Deborah Russell holds a PhD in Philosophy, specialising in political theory and ethics. She is also a tax expert. She was the Labour candidate for Rangitikei in the 2014 general election. She has been a Roger Award judge in 2015 and 16.

Big companies worldwide use all sorts of mechanisms to minimise their taxes. Most of the time, these measures are completely legal. For example, when companies locate all their borrowing in a country where they can get the biggest tax deduction for the interest they pay, then that’s a legally allowed manoeuvre, even if it seems wrong.  Many tax jurisdictions try to control these types of moves, but it’s not clear how successful they are.

New Zealand is like other countries in having laws that try to minimise the extent to which transnational companies (TNCs) can shift profits, or tax deductions, to try to pay the least tax possible. Our thin capitalisation rules limit the amount of interest deductions that can be claimed here, transfer pricing* rules constrain the prices for products and services exchanged between related companies, and our rules for where businesses are located, and therefore taxed, try to ensure that people and companies who do business in New Zealand are taxed here. * Transfer pricing is where the TNC declares losses in a country with a higher corporate tax rate and profits in a country with a lower one. Ed.

Finding Ways Around Tax Laws

But as fast as we develop law to ensure to ensure that those who earn income in this country pay tax in this country, transnational companies and their advisors find ways around them.  The methods they use are not necessarily developed here, but they are deployed here.

The so-called “double Dutch” tax planning method allows companies to more-or-less choose exactly how much profit they will book in New Zealand, and therefore how much tax they will pay.(1)  The method seems to be exploited very successfully by Uber. When a person in New Zealand takes an Uber ride, the fare for that ride is paid directly to a company in the Netherlands, Uber BV.

Then Uber BV pays a portion of the fare back to the driver in New Zealand who is responsible for her or his own GST and income tax, and the balance, about 20%, is split between another Uber company in the Netherlands, and their marketing company here in New Zealand. Because of the way that the tax rules operate in the Netherlands, the Uber company based there pays no income tax.

Meanwhile, the marketing fee paid to the New Zealand-based subsidiary is just enough to cover expenses here; so that very little taxable profit is booked and taxed here (Uber is a first time finalist in the 2016 Roger Award for the Worst Transnational Corporation Operating in Aotearoa/New Zealand. Tax dodging was one of the reasons it made the finalists. Ed.)

It’s an ingenious structure, and the net result is that Uber worldwide pays very little income tax at all, anywhere.  It can pick and choose how much tax it pays. This is all perfectly legal, at present. Uber is not the only company that does it: companies such as Facebook and Google do it too.  It’s comparatively easy for on-line tech companies to set up these structures. Some of the big credit card companies do it too.

It’s important to remember that not all the business activity channelled through these companies escapes taxation.  At last report, 80% of the fare charged for an Uber ride stays in New Zealand, in the hands of the driver, and it attracts GST and also income tax if the driver’s expenses are less than the fare income they earn.

I think that even if “double Dutch” tax planning is legal, it can nevertheless be described as immoral. And the immorality around tax planning is not limited to big transnational companies. It extends to the people who advise them and help them to set up the schemes, people to whom we give the title “professionals”, and it extends to the institutional structures of our societies.

The Immorality For Big Companies Is Clear

They are acting as free riders, taking benefits from the countries where they do business, but not contributing to any costs. New Zealand provides many benefits for companies who chose to do business here. Our population is well educated, thanks to our comprehensive education system, so we are well placed to consume high tech products and services. We have comparatively good healthcare, so employees are less likely to be unable to work for long periods of time due to illness.

We have a developed welfare system, so it is possible for people to work for fewer hours or to be on call for jobs, rather than all employment needing to be full time. This provides a reserve pool of labour for business. Provided this reserve pool of labour is not exploited to drive wages lower, and that people are happy to be part of the reserve pool from time to time, then having access to it provides real benefits to business.

To be clear, our health, education and welfare systems are all struggling in various ways, and it can be frightening and difficult for people to be dependent on them. Nevertheless, they provide a minimal level of security which contributes to a stable society. We also have the standard accoutrements of any First World society, ranging from the physical infrastructure of roads and telecommunications and public transport, to the less tangible structures of the rule of law, a competent and incorrupt judiciary, and a highly regarded democratic Parliament.

These benefits are all paid for in large part by our taxes. They are the structures of civilisation in our society. Famously, taxation is the price of civilisation. Yet these companies refuse to pay the price, at all. The companies however, develop their clever strategies by hiring the brightest tax lawyers and accountants they can. Some of these people are employed directly by the companies, others indirectly through professional services firms, such as the big transnational accounting and law firms.

They are people to whom we give the title, “professional”. To claim the title, “professional”, is to claim a certain status and standing in our society. Professionals are people who are highly educated, who are members of organisations that certify that they are of good repute, who have codes of conduct which they themselves police. They hold themselves out as good guys, people who can be trusted to behave with probity. They don’t have customers; they have clients, people they advise and lead.

For the most part, people who are members of the professions are ethical in their approach. And, in fact, the professionals who give advice to the big transnationals can claim that they are acting in their clients’ best interest. None of these schemes are illegal, and big companies have obligations to earn the best possible return for their shareholders, so by enabling the companies to minimise their tax, professionals are helping their clients to achieve their goals.

Even more than that, if we look into the companies’ shareholders, then we find that many transnational companies are ultimately owned by pension funds and insurance companies. These entities have an absolute obligation to earn the best possible return, because they provide income security for pensioners and a safeguard against disaster for everyday people and for all manner of businesses. Not trying to earn the best return possible would undermine the economic security that ordinary people count on.

There is a certain force to that argument. The ultimate owners of companies do need to be able to rely on their investments.  However, it is clear that the dispersed ownership structures of big transnational corporations are problematic. No one quite knows who owns what, or who controls what. That means that the lines of moral responsibility within big transnational companies are not clear. But that just means that boards and senior management need to work harder to understand their responsibilities, not just resign them to the mantra of greatest possible financial returns.

More to the point, when it comes to financial security, people don’t just rely on their investments in big companies. Citizens also rely on their governments to provide economic security. That’s the essence of the Welfare State, and of the myriad of institutions and practices within modern liberal democracies. They’re about providing a good life for their citizens, so that people may flourish.

Are “The Professionals” Just Out For Themselves?

And one of the institutions that modern liberal democracies rely on is the professions. From setting entry standards for members, to contributing to the development of policy and legislation, to speaking truth to power when political leaders make missteps, professions act as a source of wisdom that stands apart from Government. Like the universities, professions have a role as critic and conscience of society, and as part of the edifice that keeps our society functioning effectively.

Examples of professions, and professionals, taking on this role are common. The New Zealand Medical Association comments on the health budget and on Government health priorities, the New Zealand Law Society comments on constitutional matters, Chartered Accountants of Australia and New Zealand actively contributes to the development of legislation. The professions embrace their role in the wider community.

When individual professionals use their expertise to minimise the tax paid by big transnational companies, they are creating a conflict for themselves between their roles as advisors for clients, and their roles as part of the fabric of our society. I think that this conflict is largely unexamined, and even if it is, it is usually resolved in favour of obligations to individual clients. Perhaps that’s why some tax accountants and lawyers so early pursue new ways to minimise tax obligations for Big Business.

They can say they’re just doing their job. But it’s time for them to examine whether this is really consistent with their role as professionals. And it’s time for professional bodies to have a long, hard, discussion about their obligations as part of the structure of civil society. Are they part of our society, part of our system of government, part of the institutions that help to ensure that all citizens can have a good life?  Or are they just out for themselves?

See also “Death And Taxes: The Latter Aren’t ‘Inevitable’ If You’re A TNC”, by Murray Horton, in Watchdog 142, August 2016, http://www.converge.org.nz/watchdog/42/01.html Ed.