politics of Europe, the unsure nature of how Germany wants to stand up and stand its balance sheet along with the ECB’s, or in this country because there’s a logjam. Things can’t get done at least to the liking of the masses, to the citizens - to the voters. But what that really has done is it’s taken the voters out of the game. If central bankers didn’t have such a large foray into politics, well, politicians would have had to sink or swim on the merit - or lack therein - of their policies that weren’t creating the growth. But central bankers early recognized that they needed to buy time to create stability and the growth would surely come. But the problem is, in the parlance of trading, is that the spread between these two [growth and stability] continues to get wider and wider and wider.” Read more
Ireland introduced a super low-tax-rate regime designed to entice "manufacturing industries" to their shores to provide jobs and abundant wealth for their peasantry
How has that worked out for Ireland?
Is Ireland any better off today? Did they get the jobs? Is it a wealthy country today?
What has happened has been somewhat different to the original intention
It attracted the global high-tech-hucksters instead who have used Ireland as a halfway-house on the journey to tax-nirvana
Bit like the Pony Express of yore
The only money made by the pony-express staging-posts along the route was for housing and feeding the ponies
It now appears, that in addition to providing advantageous low tax-rates they have also been subsidising Google and Facebook and Starbucks & Co to the tune of $ billions, which they may now have to claw back because the EU is fed up with continually subsidising Ireland, and by proxy, subsidising the high-tech hucksters. Genius
Anger is mounting in Cork. The vexing issue of tax – specifically, how much the Irish government should be collecting – dominates the city.
Placards strung from lampposts indicate widespread disquiet; the airwaves are dominated by splenetic voices proclaiming that there is one law for the rich and another for the poor; a meeting on Monday in the city's Metropole hotel will hear proposals for a mass protest, with leading politicians calling for Ireland's citizens to stop paying their taxes. Across the city, the controversy surrounding the introduction of new water charges, to pay for improvements to Ireland's crumbling piping systems, is impossible to ignore. Read more
How has that worked out for Ireland?
Is Ireland any better off today? Did they get the jobs? Is it a wealthy country today?
Well, given Ireland has moved from being one of the poorest nations in Europe to one of the wealthest, what do you think? Per capita it's now as rich as France, significantly wealther than NZ.
Yep-di-doo
My neighbour was a high-flyer too, much richer than me.
Flash house, flash cars, flash high-maintenance wife, flash boat, private schools
Then he lost his job
Banks foreclosed on his house
Cars have gone, public schools, wife will probably go next
Now I'm richer than him
And I haven't done a thing
Implement Financial Transaction Tax, specifically on all cash transactions where the flow is outwards. 15% like GST.
I just bought in some footwear from the USA. $60 dollars GST to pay after some minion unwrapped the parcel and scrutinised the invoice and declaration etc etc and etc.
Would have been simpler for them to hit me if at the time the cash transfered. Via bank and credit card process, that 15% was imposed on that particular transaction at the bank. it would catch all sorts of minor and sometimes major imports.
For the multinationals who have all sorts of jiggery to conceal profits it would also catch them nicely, because despite all the jiggery, there comes a time they will want that cash. And have to transfer it.
It would also even up the playing field for local businesses.
And because it would also be incurred on incoming comsumables, eg petrol, the case raised could be used to lower other taxes (yeah right)
Yup. I do pay the GST. I pay income tax as well, both personally and in enterprises I own, and GST in the name of those enterprises.
So what is your point ?
But the concern is that if the multinationals don't pay tax, then I have to pay more of all of those to compensate. I think you understand that.
The august and doubtless sincere common taters who urge an FTT, a GST on all FX credit transactions, a Concerted Move by All Nations yada yada, are quite simply deluded about the abilities of Gubmints to do anything of the sort.
The point is not about the righteousness of the remedies or the Weevils of the Dodgers. Much electron-torturing is expended in the futile business of pushing Old solutions (land tax?), inventing new ones (see upthread for some attempts) or simply venting.
The real point is about decision-making time.
Gubmints, particularly those of a democratic persuasion, Change Fings at the speed of a stoned sloth walking through glue. Think of the Consultations, Consensus-building, rule-inventing and law-scribing that has been needed to do a rather simple thing: build mo' freakin' houses.....and they haven't written the final page in That book yet.
Corporations can routinely move faster than any Gubmints (and let's leave aside the question of whether disparate Gubmints Can in fact do anything in a coordinated fashion...the UN is a prime workinmg example: motto 'Let's hold Committee Meetings till they're All Dead').
They are like corporate farmers: spot a problem in Paddock A, get outa there and move operations to Paddock Z. And their monitoring and BI systems are generally top-notch: think of a combination of the sort of headline-reading algos in HFT systems, fast feedback from local staff on the ground, and the ability to retain the finest legal eagles on the planet: a combination Gubmints have not been able to match for the best part of 30 years.
The issue has been disguised until recently, but the InterWebs have blown the lid offa the old tax models and exposed the lumbering fossils that pass for Gubmints, for what they are..
In warfare, the imperative is to 'get inside the decision loop of your enemy' i.e. spin your own OODA loop faster than They can.
It is at heart an institutional learning conundrum: how to reel in international corporations who can outwit anything you as Gubmint can do. Any Gubmint is boundary-constrained (limited reach), democracy-committed (guaranteeing very long decision loops), advice-limited (because the finest minds work for the private sector), and dependent on creating, purchasing or otherwise enticing sufficient electoral votes to even stay in the game (thus posing an immediate bifurcation of Good Works versus Survival objectives).
Not a contest of equals.
One can issue a confident prediction about the outcome: lotta sloganising, status quo continues, check back in a decade for any action.
Oh, and Move First (cheeks aglow with Righteousness), and see your grateful (and less constrained values-wise) international competitor Gubmints, eat your lunch.....
Cute Waymad. But the FTT or GST on FX is not in combination with other goverments etc etc. it's brutally simple and difficult to circumvent. It will get ya.
If you want to get your cash out the only way to avoid it would be to carry it out in brown paper bags, possible true, but not practical for these guys.
aaaw, c'mon, c'mon
I hae said it before
Any slob that comes in heah and sets up in bidness, and then proceeds to pillage the system, they are given a very simple choice
Pay an annual licence fee of $½ billion tae hang yer shingle out, or, p*ss orff
Like I have advocated, many times, doing to the banks and insurance companies
And that's just for starters
A little bit of radical reform is necessary.
Parliament is convened on Interest.co.nz this 6th day of Oct 2014.
Without any further filibustering.....I declare that all current Tax legislation as at the 6th October 2014 is fully revoked.
All those in favour.....majirity show of hands
All those against.....a minority......less if I don't put me glasses on.
Motion carried.
Next motion on the table (no readings necessary you ave all had time)
The 2014 Automatic Payment Transaction Taxation Bill.
ALL transactions to incur a .5% APTT......there are NO exclusions.
The APTT is applied at time of transaction at your bank and the bank will automatically take the appropriate % of tax from your account and redirect it to the Governments Bank Account.
Reserve Bank will issue newly designed currency periodically.
Done and dusted!!!!
You all might want to sell your Xero shares !!!
Yes that could be an issue Waymad but people are always going to barter.......there is a cost to barter which people would likely factor in and an APT could be kept at a very low rate. If anything the current high rate of GST etc would encourage a higher level of barter than an APT tax system.
Haha..you're probably right Cowboy!..........make them keep a register none of this anonymous crap going on......
I just want rid of all the taxation compliance duties and costs.....it is a very inefficient and complex system for collecting money for Government spending.
Governments complaining about low tax countries need to be competitive and efficient......they are all whinging about the loss of taxes to other jurisdictions but that doesn't address their own failures of not being competitive and efficient in a global environment.........
Perhaps the answers lies in dealing with those who invent the avoidance schemes -Co Directors/Senior Execs/Accountants/Lawyers etc so include in Law that all those involved in such schemes are criminals and liable on conviction to imprisonment and forfeiture of assets under the proceeds of crime legislation/ Results less avoidance and/or more of those in jail a win win whichever way. As an afterthought perhpas policiticans and law drafters should also be included as assessories.
That's why I ask people if they have bought a boat this year.
If they have not...
well boats attract GST, GST is a tax.
If you have not bought a boat this year then they are avoiding tax.
If you have bought a boat, and it isn't the most expensive boat you could buy then, again, that is avoiding tax.
Evading tax, is stealing a boat, claiming it's yours, so you don't have to pay the tax payment.
avoidance is not illegal, so criminalising it is very unethical.
Depends how the end result is labelled and what level of coercion is involved.
Last week, as the Tory faithful cheered on George Osborne’s new cuts in benefits for the working-age poor, a little story appeared that blew a big hole in the welfare debate. Tucked away in the Guardian last Wednesday, an article revealed that the British government had since 2007 handed Disney almost £170m to make films here. Last year alone the Californian giant took £50m in tax credits. By way of comparison, in April the government will scrap a £347m crisis fund that provides emergency cash for families on the verge of homelessness or starvation. Read on
Does Jackson's grant offered by the government to his Hollywood masters together with the $30 million Tiwai Point offering ring a few alarm bells?
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