Dodge City

The Transnationalsí Favourite Place To Do Business

- Murray Horton

Articles about tax in general, and tax dodging in particular, tend to be instant cures for insomnia. That is exactly the effect the transnational corporate criminals want, because they deliberately structure their rorts and fiddles to be as labyrinthine and impenetrable as possible. Of course they do, because they’re concealing crimes, namely of stealing from the world’s peoples and not paying their fair share. Transnational tax dodges are given colourful but confusing names. You might be disappointed to learn that the “Dutch sandwich” and the “double Irish” is not a business lunch featuring a hearty snack followed by a couple of pints of Guinness. The language of the subject is more double Dutch than double Irish, I’m afraid. But please have a strong cup of coffee (a “double shot” perhaps) and read on, because this is a subject that affects all of us, not only in this country, but around the world. It is one of the numerous negative effects of this much vaunted “globalisation”, which operates to a business plan that Genghis Khan understood very clearly – namely the licence to loot and pillage on a global scale.

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 (in that case it is being used as the justification to flog off the city’s hugely valuable portfolio of publicly owned assets, a move that is entirely driven by neo-liberal ideology and nothing else). 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, they 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?” Let’s start with getting it from the TNCs that are bludging off New Zealand taxpayers.

Google, Facebook, Apple: 0.4% NZ Tax Rate

Transnational corporate tax avoidance involves serious money, for instance, the $2.2 billion which the Big Four Australian banks agreed to pay in 2009 to get the Inland Revenue Department (IRD) off their backs (the biggest tax dodging settlement in NZ’s history). TNCs will go to great lengths to dodge taxes e.g. MediaWorks restructured in 2013 and was thus able to “walk away” from a $22 million tax debt. The likes of Cadbury pay derisory amounts of tax or none at all in New Zealand because of various international tax rorts that are available to TNCs (but not to local businesses, let alone “Mum and Dad” taxpayers). To quote a Businessday column in the Press: “Together, Google, Facebook and Apple made an estimated $750 million out of New Zealanders in the last tax year (2013) but paid less than $3 million in tax – that works out to a tax rate of 0.4%. On the other hand, the New Zealand company tax is 28%” (20/1/14, “The Argument For Clear Rules And Swift Justice”, Mike O’Donnell, http://www.stuff.co.nz/business/opinion-analysis/9621840/The-argument-for-clear-rules-and-swift-justice).

If TNCs were made to pay their share of NZ taxes (and I’m not calling it “their fair share” because the tax rates for businesses have been cut and are too low), the State would have billions more available for the needs of the New Zealand people, such as education and health. If those tax rates were restored to what they were until recently, let alone increased from that to a more realistic level, there would be yet more billions available for the common good, as opposed to the shareholders and grossly overpaid chief executive officers (CEOs) of transnational corporations.

IRD Closes Down Some Rorts

“Foreign companies….find innovative ways to use overseas entities to charge expenses against their New Zealand operations, with the effect that what would have otherwise been New Zealand-based profits are shifted to some overseas jurisdiction” (Press, 23/9/14, “Fancy Trying A Dutch Sandwich? Not If You’re A Kiwi”, Geordie Hooft, Taxing Matters). 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 is 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. “Both ‘optional’ and ‘mandatory’ convertible notes - OCNs and MCNs - were widely used to turn debt into equity and vice versa to exploit differences between the Australian and New Zealand tax codes in the first half of the last decade. Among those caught in a dragnet of Inland Revenue Department anti-tax avoidance operations targeting these devices have been Qantas, Transfield, Telstra Corp, Toll Holdings, and Ironbridge, the former owners of Mediaworks, which runs the TV3 and RadioLive networks. A test case, involving West Australian firm Alesco, nearly went all the way on appeal to the Supreme Court, before Alesco's owners decided to cut a deal with the IRD rather than fight an apparently lost cause.

“… The latest such win in New Zealand, buried in the prospectus for the Hirepool float announced (in June 2014), is the company's abandonment of some $58.3 million of tax losses, involving not quite clever enough use of convertible notes to fudge debt and equity between New Zealand and Australian interests…Hirepool's MCNs are likely to have dated the deal in 2006 when Auckland investor couple Sharon Hunter and Tenby Powell sold 80% of Hirepool to Next Capital, an Australian private equity investor, for $174m. By selling some of their shares into (Hirepool’s) float, Next and other shareholders expected to bank between $43.2m and $125.2m, depending on the strike price. No doubt, they had hoped at one time to crystallise at least some value from the $58.3m of tax losses accrued on the Hirepool balance sheet. Assuming a dollar of tax loss converts to 28 cents in the hand at the current company tax rate of 28%, those losses may have been worth around $16.3m in avoided tax. However, those efforts were formally abandoned (in June 2014), when a settlement was reached with IRD. The tax losses appear to have been a loose end needing a tidy-up before the Hirepool prospectus could be registered. While $16.3m in tax clawed back might not sound much, every $16.3m won for the taxpayer adds up, and action against abuses involving MCNs and OCNs are expected to realise as much as $300m in back tax and penalties. However, victories of this size don't start to touch what could be achieved if multi-national corporations that play the tax field were paying a fair whack in every country where they make money” (Press, 19/6/14, “Time To Pay Some Tax, Facebook?”, Pattrick Smellie, http://www.stuff.co.nz/business/opinion-analysis/10174687/Time-to-pay-some-tax-Facebook).

But Big Boys Laugh All The Way To The Tax Haven

IRD’s 2014 Annual Report revealed that 11 other Australian TNCs had settled with it after its victory against Alesco’s use of MCNs to reduce its NZ tax bill. IRD stated that those 12 companies agreed to make good tax discrepancies of $355.8 million – a sum not to be sneezed at, but one which represents only a fraction of the tax not paid by TNCs in this country. The aforementioned giant American digital communications, social media and online retail TNCs are front and centre when it comes to tax dodging. Apple made $571 million in NZ in 2012 but paid only $2.5 million in tax. And that’s as good as it gets. Amazon made $46.5m that same year and paid $1.6m in tax. Google trumped them - it made $140m and paid only $165,000 tax. Facebook was an even bigger dodger.

It’s worth mentioning at this point that Apple has the biggest amount of cash of any TNC bar none (and has it stashed out of the reach of the American, and any other, tax man). According to a graphic in Time, quoting 2013 figures, Apple has $US158.8 billion global cash reserves (8-15/9/14, “Who Has The Most Cash? Measured by cash hoard it’s Apple. Many corporate coffers dwarf those of countries”). To prove the point, Australia is listed in the same graphic as having global cash reserves of $US42.5 billion. New Zealand doesn’t rate a mention.

“So let me get this straight. Facebook, the vast, online, global web of family, friends and contacts, worth US$165 billion (NZ$190b) at last count and with global revenues in the first quarter of the current financial year of US$2.5b, made a loss in New Zealand last year (2013) of $82,810. What an oddly specific number. This ‘loss’ was ‘earned’ on total revenue in this country of just $846,391 - also oddly specific, and a sum rendered in return for unspecified services by the New Zealand arm of Facebook, whatever that is, to Facebook Ireland.

“Ireland has very accommodating corporate tax laws, often involving a structure known as ‘the double Irish’, where two subsidiaries are registered in Ireland and one routes its revenue through a fully-fledged tax haven, as often as not located in the Caribbean. Other multinational firms taking advantage of such cosy arrangements include Apple, Microsoft, Google, Oracle, Cisco, eBay, Johnson & Johnson, Pfizer, Merck, and Bristol-Myers Squibb. One of the fringe benefits of owning a global social network empire is that you can domicile the thing wherever you like and pay only as much tax as you choose. In Facebook's case, it declared tax of $23,034 in New Zealand last year (2013) in its mandatory Companies Office filings - just about the only detail discoverable about Facebook's New Zealand operations - which is a bit odd, since the local unit also declared a loss, so it's not obvious why any tax was owing” (Press, 19/6/14, ibid.).

Oregon Group: 0.23% Average NZ Tax Rate

TNCs are very adroit at exploiting tax breaks. Tim Hunter, writing in the Sunday Star Times (2/2/14; “Tax Breaks For Foresters”), highlighted the situation in that sector. Malaysian TNC Ernslaw One is the fourth biggest forestry company, owning around 100,000 hectares. Companies Office documents for its parent, Oregon Group, “indicate an average tax expense since 1999 of 0.23%” i.e. $1.6m tax on total pre-tax profits of $701.7m. Ernslaw One itself is very “unprofitable”. “Over the 17 years records are available the business racked up pre-tax losses of $190.6m”. The ultimate owner of Ernslaw One and Oregon Group is the Tiong family’s patriarch, Hiew King Tong, who has a estimated net worth of $NZ2.2 billion. The biggest forest owner is Hancock Natural Resource Group, with 176,000 ha. Its’ Taumata Plantations (a holding entity for several foreign insurance and investment funds) has racked up collective losses of $595.5m, since 2006, with accumulated tax benefits of $126m. American-owned Rayonier, the third biggest forest owner, paid an effective tax rate of only 7.6% since 2000.

Writing as Chalkie, Tim Hunter (who is Fairfax Business Bureau Deputy Editor) had a weekly half page column in the Press and other Fairfax papers (I say “had” because it has not reappeared in 2015, more’s the pity). In 2014 he returned time and again to the issue of TNC tax dodging, a sure sign that this is an issue that has achieved break through into the mainstream media. For example: Press, 20/8/14, “We Need To Talk About Who Pays Tax”, http://www.stuff.co.nz/business/opinion-analysis/10400785/We-need-to-talk-about-that-red-carpet-rollout. “...Why would an overseas buyer pay more for an asset than a New Zealander? Is it because they can accept lower returns on capital? Perhaps. Is it because they can sweat the asset more? Again, perhaps. But Chalkie reckons one reason stands out - tax. There are huge tax advantages available to overseas investors that simply cannot be accessed by locals. They crank up the returns available to foreign buyers and make New Zealand assets worth more to overseas owners than to New Zealand residents.

“One of Chalkie's favourite examples is Wellington Electricity Distribution Network, owner of the power lines carrying electricity around the capital. Wellington Network was acquired in April 2008 by Cheung Kong Infrastructure Holdings for $785 million, from listed network company Vector. …As a regulated utility, Wellington Network's returns are controlled by the Commerce Commission, so there was little scope for the new owner to make more money from it than Vector could. At the time, CKI's Managing Director, Kam Hing Lam, said: ‘Upon completion of the transaction, Wellington Electricity Distribution Network Ltd will bring in immediate profit contribution to CKI’. Oddly enough, since CKI took it over Wellington Network has made nothing but losses. Of course, those losses are not real and CKI did not pay $785m for a duffer”.

“On A Cash Basis, It Appears That The Business Paid No Actual Tax At All”

“Wellington Network is in fact highly profitable, with an earnings margin consistently around 30% before interest and tax. What drags it into ‘loss’ is interest on its’ huge debts. Under CKI's ownership, Wellington Network's debt has consistently been around 80% of its total assets. This contrasts with typical corporate behaviour since the financial crisis of 2008, whereby gearing is kept below 50% and often 40%. Of the network's debt, around $300m was due to related parties at a premium interest rate. In 2012, for example, the related-party debt cost 12.5%, compared to the commercial rate of 6.97%. In cash terms that worked out at $54m paid in related-party interest and $31m in bank interest. The interest payments greatly exceeded Wellington Network's earnings before interest and tax, producing a loss - and a corresponding tax benefit - every year until 2013. In the last six years, the only tax expense recorded by Wellington Network was $2.2m in the year to December (2013). On a cash basis, it appears that the business paid no actual tax at all.

“The structure works because related-party debt allows overseas-owned companies to benefit from much higher levels of gearing than a locally owned company could. Wellington Network borrows the money from a CKI company registered in the British Virgin Islands (BVI), which has a branch in New Zealand, and in each of the last two years paid tax of just under $1m. So CKI manages to pay virtually zero tax in New Zealand, but it presumably pays tax in its local jurisdiction, right? Er, no. Wellington Network is owned by an entity in the Bahamas, where, like BVI, the tax system is a warm bath for companies to float in the dark and listen to the sound of money - no company tax, no withholding tax, no capital gains tax, nothing…

Chalkie reckons we should welcome foreign investment, but not so much that we meet it at the airport with the tax equivalent of a red carpet on the tarmac, a chauffeur-driven limousine, free accommodation at Kauri Cliffs and an invite to John Key's house for drinkies every Friday night. Whatever the benefits of overseas ownership - and there will be some - Chalkie reckons we should also take account of the costs. The issue is the same whether the assets are companies or farmland. The would-be buyer of Lochinver Station near Taupo has been named as Pure 100 Farm, described by the Overseas Investment Office as ‘a wholly owned subsidiary of Shanghai Pengxin Group’. It may be, but its immediate parent is Milk New Zealand Holding, owner of the former Crafar and Synlait farms in Waikato and Canterbury. Milk New Zealand Holding is wholly owned not by Shanghai Pengxin, but by Milk New Zealand Investment, a company registered in the British Virgin Islands. The ownership was disclosed to the Companies Office on August 13 (2014). Chalkie reckons owning New Zealand farms through a Caribbean tax haven may have tax advantages - or is that xenophobic?”  Needless to say, CAFCA totally disagrees with Chalkie’s statement that “we should welcome foreign investment” but his columns were the most informative items in the Fairfax papers in any given week, always worth a read, packed with facts and well considered opinion. Maybe that’s why Fairfax has stopped them.

Luxembourg: An Embarrassment To First World Capitalism

A more recent Chalkie column on tax dodging was titled “Richlisters In Swanky Euro-Tax Company” (Press, 17/12/14, http://www.stuff.co.nz/business/opinion-analysis/64224097/cunning-convertibles-put-rich-listers-in-luxe-crew). This analysed the revelations from a huge leak of tax documents hacked from accountancy transnational PwC, “using the helpful attitude of Luxembourg, a zit on the face of Europe. Embedded next to Germany, Belgium and France, the zit's economic role is to nurture tax sheltering the way agar gel nurtures bacteria, in the process accumulating financial pus from all over the world, including New Zealand.

“Among the 548 tax rulings published in the Luxembourg leaks is one covering the Catalyst Buyout Fund 2, an investment fund run by Australian private equity firm Catalyst Investment Managers that raised $A438 million in 2009. The Fund's aim was to invest in ‘established cash-generative businesses with top-line growth prospects, typically with enterprise values between $A75m and $A400m and headquartered in Australia or New Zealand’. The Fund's investors included major Australian pension fund firms IFM, Australian Super, Unisuper, as well as investment firms Macquarie, Axa and ING.

“So this is a fund targeting investments in Australia and New Zealand, whose investors are mainly Australian, run by an Australian private equity firm…The fund structure appears to be based on a limited partnership in the Channel Islands tax haven of Jersey. This partnership owns 100% of a private limited company in Luxembourg, which in turn owns 100% of a private company in Sweden. The money flow is from Jersey to Luxembourg to Sweden, with the latter doing the actual investment in the ‘acquisition structure’ in Australia or New Zealand. Why would Jersey, Luxembourg and Sweden be hosting a private equity fund focused on activities on the opposite side of the world? There's a one-word answer – tax.

“In this case the tax issues involved the funding mechanism in which Jersey funded LuxCo in exchange for Luxco shares and a special piece of paper called a convertible preferred equity certificate, or CPEC. The split was such that $100m of funding, say, would be $1m in equity and $99m in CPECs. LuxCo would fund SwedenCo on the same lines. These CPECs are the cunning key to many of Luxembourg's tax structures because they are simultaneously equity and debt, depending on which eye you squint at them through…

“Exactly what Catalyst has done with its fancy tax structure in New Zealand is unclear - the firm hasn't said whether Fund 2 has bought anything here, although a previous fund invested in retailer Ezibuy and sold it to Woolworths last year (2013). Still, Catalyst would have some classy Luxy neighbours to talk to about tax. Other fiscally tight-fisted firms there include Amazon, Apple, All Blacks’ sponsor AIG, advertising and PR firm Interpublic, media streamer Netflix, telco Vodafone, financial services firms AMP Capital, AXA, Deutsche Bank - even the Australian government's Future Fund is in there. And PwC is not the only accountancy firm helping them with their hybrids. The leaked files include deals brokered by EY, Deloitte and KPMG…

“…The fact is that numerous international players make use of Luxembourg's favourable jurisdiction and (2014’s) leaks reveal the friendliness of the Duchy to their tax problems. The issue has triggered outrage among Luxembourg's European partners, and embarrassment for Jean-Claude Juncker, former Luxembourg Prime Minister and current President of the European Commission, the European Union's leadership body. This month (December 2014) the Finance Ministers of Germany France and Italy urged the EU to draft a Europe-wide tax code to outlaw corporate tax avoidance and prevent member states from offering sweetheart tax deals. Similar measures are now being discussed at the Organisation for Economic Cooperation and Development (OECD) and the Group of 20 (G20). Chalkie looks forward to some progress. It will be a fine day when smart people no longer waste so much energy on dodging tax. If it comes, we will have the publicity of leaks to thank. Peer pressure is a powerful force”.

NZ Rolls Out The Welcome Mat To TNC Tax Dodgers

Chalkie was very good at highlighting the many and various obscure ways used by TNCs to dodge tax. Yet another of his columns (Press, 8/10/14; “There’s A Hole In My Tax Base”, http://www.stuff.co.nz/business/opinion-analysis/10590687/Kiwis-missing-out-from-hole-in-our-tax-base) was accurately subtitled: “In The Global Fight Against Tax Avoidance, New Zealand Seems Bent On Being Part Of The Problem”. This analysed the soporific Tax (International Investment and Remedial Matters) Act of 2012. “The tax cut in the Act allowed foreign investors to pay zero New Zealand tax on interest from New Zealand corporate bonds. The idea was to stimulate the bond market and make it cheaper for local companies to borrow money by issuing bonds… (The Act) cut a fee called the approved issuer levy (AIL) from 2% to zero on bonds sold to multiple investors, such as retail bonds issued on the NZX”.

After a very detailed analysis of figures, Chalkie concluded: “Chalkie reckons these numbers imply New Zealanders are paying more tax on their lending to local entities than foreigners are. This is particularly likely to be the case if the foreign lender is located in a tax haven. If you're in the Caymans, say, the AIL means you pay no tax in New Zealand, while you also pay no tax in the Caymans…. In the end, Chalkie reckons what we have inadvertently created here with the AIL is a system that contributes to global corporate tax avoidance because it allows a wide range of entities to operate completely outside any tax system….After all, if this was really about lowering the cost of capital for NZ companies why not think about some sort of tax break for NZ investors? Yes, there are no simple answers in tax policy, but creating huge loopholes for the benefit of international tax avoiders is surely not the best option”. And so say all of us.

For a brief period it looked like TNC tax avoidance might become an election issue in 2014. Labour said that, if elected it would tackle “aggressive tax avoidance”. The then finance spokesperson, David Parker, said: "Facebook and Google take hundreds of millions of dollars out of the New Zealand economy through advertising, pay virtually no tax and they do that because they construct their affairs in a way which either says the income isn't earned from New Zealand or if it is, even if it's providing services to New Zealanders, they construct arguments and their affairs in a way that they have no New Zealand taxable income" (New Zealand Herald, 7/1/14, “Foreign Firms Face Tax Clash”).

The Herald followed up with an editorial supporting Labour on the subject. “Tax avoidance is a wretched business. Nobody in business who stops to think about the benefits they derive from public services can feel comfortable avoiding their fair share of tax. That guilt should be felt particularly by Internet companies based in the United States when they consider how university and military investment founded their industry. Their debt to US taxpayers far exceeds the taxes they ought to be paying…Global information networks present a particular taxation problem. They are akin to exporters of goods and services and exporters do now normally have to pay tax in their foreign markets. But exporters of manufactured goods and physical services have a production centre somewhere in the world. Companies that design Websites, run servers and make money online can base themselves wherever taxation is minimal. This is a global problem requiring a global solution… ’Aggressive avoidance’, as this is called, deserves an aggressive response. It is a mission Labour should vigorously pursue in the national interest” (13/1/14, “Labour Right To Tackle Tax Avoidance By Online Giants”, http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11185239).

But, as we know, Labour suffered its worst election defeat in 90 years at the 2014 election and is not in any position to implement any such policies on tax (or anything else) while it continues to languish in Opposition. Labour’s current finance spokesperson, Grant Robertson, has said that TNC tax dodging will be one of the subjects of the Party’s upcoming tax review. But who knows if such a policy is a priority any longer under new Leader Andrew Little, with him obviously intent on regaining the “Centre Right” ground from National (more Right than Centre, in reality), after what were touted as the “Centre Left” policies of former Leader David Cunliffe.

TNCs Go On Assiduously Dodging NZ Tax

“Microsoft denies a transfer of ownership of its New Zealand business from the United States to Luxembourg is related to the tiny European state's favourable tax policies. Luxembourg, which has a population of less than 600,000, has been accused of facilitating large-scale tax avoidance by multinationals. Microsoft New Zealand was owned by Microsoft Corp in Redmond until just before Christmas (2014), when its shareholding was transferred to Microsoft Luxembourg International Mobile, Companies Office records have revealed. Five days before the transfer, Britain's Guardian newspaper reported that Microsoft subsidiary Skype had been using two Luxembourg companies and an Irish subsidiary to ‘circulate royalties and profits’ in a manner that had allowed its Luxembourg-based entity to pay no corporation tax for five years.

“Microsoft responded to those claims by saying it followed the law in all the countries in which it operated. Microsoft New Zealand spokesman, Brendan Boughen, said the feedback he had received from the subsidiary's tax team, through its legal counsel, was that the transfer of ownership of Microsoft New Zealand to its business in Luxembourg was ‘entirely unrelated to tax issues but was part of an internal restructuring of Microsoft's marketing subsidiaries’. The European Commission ruled this month (January 2015) that the tax treatment offered by Luxembourg to US technology giant Amazon was illegal and had allowed Amazon to operate almost tax-free in Europe. Luxembourg was the accounting home for about of a fifth of Amazon's $US74.6 billion annual revenues in 2013, Reuters reported. Organisation for Economic Co-operation and Development Tax Director Pascal Saint-Amans, who is leading an unprecedented multilateral drive to close down multinational tax rorts, told Stuff in October (2014) that Luxembourg was coming under ‘enormous pressure’ to end some of its practices… (Microsoft’s) New Zealand subsidiary last reported a profit of $8.1 million on revenue of $78m in the year to June 2013, paying $3.9m in tax and a $7.3m dividend to its US parent” (Press, 29/1/15, “Microsoft NZ Denies Tax Avoidance”, Tom Pullar-Strecker, http://www.stuff.co.nz/business/industries/65499276/microsoft-nz-ownership-transferred-from-us-to-luxembourg).

And, not to be outdone, our old mate Insurance Australia Group (IAG) “recorded a ‘significant portion’ of its Canterbury earthquake costs in the group’s ‘captive vehicle in the lower-tax jurisdiction of Singapore’. The entity provides excess of loss cover to group entities outside Australia and meant IAG paid an unusually low tax rate of 10% in the first half of 2015” (Press, 19/2/15, “EQC Holdups Delay Work”, Tim Fulton). It’s worth reminding readers that IAG was the runner up in the latest (2014) Roger Award for the Worst Transnational Corporation Operating in Aotearoa/New Zealand (see the article elsewhere in this issue, detailing why IAG got the silver medal. And the full Judges’ Report can be accessed at http://canterbury.cyberplace.co.nz/community/CAFCA/pdf/roger-award-2014.pdf ).

TNC tax dodging is an issue that has achieved the tipping point of pissing off Rightwing and/or populist media commentators. For example, Mike Yardley, who writes a weekly column in the Press. “Time The Corporate Giants Paid Their Fair Share Of Tax” was the title of his March 3, 2015 one, in which he asked “whether New Zealand is making sufficient strides to combat the unremitting greed of the digital economy’s global giants”, and urged the Government to be “a fast follower” of Britain’s brand new “Google tax” (see below).

Global Problem

Obviously, this problem is not confined to New Zealand; it is, by definition, transnational. “The largest companies in Australia have been able to dodge $A80 billion in tax between 2004 and 2013, argued the United Voice union and the Tax Justice Network. In their joint report ‘Who Pays For Our Common Wealth?’, they found that, of Australia’s 200 top Stock Market listed companies, 84% of them paid less than the company tax rate of 30%” (Vanguard, November 2014, “Big Business: The Real Tax Bludgers!”,  Max O, http://www.cpaml.org/web/uploads/November+2014+o.pdf).

“If income inequality and the wealth share of the ‘1%’ were the room-clearing economic issues of the past few years, corporate tax dodging is shaping up to be a focus of the next few. President Obama recently used the word deserters to describe firms that have attempted to lower their tax rate by acquiring foreign firms, chiefly in order to switch to lower-tax jurisdictions. A few days ago, Treasury Secretary Jack Lew upped the ante by pushing Congress to take legislative action against such firms, as well as hinting that the Administration itself might try to regulate away inversions.

“The stakes are high. Corporations in the US today are hoarding about $US2 trillion in profits overseas, arguing that the US corporate tax rate of 35% makes it too difficult to bring this cash home and invest it here - better to keep the money abroad and pay lower taxes in other countries. Yet the truth is that legions of tax lawyers make sure that most big American corporations never pay anywhere close to that rate. Fortune 500 companies on average pay more like 19.4%, and a third pay less than 10%, chiefly because of all the generous loopholes Congress has afforded corporations over the years. Partly as a result, US firms are enjoying record profit margins, making more money than ever before, yet paying a lower share of the overall US tax pie than they have in decades.

“While there are plenty of creative ways for corporations to avoid paying US taxes by stashing money in Ireland, the Netherlands or the Cayman Islands, inversions go a step further: those companies are more or less renouncing their corporate citizenship to avoid taxes. They want the benefits of US talent and markets but not the responsibilities. This strikes many as grossly unfair, particularly given that taxpayer-funded, early-stage investments in areas like the Internet, transportation and health care research are the reason many of the largest US companies got so big and successful to begin with. That’s a leg up - call it corporate welfare - that most firms conveniently forget when they start looking for places to hide their profits. As the academic Mariana Mazzucato argues in her excellent book ‘The Entrepreneurial State’, many of the most lauded corporate innovations, including the parts of smartphones that make them smart (Internet, GPS, touchscreen display and voice recognition), came out of State-funded research. Ditto any number of pharmaceutical, biotech and cybersecurity innovations. ‘In so many cases, public investments have become business giveaways, making individuals and their companies rich but providing little return to the economy or the State’, says Mazzucato.

“Tax inversions that expatriate the gains of American corporations to enrich a tiny managerial caste symbolise a whole new genre of selfish capitalism. Globalisation allows firms to fly 35,000 feet over the problems of both nations and workers, who are all too familiar with the reality on the ground - an economy in which wages still aren’t rising, good middle-class jobs remain hard to come by and public deficits remain large, since the private sector won’t spend to fill the void. Economics 101 tells us that when one sector saves, another must spend, but the textbooks didn’t anticipate this….

“Pressed on their overseas tax dodging, corporations say they’ll stop looking for better deals abroad only if the corporate rate shrinks (they also want a tax holiday to repatriate foreign earnings). While we should cut and simplify our tax code to put it in line with those of other developed countries (25% would be fine), the last time the US offered a tax holiday, back in 2004, most of the repatriated money went to stock buybacks and dividends - not investments in factories and workers. A new relationship between corporations and the US Treasury is what’s really needed. Treasury’s Lew should push for changes to the tax code that would reduce the appeal of inversions to companies that pursue them. That would mean taking on corporate lobbyists and the money culture that has turned the tax code into Swiss cheese. As the inversion debate makes so clear, it’s about time” (Time, 22/9/14, “The Artful Dodgers: Companies That Flee The US To Avoid Taxes Have Forgotten How They Got So Rich In The First Place”, Rana Foroohar, The Curious Capitalist, http://time.com/3326573/the-artful-dodgers/).

UK’s New “Google Tax”

In Europe the powers that be have moved beyond the handwringing stage and started taking long overdue action against tax dodging TNCs. In January 2014 it was reported that Google was facing a British tax bill of at least ₤24 million. “The charge relates to US shares given to Google staff in London, and billed to the company’s Irish subsidiary, thereby reducing its past corporation tax payments in Britain. Such share payments, which have also been made by Apple, Amazon and Facebook, have come under scrutiny by HM Revenue & Customs, because the multinationals have counted them as a tax-deductible expense. The four US technology companies have collectively paid millions in shares to UK staff while avoiding up to ₤1 billion a year in tax in Britain, according to a Sunday Times analysis” (Press, 6/1/14, “EU To Get Tough On Google Tactics”). David Cameron’s Tory government went further and instituted a new 25% “diverted profits” tax (popularly called “the Google tax”) which aims at punishing TNCs which use rorts like the “double Irish”. It came into effect in April 2015.

Attempt At Global Solution

International action by states is the only way to deal with transnational corporate tax dodgers. In February 2014 the G20 (with New Zealand tagging along as Number 21, invited by the host, Australia) “backed a draft plan from the OECD to clamp down on companies such as Google, Apple and Amazon, and agreed to implement a standard for automatically exchanging information between tax authorities by 2015” (Press, 24/2/14, “Tax Evasion, Havens On G20 Hit List”, Andrea Vance). In September 2014 the OECD released seven recommendations for its Action Plan on Base Erosion and Profit Shifting (BEPS). They included improved transfer pricing requirements and preventing the abuse of double tax agreements (transfer pricing is where a TNC declares a loss in a country with a higher tax rate and its profit in a country with a lower one). Other measures include:

“Country-by-country reporting: TNCs will have to report to tax collectors the geographic distribution of taxes, revenues, number of employees and assets for each country where they operate. This is a considerable step forward, because it would help national tax collectors have a comprehensive view of the TNC and allow them to spot any inconsistency in the allocations. The OECD only considers filing of the reporting with tax administrations. Public disclosure, or even partial disclosure, is not under consideration, despite being required already by other similar reporting frameworks in Europe and in the United States….”

Big Business Calls For Lower Global Tax Rates

“…Unsurprisingly, business groups, tax lawyers and auditing firms have so far shown fierce resistance to any ambitious outcome of the BEPS Action Plan. Their participation in the numerous consultation rounds has been massive with over 400 pages of comments being submitted by business groups alone in the last round on the digital economy. Alongside traditional lobby groups, the business voice is heard through non-financial TNCs (such as Rio Tinto, Procter), global banks and asset managers (Black Rock), audit firms (PwC, KPMG & Deloitte) as well as a mysterious ‘Digital Economy Group’ represented by the law firm Baker & McKenzie, but whose membership is kept secret.

“Apart from classic points on minimising the BEPS phenomenon (‘a few black sheep’, ‘don’t throw the baby out with the bath water’, etc.), business arguments include:

  • BEPS is about revolution, it will depart from ‘50 years of international consensus’ and that is simply too much to accept;
  • Paying tax is a business that is subject to market forces. Because of globalisation, cost pressures on TNCs are high and increasing. Like other expenditure categories, tax costs should be minimised, rightly so. 
  • It’s the fault of the governments who indirectly facilitated BEPS problems. Companies simply comply with the rules. 
  • The real focus should be on increasing tax certainty, facilitating arbitration and tax deals between individual TNCs and tax administrations. 
  • In the end, the best way to reduce the risk for BEPS is to agree worldwide on a corporate income tax of 15%. 

“Business groups are also strongly opposed to a number of specific BEPS measures. We are warned that foreign direct investment flows would vanish should there be any restriction to debt service deduction from the corporate income base (a key deliverable on ‘hybrid mismatch’), or to offshore bank accounts (key to eliminate ‘treaty shopping’), particularly in developing countries. Naturally business groups are flatly opposed to any possible form of public disclosure of the country-by-country reporting framework” (Global Labour Column 188, November 2014, “The G20/OECD Base Erosion And Profit Shifting Action Plan”, Pierre Habbard, http://column.global-labour-university.org/2014/11/the-g20-oecd-base-erosion-and-profit.html#more).

Ireland Vows To End Loophole

“Hopes are rising that multinational companies operating in New Zealand may soon be paying a fairer share of tax. The French official leading the global clampdown on multinational tax rorts says the scrapping of the notorious ‘double Irish’ tax loophole shows aggressive tax planning is on the way out. OECD Tax Director, Pascal Saint-Amans, said tax planning had become the core strategy of some companies, which were competing on how much tax they could avoid rather than on the quality of their products….

“The BEPS project appeared to chalk up an early victory recently when Irish Finance Minister Michael Noonan announced the country would call time on the ‘double-Irish’ rort by 2020... Ireland's decision showed the BEPS project was being taken seriously and a game-changer, Saint-Amans said. ‘It is a recognition that the environment has changed and that tax planning will not be as it used to be, in the future. Companies should of course optimise and should plan, but to reduce marginally the tax burden, not to massively reduce it as the core element of their strategy’, he said…

“Saint-Amans said the OECD was on track to complete the BEPS project next year (2015) and told Fairfax he believed it could force Ireland to plug the ‘double-Irish’ loophole earlier than 2020. But he said that belief should be seen in context. ‘The overall tax planning of companies and what has been happening in the past 20 years is coming to an end, so it is not just about phasing out the ‘double-Irish’; it is about rethinking the overall strategy and do they need to rethink the overall strategy before six years? Oh yes’.

“He downplayed suggestions multinationals might simply switch to lesser-known loopholes, arguing that would not be simple. The same week Ireland moved on the ‘double-Irish’, Switzerland announced it would also put an end to tax regimes that had been considered harmful, he said. ‘The Secretary of State of The Netherlands has written to the Dutch Parliament to say it would have to make changes in 2015. Luxembourg is under tremendous pressure. It is not the case that there's one thing closing down, so they will shift to another country. All the countries are changing’.

“Saint-Amans said that assuming the BEPS project was successful and put an end to tax loopholes, that would still not mean countries would stop competing with one another by offering lower corporation tax rates in a bid to attract multinational business. Ireland's standard corporation tax rate is 12.5%, half the OECD average, while New Zealand's rate is 28%, for example. ‘What I would foresee is, if we put an end to double-non-taxation, tax competition will not go away. A number of countries may reduce their tax too, which is fine, so long as activities are taxed where they take place’, Saint-Amans said” (Press, 27/10/14, “Multinationals Feeling Heat On Tax Rorts”, Tom Pullar-Strecker, http://www.stuff.co.nz/business/industries/10665249/Multinationals-feeling-heat-on-tax-rorts).

The following subsection, including the subheading, is from the 2014 Roger Award Judges’ Report (which can be accessed at http://canterbury.cyberplace.co.nz/community/CAFCA/pdf/roger-award-2014.pdf ). ANZ was the winner.

“And Still The Bad Behaviour Continues

“And so on to 2015, when it has been disclosed that ANZ, undeterred by its 2009 prosecution and conviction for tax-dodging, has embarked on a new scam, playing off Australian and New Zealand tax laws to double-dip on tax benefits:

‘Five years after paying $413.7 million to settle a huge tax avoidance claim, ANZ Bank is under fire for a $1 billion deal that appears to ‘double dip’ on trans-Tasman tax benefits. The criticism follows the Australian bank's issue this month (March 2015) of $A970 million ($995 million) of hybrid securities to finance its New Zealand operations. Veteran businessman and tax campaigner Tony Gibbs described the issue as ‘very smelly’.

‘While the income on the notes counted as interest in New Zealand, generating a tax deduction for the New Zealand bank, it was treated as dividend across the Tasman, allowing Australian investors to access tax credits. ‘It sounds to me like double dipping’, he said. Normally, interest costs are a business cost and are tax deductible to the company, while dividends are paid from after tax profits and are not. However, ANZ's transaction achieves tax benefits at both ends of the deal….

‘The deal's structure involved the Australian bank issuing mandatory convertible notes (MCNs), which are a cross between equity and debt, through its New Zealand branch.  The New Zealand branch then used all the money to subscribe for similar notes issued by ANZ's New Zealand incorporated bank. …The Australian notes were issued with a dividend of 5.6%, comprising a cash payment of 3.9% and franking credits of 1.7%. The New Zealand tax deduction gives an estimated further saving in the bank's after tax borrowing cost, reducing it to about 2.3%’ (Dominion Post, 26/3/15 , “ANZ Hybrid Issue Seen As ‘Double Dip’”, Tim Hunter, http://www.stuff.co.nz/business/industries/67503078/ANZ-under-fire-for-1-billion-trans-Tasman-deal?cid=edm:businessday:dailybrief)

“Asked to comment, an ANZ spokesman [sic] said blandly that ‘the tax implications are described in the prospectus and were signed off by both the Australian and New Zealand tax departments before the transaction proceeded’. Watch this space – another Roger Award nomination may be in the offing”.

Make The Rich Pay

I last wrote about this subject as the lead article in Watchdog 133 (August 2013, “Artful Transnational Tax Dodgers: Squeeze Them Until The Pips Squeak”, http://www.converge.org.nz/watchdog/33/01.html). I’d like to think otherwise but somehow I doubt that this is a story that’s going to go away any time soon. The concluding subsection of my 2013 article is every bit as relevant now as it was two years ago, and will continue to be into the future. So, here it is again, two years later.

At least it’s (i.e. the BEPS Action Plan) 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.  

See Mike Treen’s article “Unite Takes On The Transnational Food Companies”, elsewhere in this issue, for details of McDonald’s tax dodging, both in NZ and globally. Ed.


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