Artful Transnational Tax Dodgers
Squeeze Them Until The Pips Squeak

- Murray Horton

One of the most common arguments presented by the Government and its ideological apologists for selling off public assets, cutting public services, bashing workers and beneficiaries, etc, etc, is that “the country can’t afford it. Where is the money going to come from?” The latter is an argument with which Christchurch people have become wearily familiar, in relation to the multi-billion dollar quake rebuild. It is part of a double whammy, the other half of the equation being the justification of foreign investment that “we don’t have enough capital of our own in NZ, we need their (transnational corporations’) money”. When transnational corporations (TNCs) are criticised, their apologists say: “They bring money into the country, the employ New Zealanders and they pay tax here”. All of those arguments are wrong but the one I want to focus on is that of TNC tax dodging. An analysis of the reality also provides a partial answer to that hoary old plaint: “Where is the money going to come from?” From the TNCs that are bludging off all other New Zealand taxpayers.

From the outset, let me acknowledge that tax dodging is not unique to foreign-owned businesses. Elsewhere in this issue there is a short article by John Minto with the wonderfully pithy title “I’ve Had A Gutsfull Of Lowlife Bludgers”: “I’m talking about the wealthiest group of New Zealanders who control over $50 million in wealth each but pay bugger all tax. A New Zealand Herald story spelt out their deceitful ways. Under the headline ‘How Super-Rich Kiwis Dodge Tax’ (1/6/13, Anna Leask, the paper reported that 107 out of 193 of what the Inland Revenue Department calls ‘high wealth individuals’ do not even declare income of even $70,000 so these rich pricks don’t even pay the top tax rate. Bludging bastards”. So, let’s be very clear that CAFCA does not turn a blind eye to the local rich who rip off their fellow citizens by dodging tax.

But, as in all other comparisons between New Zealand capitalists and TNCs, the difference is one of sheer scale. TNCs have mechanisms available to them to avoid taxes that the local wannabes don’t – things such as transfer pricing, whereby the TNC declares losses in a country with a higher corporate tax rate and profits in a country with a lower one. Even better, make use of the myriad of tax havens that have proved such a nice little earner for a myriad of flyspeck countries and autonomous colonies around the world. And TNCs can make use of various financial instruments to move profits and losses around between countries, for tax avoidance purposes. One such class of financial instruments are called optional convertible notes (OCNs), with debt and equity components that enable the holder to convert the debt owed to it into shares in the company that issued the note.

IRD The Unlikely Hero

OCNs proved very popular and profitable in the 2000s with Australian-owned companies operating in NZ. What they didn’t count on was the Inland Revenue Department (IRD) actually doing its job and pursuing them relentlessly for the avoided tax. IRD has prosecuted more than a dozen Aussie companies, and although the cases have taken years to grind their way through the courts, IRD has been very successful. Most spectacularly, in 2009, it won an out of court settlement of $2.2 billion from the four big Australian banks (by settling without having to go to trial, the banks paid 20% less than what IRD was claiming and avoided the punitive financial penalties that would have been imposed has they lost at trial). In the finest NZ tradition of political and corporate “bad news” being announced at times when the media and public are otherwise distracted, this settlement was announced a couple of days before Christmas. CAFCA put out a press release entitled: “IRD Delivers Best Possible Xmas Present To Long Suffering Kiwi Taxpayers”.There really is a Santa Claus. And he has been revealed to be the most unlikely of people, namely the Commissioner of Inland Revenue. Just in time for Christmas IRD has persuaded the Big Four Australian-owned banks – ANZ, ASB, BNZ, and Westpac – to recognise the futility of attempting to dodge payment of the astonishing $2.2 billion of taxes that, between them, they avoided via deliberately complicated structured financial transactions. So that's how they rode out the recession, by not paying nuisance costs such as taxes. Not an option for the rest of us mugs who have to pay our taxes, whether we like it or not.

“The Big Four only faced up to the inevitable after two of them had been to court and lost, with the judge in one case describing what they did as ‘a rort’… This is theft from the NZ taxpayer on a truly monumental scale, particularly at a time when the Government is cutting back public spending and dropping unsubtle hints about more beneficiary bashing. This huge shortfall in tax could be used for health and education” (24/12/09). Not surprisingly, the 2009 Roger Award for the Worst Transnational Corporation Operating in Aotearoa/New Zealand was won by one of those banks, namely ANZ.

Although that was IRD’s most spectacular victory, it was by no means the end of the story. IRD is still pursuing a number of Australian-owned companies, including big names like Qantas, Toll and Telstra, for their use of OCNs to avoid tax and penalties (an estimated $226 million plus interest is at stake). And IRD keeps on winning. In March 2013 it won its $8.6 million claim against Alesco in the Court of Appeal, which found that “there was no commercial reason for the instrument other than its effect on the company’s tax burden and was ‘a fiction adopted solely for income tax purposes’” (6/3/13; “Call For Sanity After IRD Win”, William Mace, Alesco, a trans-Tasman producer of garage doors and construction products, which has since been taken over by Dulux, is one of the smaller fry in this saga (Toll Group is being pursued for $19m). In July 2013 it was granted leave to appeal to the Supreme Court – by then Alesco estimated it had $14.9m at stake, including tax, penalties and costs.

As IRD keeps on winning the pips are really beginning to squeak. The large law and accountancy firms, which are themselves TNCs, called for IRD to back off its pursuit of their fellow transnationals. “Ernst & Young senior tax partner Jo Doolan said the result was alarming and worrying because she believed Inland Revenue had effectively changed its view of OCNs retrospectively. This is an alarming result which shows that even where taxpayers have real businesses behind what they are doing, the Commissioner can still rewrite the tax outcomes, often years after the transaction is finished’, Doolan said. ‘It reinforces the feeling of many inbound investing corporates that the New Zealand tax environment is too uncertain. It may discourage them from continuing to do business here’. Doolan called for political intervention to ‘restore sanity’ to the tax system before foreign capital was scared off by the aggressive avoidance policy” (ibid). Gordon Campbell on Scoop was right on the money when he said to those who claim “this legal ruling in favour of IRD will deter foreign investment. To which most of would reply ‘Great!’ Because we need this kind of foreign investment like a hole in the head”.  Exactly. Campbell pointed out the hypocrisy of those same handwringing apologists for TNC criminality issuing no similar call for mercy for common or garden tax dodgers, let alone welfare cheats (Scoop, 6/3/13,

MediaWorks “Leaves Tax Debt Behind” By Restructuring

One of the highest profile Australian-owned companies being prosecuted by IRD is MediaWorks, the owner of TV3 and a string of radio stations, which is being pursued for $22m in avoided tax dating from the 2002-04 period. The case had reached the Court of Appeal, which had decided in favour of IRD. MediaWorks was owned by private equity company Ironbridge. In June 2013 it was put into receivership but with an “unusual restructuring deal” that “appears to free (MediaWorks) from a potential $22 million obligation to the Inland Revenue Department…Michael Stiassny of Kordamentha (the receivers) said the potential obligation to Inland Revenue taxes will be ‘left behind’ in the changeover” (New Zealand Herald, 17/6/13, “Taxpayers May Cover MediaWorks Tax Bill”, John Drinnan).

“MediaWorks receivers appointed this week said the tax dispute was unlikely to be carried over to new owners. Under a complex deal, lenders for the media company have written off $600 million and are expected to take over as equity holders of a new firm, with a potential $22 million tax bill at least partly abandoned” (NZ Herald, 19/6/13, “Labour Warns Govt On MediaWorks Tax Dispute”, John Drinnan). “The National Party's relationship with big entertainment firms is back in the limelight, with Prime Minister John Key talking down the prospects of recovering MediaWorks' $22 million tax debt.

“Key told Parliament… he did not expect Inland Revenue would recover a $22 million IRD debt ‘because the company is fundamentally broke’. The banks - led by Westpac - have written off $600 million of debt, seen off the former owner private equity company Ironbridge Capital and handed the assets to receivers at KordaMentha. New Zealand First Leader Winston Peters is on the front foot on the tax debt. He harked back to the Government scheme that provided MediaWorks with a $43.3 million loan so that it could pay for its radio frequencies to stay on air, which led to allegations of cronyism.

“That deal - uncovered by the Herald in 2011 after it was obscured behind a highly opaque press release - was a lifeline for MediaWorks. At that time Steven Joyce, then the Minister of Economic Development, was in the gun. Joyce made his fortune by selling his radio stations to MediaWorks several years ago but he resiled from the Cabinet decision that approved the lifesaver deal for MediaWorks. In 2011 the Government relationship with MediaWorks came to the fore when RadioLive allowed Key and his office to take over the afternoon show for an hour, in what was effectively a pre-election promotions show. As for the loan, the Government insisted it was a deferred payment scheme, MediaWorks was charged an 11.3% interest rate and it has since been repaid. But the impression has lingered that MediaWorks was treated as a special case and that like SkyCity and Sky TV it has a good rapport with the Nats and their opposition to regulation.

“Sources believe that the IRD debt was a factor in the bankers' unexpected decision to put the company into receivership, rather than a more traditional restructuring that might have left the IRD's debt intact. MediaWorks' precarious financial position has been known about for a long time and Peters questioned why Inland Revenue had not sought to place MediaWorks in statutory receivership which he said would have given the IRD greater control…Labour revenue spokesman David Cunliffe said… Key’s approach was highly unusual and it was ‘an outrage’ for the PM to comment on a tax case as he had done… Cunliffe said Key’s comments were like a message from a loud-hailer to IRD officials handling the MediaWorks debt” (NZ Herald, 28/6/13, “Key Comments In Spotlight”, John Drinnan).

Par For The Course

So that’s how TNCs get to dodge taxes, even when in the middle of a court case – undergo an “unusual” receivership which results in their tax obligations being “left behind”, with the full support of their good mate the Prime Minister. National’s relationship with MediaWorks has always been extremely cosy – for a very detailed account of that 2011 $43.3 million loan see the subsections entitled “MediaWorks: Government Backs The Venture Capitalist Owner” and “Bailing Out Its Mates” in Wayne Hope and Merja Myllylahti’s article “Media-Communication Ownership In Aotearoa-New Zealand: Legacies And Contemporary Trends” in Watchdog  128, December 2011, At the time of writing, the status of IRD’s thus far successful court case against MediaWorks is unclear. 

Tax dodging, or complete non-payment of tax by TNCs, is one of the criteria for the Roger Award. For example, the 2003 Roger was won by Japanese forestry processing TNC Juken Nissho. The Financial Analysis in the Judges’ Report ( examined Juken Nissho’s accounts for the five most recent years (1999-2003 inclusive) and concluded: “The company reports losses and pays no tax. Juken Nissho paid no tax in any year”.

Cadbury Cops It Sweet

Nothing has changed in the following ten years when it comes to TNCs dodging tax in NZ. The weekly Press Businessday column by Chalkie (Tim Hunter) is always worth a read. “Cadbury Tax Adds Sweetness To Results” (3/7/13, was a most enlightening study of tax avoidance by one of the world’s biggest food TNCs. “…In a long investigative piece published two weeks ago, Britain's Financial Times revealed Cadbury's culture of aggressive tax avoidance before its acquisition by United States food giant Kraft in 2010. Using elaborate - and apparently legal - schemes and networks of overseas subsidiaries in the Cayman Islands, Holland and Ireland, Cadbury cut its tax bill by almost 80% over ten years, the paper said. As a former Cadbury executive told the FT: ‘Cadbury has been very aggressive on the tax side, which goes against what you would think about the reputation of the company from its philanthropic background’.

“Just so, but Chalkie can't help wondering whether Cadbury was as aggressive in New Zealand and if it still pays an unusually small amount of tax. After scouring various public documents, Chalkie reckons the answers are yes it was, and yes it does. The first figure leaping into the foreground is the tax expense for Kraft Foods Investments (New Zealand), Cadbury NZ's owner, in the year to December 2012. This number was $598,000, about 5% of the company's pre-tax profit for the year of $12.2 million. Had Kraft paid the standard rate its tax expense would have been $3.4m. What about previous years?

“…Cadbury's five-year tax expense becomes $4.5m, or 8% of pre-tax profit - an achievement that would surely have high-fiving tax advisers heading off to celebrate with raw fish and Krug at the nearest Japanese bistro. Chalkie asked Kraft to explain why Cadbury appears to have paid 8% tax in the last five years. In a statement it said: ‘We pay tax in line with the laws in all the countries in which we operate. However, we do not provide tax figures for any specific market’. In Chalkie's view, we can infer two things from this statement. One, it is indeed paying very little tax. Two, it doesn't want to talk about it….

“…Trawling through the books reveals some interesting structures in the Kiwi corner of Cadbury's empire, although their place in the global jigsaw can only be guessed at. For example, finance for Cadbury NZ, and possibly other parts of the group, was channelled through a pair of New Zealand trusts ultimately owned by Cadbury in the UK, via Holland - Landrew Holdings Trust and Teming Investment Trust. Landrew Holdings appears to have got its money through borrowing $215m, of which about $142m came from Cadbury Schweppes Finance in Australia and about $73m came from Cadbury NZ, the latter interest-free. Landrew used the money to buy units in Teming Investment Trust, which loaned the money back to Cadbury Schweppes Australia and Cadbury NZ, the latter at about 8% interest. The ultimate effect of this money-go-round is not obvious, but one effect looks clear enough - Cadbury loaned money interest-free and then borrowed it back with interest. It's hard to see the commercial benefit to Cadbury of doing that, but the process would appear to shift income from Cadbury to the trust.

“There is more to the money-go-round though. For example, other accounts show Cadbury NZ was financed by borrowing from a subsidiary called the Natural Confectionary Company, which itself was financed by an investment from Cadbury NZ of $53.1m. Natural Confectionary Co seems to have used the money to acquire a 20% shareholding in Irish company Seurat. The exact same sum was returned to it by Seurat as a capital repayment in 2003. Chalkie's head is spinning, but all this shuffling of assets and liabilities would seem to have little to do with making chocolate.

“In an ironic twist, while all this tax minimising was going on Cadbury NZ received cash grants from the Government totalling $1.8m in 2007 and 2008 to help pay for a pilot plant and research in a joint venture with the University of Otago. According to the accounts the plant cost $813,000 and had a useful life of ten years. Why Cadbury NZ, which paid dividends of $30m in 2008 and $102m in 2009, needed $1.8m taxpayers' money to pay for a pilot plant is not clear. At any rate, the Government's encouragement of Cadbury did not produce anything positive in the short term, because in 2008 the company announced it was cutting 145 jobs at the Dunedin plant as it reorganised regional production. Reports at the time said Cadbury's quid pro quo was an investment of $51m in Dunedin during the next two years, although Chalkie has scoured the accounts for signs of this investment and come up empty-handed. What we have here, in the end, is a picture of corporate behaviour at odds with the image it is trying to project. Sweet as? Yeah, right”. So Cadbury simultaneously avoids NZ tax whilst extracting corporate welfare from the NZ taxpayer. To add insult to injury, it also makes NZ workers unemployed. That’s the sort of foreign investor the country needs, isn’t it!

New Law Will Keep It Secret

Here’s another example, also from a Chalkie column (Press, 7/11/12, “Proposed Changes A Step Backwards”, “Google, for instance, is a foreign-owned company. In New Zealand it dominates the market in online search advertising, outpacing local competitors by a considerable margin. The overall interactive market for 2011 was estimated at $328m by the Advertising Standards Authority. Of that, $135.5m involved search and directories. If Google's revenue was proportionate to its share of site visits, which is a reasonable assumption, it would have pulled in, conservatively, about $110-$120m. However, its financial statements show revenue of just $4.4m for the year to December (2011), producing a loss of $52,325. It made a loss the previous year too, and the year before that, and the year before that. The low numbers are due to Google's use of a tax structure known as the double Irish, in which New Zealand billings go to Google Ireland, where company tax on trading income is 12.5%. The Irish company then pays commission on those sales to the unit in New Zealand, where the company tax rate is 28%. Hence Google NZ's low reported revenue and 2011 tax bill of just $109,038”. The thrust of that column was to point out that we know how little tax Google pays in NZ because it is required to file accounts with the Companies Office under the Financial Reporting Act – but that Act is in the process of being amended to remove the obligation for many TNCs to file their accounts (including how much tax they pay). The threshold for non-disclosure will be revenue of less than $30m in each of the previous two years. And that is easy to arrange for TNCs such as Google with mechanisms such as the double Irish at their disposal. In future, under the new law, it won’t have to report its NZ revenue or tax payments (although the proposed new Financial Reporting Bill was introduced into Parliament in July 2012, it was still going through the House at the time of writing, more than a year later).

Of course, this TNC tax dodging is not happening only in NZ – it is a pattern all over the world. In Australia the Uniting Church published a report in May 2013 entitled “Secrecy Jurisdictions, The ASX100 And Public Transparency” which “found that more than 60 of the top 100 companies (on the Australian Stock Exchange – ASX) had subsidiaries in tax havens such as the Cayman Islands, Switzerland, Luxembourg, the British Virgin Islands, Bermuda, Mauritius, Jersey, the Cook Islands, the Seychelles, and in low tax jurisdictions such as Hong Kong and Singapore… to dodge the scrutiny of the Australian Taxation Office. Many of these subsidiaries conduct almost no commercial activity, and exist only to avoid or minimise taxes…News Corporation, Westfield and the Goodman Group were listed as operating more than 50 subsidiaries each in a number of tax-free or low tax countries. The Commonwealth Bank was also listed. A subsidiary of the bank, Burdekin Investments, operates out of George Town, capital of the Cayman Islands. Its headquarters is Ugland House, home to thousands of so-called ‘post box companies’ taking advantage of local tax rules. In its 2012 Annual Report Telstra (one of the Aussie companies being prosecuted in NZ by IRD. Ed.) confirms 20 subsidiaries registered in tax havens – 11 in the British Virgin islands, four in Bermuda, four in Jersey, one in Mauritius and one in the Cayman Islands” (Vanguard, July 2013, “Corporate Tax Dodgers Are Bludging On Working People”, Bill E.)

Double Non-Taxation

Indeed, TNC tax dodging is a very big story in the world’s richest countries, whose governments have resolved to take strong measures to recoup the billions in tax revenues they are losing every year. But in New Zealand the whole subject is buried in the business pages of the papers and doesn’t feature in the top priorities of the political agenda. In December 2012, when Peter Dunne was still Revenue Minister (he had to resign from Cabinet in June 2013 as a result of the scandal involving the leak of the official report into the illegal  spying by the Government Communications Security Bureau) he “ordered Inland Revenue to work closely with the Organisation for Economic Cooperation and Development on the OECD’s Beps (base erosion and profit shifting) initiative that aims to make big changes to international treaties to eliminate tax rorts. Tax avoidance accounting schemes include the ‘double Irish’ and ‘Dutch sandwich’ that are reportedly used by organisations such as Google, Microsoft, Facebook, Pfizer and Starbucks to route profits to tax havens and dodge billions of dollars in corporation tax.

“‘New Zealand certainly doesn't want - and I think most OECD countries don't want - to see multinationals using devices and techniques that minimise their tax liabilities right across the board’, Dunne said. His comments follow the OECD's top tax official, Pascal Saint-Amans, welcoming New Zealand's support for Beps and saying a comprehensive, global action plan could be implemented within two years” (Press, 15/1/13, “Muzzle On IRD Over Firms’ Tax Affairs May Go”, Tom Pullar-Strecker, In April 2013 Dunne said that he was watching an Australian move that would force TNCs to publicly disclose more about their tax affairs. Labour’s revenue spokesman David Cunliffe said: “With every year that passes potentially hundreds of millions of dollars of tax are lost” (Press, 21/4/13, “Multinational Companies: Labour Urges Action To Counter Tax Avoidance Rorts”, Tom Pullar-Strecker).

As explained by tax expert Geordie Hooft in a Comment piece in the Press (18/6/13, “Multinational Trade Requires Rethink On Tax”): “… as long as a foreign company does not have   a fixed place in New Zealand (as defined as a ‘permanent establishment’) then they do not have to pay any tax here on their business profits. Multinational companies are cleverly choosing where to carry on business. With the development of online shopping and ‘virtual’ worlds, this can easily be changed. Google, Amazon and Apple are often cited as examples. Fighting the ‘base erosion and profit shifting’ of multinational companies will require a concerted effort by the world’s economies  - including a complete rethink on how profits are attributed to particular countries for tax purposes. One idea is to base it proportionately on where sales are generated. Officials at Inland Revenue and Treasury have recommended New Zealand’s participation in an OECD project to tackle the problem. In contrast to their usual snail-paced approach to such policy issue, the OECD report is on a fast track…”.

Auckland University tax expert Professor Craig Elliffe said: “The whole international tax system has been based on the principle of reciprocity; you surrender some tax rights because another government is going to take tax. The real problem that has emerged is double non-taxation. You have got weak ‘controlled foreign company’ rules, the ability to strip out profits from source countries and to put them in jurisdictions where they will effectively not be subject to tax at all” (Press, 15/1/13, “Muzzle On IRD Over Firms’ Tax Affairs May Go”, Tom Pullar-Strecker, “Google, which has previously proudly defended its use of tax rorts as ‘capitalism’, refused to say whether it intended to accept a request from the OECD to work with it to eliminate double non-taxation” (ibid.).

Google, Starbucks, Facebook, Microsoft, Amazon, Etc, Declared “Immoral”

Google is one of the main TNC offenders that have got both European and American politicians so riled up. In December 2012 the British Parliament’s all-party Public Accounts Committee (PAC) accused it and others, such as Starbucks and Amazon, of “immoral tax avoidance” and said that the Government should “get a grip” and clamp down on TNCs. Labour MP Margaret Hodge, who chairs the Committee, said: “Global companies with huge operations in the UK, generating significant amounts of income, are getting away with paying little or no corporation tax here. This is outrageous and an insult to British businesses and individuals who pay their fair share” (New Zealand Herald, 3/12/12, “Multinationals Feel UK Tax Heat”). “Companies operating in Europe can base themselves in any of the 27 European Union nations, allowing them to take advantage of a particular country’s low tax rates. Google has picked Ireland* and Bermuda as its main bases, while coffee chain Starbucks has its European base in The Netherlands and pays British tax only after transferring large sums in royalties to its Dutch headquarters. The Committee said online retailer Amazon paid ₤1.8 million in British tax in 2011, on turnover of ₤405 million. Hodge said executives from the three companies had been ‘unconvincing and, in some cases, evasive’, when they appeared before the Committee…’All three companies accepted that profits should be taxed in the countries where the economic activity that drives those profits takes place’, the lawmakers’ report said. ‘However, we are not convinced that their actions, in using the letter of tax laws both nationally and internationally to immorally minimise their tax obligations, are defensible’” (ibid.). *Ireland’s corporate tax rate is 12.5%.

When Google executives appeared before the Committee in November 2012, Hodge told them: “We’re not accusing you of being illegal, we’re accusing you of being immoral” (,3/12/12, “UK Slams ‘Immoral’ Tax Practices Of Multinational Companies”, Megan Gibson). Starbucks, which has operated in the UK for 15 years, told the Committee that it hadn’t paid UK tax in the previous three years because it hadn’t made profits in the UK. The PAC Reports says: “We found it difficult to believe that a commercial company with a 31% market share by turnover, with a  responsibility to its shareholders and investors to make a decent return, was trading with a apparent losses for nearly every year of its operation in the UK” (ibid). Starbucks got the hint and announced, in December 2012: “….we are looking at our tax approach in the UK…(we) understand that in order to maintain and further build public trust we need to do more” (ibid). Google unapologetically told the PAC: “We pay the tax we are required to pay in every country in which we operate” (ibid.), which is exactly what Cadbury said in New Zealand. That “so what are you going to do about it?” attitude is no longer good enough for some European countries – for example, in 2012 France slapped Amazon with a $US252 million bill for unpaid taxes and penalties.

The revelations kept coming. In December 2012 the UK Sunday Times revealed that: “Microsoft is channelling online payments for sales of its new Windows 8 operating system to Luxembourg as part of a scheme that avoids British corporation tax on more than ₤1.7 billion a year of revenue. The Sunday Times has established that a small office in a Luxembourg business park with just six staff handles hundreds of millions of pounds form online Microsoft sales in the UK and the rest of Europe. The bulk of the money is transferred to Microsoft’s European headquarters in Ireland. Profits can then be routed to Bermuda without UK corporation tax being paid…Luxembourg has become one of the key hubs in intricate and legal schemes that can put revenues out of reach of the British taxman. It now has the highest gross domestic product per head of population in the world. Richard Murphy, of the Tax Justice Network said: ‘There is no practical reason for routing money through this small city, but it is at the core of the web of financial flows into and out of Europe. The reason is financial engineering, so that companies can reduce the amount of tax paid. It is one of the biggest tax havens in the world’. Luxembourg has a corporate income tax rate of 21%, but this can be significantly reduced in negotiations with the authorities. The tax paid on royalties can be below 6% and on corporate earnings from interest income it can be under 1%...

“Microsoft’s operations in Luxembourg are disclosed in the small print of its online UK store, which states: ‘If you are purchasing electronic software downloads, you are contracting with Microsoft Luxembourg’…Accounts reveal it had a turnover of ₤273m last year (2011). The firm paid ₤2.6m in tax, but most of the revenue went to its European headquarters in Dublin in royalties. The accounts of the Irish company – Microsoft Ireland Operations Ltd (MIOL) – reveal it receives more than ₤1.7b revenue from the UK. No UK corporation tax is paid on any of the money. Most of the UK revenues from MIOL are paid to another Irish company, Microsoft Ireland Research, which reported $US4.3b of profits for licensing rights in 2011, which would be subject to Irish corporation tax rate of 12.5%” (Press, 10/12/12, “Microsoft Uses Offshore Tax Haven To Avoid Tax On Revenue”).

“Facebook funnelled ₤440m into a tax haven last year (2011) in an effort to sidestep the tax authorities in Britain and other big markets. The move enabled the social networking giant to pay a mere ₤2.9m of corporation tax on more than ₤800m of overseas profits in 2011, accounts for its Irish subsidiary show. In Britain, it paid less than ₤240,000…Like Google and Apple, Facebook uses its Irish operations to eliminate its liabilities in lucrative territories. British companies that advertise on Facebook must buy through Facebook Ireland Ltd. This allows Facebook to push most overseas revenues through Ireland, sidestepping the authorities in higher tax states. Many technology companies locate their intellectual property in tax havens, such as the Cayman Islands, using Ireland as a conduit” (Press, 24/12/12, “Facebook: Tax Haven Conceals Funds”).

Bad Apple

All of the TNCs cited just above – Microsoft, Starbucks, Google, Facebook and Amazon – are American. But, guess what? American TNCs don’t pay tax in the US either. “Apple is stashing nearly $US1 billion a week beyond the reach of the United States taxman after the tech giant ramped up its efforts to slash its tax bill. The Silicon Valley company squirreled away more than $US11b into its warren of subsidiaries in low tax countries and tax havens in the final three months of 2012. This legitimate manoeuvre raises the amount of cash Apple has shielded from US authorities to $US94b, according to documents filed (in January 2013)…Apple is one of the world’s most profitable businesses. Since launching the iPhone in 2007, Apple’s cash pile has swollen from about $US15b to $US137b. The company parks most of its cash overseas, hidden from the US Internal Revenue Service. By shifting money through a complex global structure centred on the British Virgin Islands tax haven, Apple also minimises its liabilities in lucrative markets, such as Britain. Its overseas corporation tax rate tumbled from 2.5% to 1.9% in the year to October 2012. That compares to headline rates of 35% and 24% in the US and Britain” (Press, 28/1/13, “Apple: Taxman Denied Big Bite Of Apple”).

In May 2013 the US Senate Permanent Subcommittee on Investigations released a report citing Apple as the prime example of US TNC tax dodging. ”It estimates Apple avoided at least $US3.5 billion in US Federal taxes in 2011 and $US9 billion in 2012 by using its tax strategy and described a complex set up involving Irish subsidiaries…Apple uses five companies in Ireland to carry out its tax strategy, according to the report. The companies are at the same address and share members of their boards of directors. While all five companies were incorporated in Ireland, only two have tax residency in that country. That means the other three are not legally required to pay taxes in Ireland because they are not managed or controlled in that country, in Apple’s view. The report says Apple capitalises on a difference between US and Irish rules regarding tax residency. In Ireland, a company must be managed and controlled in the country to be a tax resident. Under US law, a company is a tax resident of the country in which it is established. Therefore, the Apple companies are not tax residents of Ireland or the US, in Apple’s view” (New Zealand Herald, 23/5/13, “Apple’s Boss Defends Tax Strategy During Senate Grilling”. Apple’s Chief Executive Officer, Tim Cook, was unapologetic, telling the Subcommittee: “We pay all the taxes we owe, every single dollar”. That is the standard TNC answer, worldwide). No wonder Apple is now “neck and neck with ExxonMobil as the world’s most valuable company. Apple’s enormous profits mean it has more cash stashed overseas than any other company - $US102 billion” (ibid. And that figure is up from the $US94b cited in the January 2013 Press article quoted just above). “The Subcommittee has also examined the tax strategies of Microsoft, Hewlett-Packard and other multinational companies, finding that they too have avoided billions in US taxes by shifting profits offshore and exploiting weak, ambiguous sections of the tax code” (ibid.).

The definitive recent work on tax havens is “The Price Of Offshore Revisited: New Estimates For ‘Missing’ Global Wealth, Income, Inequality And Lost Taxes”, by James S. Henry, Tax Justice Network, July 2012, It was reviewed by Jeremy Agar in Watchdog 131, December 2012,

New International Tax Law

Something has to give and in July 2013 it did. “The biggest shake-up in international tax law since the 1920s is underway following the release of an ‘ambitious’ 15 point plan to tackle multinational tax avoidance at a meeting of the G20 (Group of 20 – of the world’s richest countries) in Moscow. The OECD will draft new model laws over the next one to two years designed to prevent multinationals avoiding paying taxes on their profits….At a Paris media briefing earlier in the week OECD tax boss Pascal Saint-Amans said $US2 trillion of accumulated profits were being held in the Cayman Islands and Bermuda tax havens. ‘Our rules have not prevented artificial shifting of profits to low or no tax jurisdictions. You can have two men and a dog in Bermuda managing assets of hundreds of billions. This is wrong, we need to fix it’. The action plan will see the OECD draft new rules and create a ‘model tax convention’ to address issues raised by hybrid mismatch instruments, transfer pricing and thin capitalisation rules, commissionaire schemes and controlled foreign companies (CFCs), all of which can be exploited to avoid tax….The work programme tackling hybrid mismatches would ‘neutralise’ the tax benefits of financial instruments that might, for example, be treated as an interest-bearing bond in one jurisdiction and a dividend-yielding share in another, he said. The OECD would develop ‘best practices’ for the treatment of CFCs that would let countries tax profits that had been created for tax purposes in low or no-tax jurisdictions, Saint-Amans said. ‘This is new; it has never been done before’.

“Action point seven may be particularly relevant to New Zealand. It will tackle ‘commissionaire arrangements’ such as those used by Microsoft and Dell in New Zealand, whereby they book their sales overseas and pay their subsidiaries a commission on sales. ‘You have what is a distributor making double digits profit but suddenly you shift all the risks through contractual arrangements to another company in the group and what is left is very low risk activity that will earn a small margin above costs’” (Press, 20/7/13, “Nations To Draft New Tax Laws”, Tom Pullar-Strecker).

Make The Rich Pay

The devil is in the detail, the proof of the pudding is in the eating and all those other clichés – so let’s see what sort of a new international tax law the OECD can produce in a year or two (meaning the tax dodging TNCs are free to carry on creaming and hiding their trillions of ill-gotten profits in the meantime). At least it’s a start, a first step to deal with something that is such a huge international scandal that even the world’s richest countries (including New Zealand, as an OECD member) have finally got pissed off about it. This whole thing illustrates the fact to which sovereign governments have wilfully turned a blind eye, namely that transnational corporations, some individually but certainly as a collective economic/political entity, are more powerful than States, even the biggest and richest ones. TNCs are simultaneously stateless and a State unto themselves. Nobody gets to vote for them, but what they do adversely affects all of us, both nationally and internationally. Belatedly, sovereign governments, who are, at least theoretically, answerable to their people as voters and taxpayers, have decided to start doing something about it. What is required is a practical domestic and international enforcement of that self-evident, time honoured maxim: “Make the rich pay!” That’s where the money is going to come from, and about bloody time too.


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