Tax is one of those hardy perennials – everyone hates paying it while, simultaneously, everyone likes and expects the level of infrastructure, services and benefits provided by the State as a result of taxation. It is the fairest way (i.e. it pisses off everyone) of sharing the cost of running a society. Throughout its nine years in power the National government had an obsession with tax cuts and promised more of them if it had been re-elected in 2017 (tax cuts simply translate into: “Someone else will pay for it”).

Labour, having dropped the tax hot potato in the run up to the 2017 election, took the safe course and established a Tax Working Group to report back to the Government (it is headed by former Labour Finance Minister, Michael Cullen, and one member is our very own Bill Rosenberg - in his capacity as Economist for the Council of Trade Unions). Measures such as a wealth tax or inheritance tax are not on its agenda. Nobody seems to be talking any more about a financial transactions tax, popularly known as a Tobin tax (named after its proponent, American economist James Tobin [1918-2002]).

Of course, those with the means (the rich) do their level best to avoid paying their fair share. And none more so than our old mates, the transnational corporations (TNCs) which are the very richest and can dodge taxes using methods not available to domestic businesses. This is a subject that affects everyone and it is one that I have written about regularly in Watchdog over the years. My most recent article was in issue 142, August 2016 (“Death And Taxes. The Latter Aren’t ‘Inevitable” If You’re A TNC”, http://www.converge.org.nz/watchdog/42/01.html). I refer you to that for the background.

This issue is one that is never out of the news and quite a lot has happened in the nearly two years since I last wrote about it. The key point to understand is that, by its very nature, transnational tax dodging is international, it requires an international response, and anything happening about it in New Zealand has to be viewed in that context.

National did implement one new tax on the TNCs – the “Netflix tax” which came into effect in 2016. It compels overseas digital companies selling online products in NZ (such as Netflix, which streams TV programmes and movies, etc, via the Internet) to pay goods and services tax (GST). The Inland Revenue Department (IRD) estimated it would only bring in $40 million in its first year. But Labour’s new Revenue Minister, Stuart Nash, said that the actual amount received was $113m - more than three times the estimate.

Nash, however, got slapped down by Grant Robertson, the Minister of Finance, when he (Nash) said that Labour would require overseas-based sellers of low value physical goods (such as Amazon) to pay GST. Robertson said that this was a matter for the Tax Working Group to decide, which pissed off NZ retailers’ representatives. For years they have been complaining about unfair competition from online overseas retailers who don’t have to pay GST.

National had put this issue in the too hard basket. It’s an issue with which governments all around the world are grappling. Australia has become the first country to impose a tax on overseas online retailers. It comes into effect as of July 2018. Of course, whether the overseas retailers can be compelled to pay any such tax is a moot point.

Rotten Apple

The very same month that my last Watchdog TNC tax dodging article was published – August 2016 – Apple was slapped with a €13 billion tax bill in Ireland by the European Commission (EC), after a three-year investigation. “Ireland had granted lavish tax breaks to Apple over several years, with the tax rate on its European profits dropping from 1% in 2003 to just 0.0005% in 2014” (my emphasis).

The EC ruled that the tax breaks which Ireland gave to Apple between 2003 and 2014 amounted to “illegal State aid”  (Press, 1/9/16, “Big Apple Pays Tiny Tax – How Does It Add Up?”, Tom Pullar-Strecker, https://www.stuff.co.nz/business/industries/83741844/Tech-giant-Apple-pays-9m-tax-in-NZ-how-does-that-add-up).

The EC accused Ireland of offering Apple a sweetheart deal of virtually zero tax, in return for building factories in Ireland, thus diverting investment and jobs from other countries. Furthermore, Apple’s tens of billions of dollars of profits, which Apple enjoys tax free in Ireland each year, are generated almost exclusively outside Ireland.

To quote the EC decision: “Most profits were internally allocated away from Ireland to a ‘head office’ within Apple Sales International. This ‘head office’ was not based in any country and did not have any employees or own premises. Its activities consisted of occasional board meetings. Only a fraction of the profits of Apple Sales International were allocated to its Irish branch and subject to tax in Ireland. The remaining vast majority of profits were allocated to the ‘head office’, where they remained untaxed”.

These sweetheart tax deals constituted the guts of the Irish economy, which expanded by an extraordinary 26.9% in 2015, thanks mainly to TNCs transferring intellectual property (IP) into the country. They have been using the ‘double Irish’ tax avoidance mechanism – they route all their European sales through Dublin and then pay large royalties to subsidiaries based in tax havens for the IP rights. In 2014, Ireland announced that the ‘double Irish’ mechanism would be phased out by 2020 but simultaneously widened rules allowing TNCs in Ireland to claim tax breaks on IP that they brought onshore.

“Companies including Google, Apple, Facebook, Starbucks and Pfizer are reported to have routed billions of dollars of profits to Caribbean tax havens using the Irish tax loophole, which exploits the fact that companies can be registered in Ireland but not deemed resident in the country for tax purposes” Press, ibid.).  

The high stakes nature of this was recognised in a Time article entitled “Apple Vs The EU Is The Biggest Tax Battle In History” (Rana Foroohar, 30/8/16): “There is a growing sense that many companies have been flying 35,000 feet over the economic troubles of the countries where they operate – and they should be forced back down to earth. Apple’s tax bill is just the beginning of a very big fight between the world’s richest companies and its governments”.

Apple can easily afford to pay that EC fine – it made $US63 billion profit the previous year, the biggest profit in corporate history. But it promised to fight back hard, and so did the Irish government, which announced that it would appeal the decision, fearing it would set a precedent and drive away the TNCs it has successfully attracted with promises of very low tax rates (you can’t get much lower than 0.0005%).

“Several lawmakers have questioned such a move, given that the tax penalty is equivalent to what the country pays annually to fund its national health care system. That debate has intensified since Ireland has faced almost a decade of austerity after the financial crisis” (Sydney Morning Herald, 3/9/16, “Ireland To Appeal Apple Tax Ruling”, Mark Scott).

Apple Is Not Alone

The EC also ruled that a tax deal for Starbucks in the Netherlands was illegal and fined it $US46 million – which Starbucks is appealing. And, in October 2017, the EC fined Amazon €250 million for a tax dodging deal with Luxembourg. Google is a prime offender. Its previous Chief Executive Officer, Eric Schmidt, said he was proud of how little tax it paid. He summarised it thus: “That’s capitalism” (actually, that’s corporate welfare).

“Google's tax affairs are back under the spotlight after filings in Holland showed it moved billions more dollars to a shell company in Bermuda in 2016 using the notorious ‘double Irish’ and ‘Dutch sandwich’ tax rorts. The transfer by the Alphabet-owned company of €15.9 billion (NZ$27b) to Bermuda saved at least US$3.7b (NZ$5.2b) in taxes that year...”

“The total pool of foreign earnings Google was holding overseas, free from taxation, was US$60.7b at the end of 2016, the company has acknowledged” (Press, 4/1/18, “Google Shields $27b In Legal Rort”, Tom Pullar-Strecker, https://www.stuff.co.nz/business/industries/100298667/googles-dutch-sandwich-shielded-16-billion-euros-from-tax).

Huge scale tax dodging is not confined to digital or tech TNCs. For example, the Australian Tax Office revealed that the likes of US oil giant Exxon Mobil, which makes multi-billion-dollar profits, paid no tax in Australia in either of the 2013/14 or 2014/15 financial years. Nor is it confined to companies. The 2017 release of the hacked Paradise Papers revealed that super-rich individuals, ranging from the Queen to rock star Bono, had stashed huge sums in offshore tax havens. But the tech giants of the digital economy are the most flagrant and spectacular offenders.

NZ: National Dragged The Chain

The extraordinary EC decision against Apple focused media attention, once again, onto Apple and its mates in NZ. “Apple pays more tax in New Zealand than many comparable companies, having paid $8.9m tax in the year to September 2015 on its pre-tax profit of $26.6m, which was achieved on sales of $732m. Some other large technology firms book all their sales through overseas offices and only pay their local subsidiaries a fee to just cover their local expenses in providing them with marketing support”.

“Facebook paid just $43,000 tax in New Zealand, according to its most recent financial statements filed with the Companies Office. Its tax was about the same amount as a mid-range doctor or lawyer would have paid. Google New Zealand recorded tax of just over $233,000 in its latest filing. It also has almost no operations here and bills local customers for advertising services from Singapore” (Press, 1/9/16, “Big Apple Pays Tiny Tax – How Does It Add Up?”, ibid.). The then Prime Minister, John Key, was quoted in this article as saying that Apple was “probably” paying its fair share of tax.

International action by states is the only way to deal with transnational corporate tax dodgers. In September 2014 the Organisation for Economic Cooperation and Development (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 refers to the prices TNCs set when they charge their local subsidiaries for centrally-provided services such as accounting and marketing. It enables the TNC to declare a loss in a country with a higher tax rate and its profit in a country with a lower one).

New Zealand is a member of the OECD, so National said it would wait until BEPS came into effect, as part of a coordinated international response. For its part, the Inland Revenue Department (IRD) was keen to get stuck in e.g. it recommended that NZ adopt OECD measures to crack down on “hybrid mismatches” to avoid tax (these mismatches occur when two countries treat a cross-border transaction by different rules and can result in TNCs not having to pay the full tax envisaged by law in either country).

Key could see which way the wind was blowing and, although having defended Apple’s NZ tax payment a couple of months earlier, criticised Facebook founder and Chief Executive Officer (CEO), Mark Zuckerberg, to his face, at the November 2016 Asia Pacific Economic Cooperation (APEC) Summit in Peru. “Prime Minister John Key took on Facebook founder Mark Zuckerberg about the company's tax reputation internationally - and Zuckerberg did not click ‘like’. Key met Zuckerberg while at a summit of about 1500 CEOs as part of the APEC Summit”.

“‘I was reasonably blunt. I said I thought that Facebook did have an issue in terms of the perception of its tax policy and I thought he needed to change that’. Asked how Zuckerberg responded, Key said ‘I think he was a bit surprised. But I don't think I'm doing him any favours not telling him that because if you think about what's happening with Facebook, everywhere you go when there's a discussion about multinationals not paying their tax, people say 'Facebook'".

“Key even linked it to the election of Donald Trump, telling Zuckerberg one of the things that drove Trump's election was a feeling the world was not fair. He said Facebook's own users could revolt and turn on it if it was not addressed. ‘There could ultimately be consequences and they should deal with it’. He said he had told Zuckerberg he should think about how to resolve that, ‘or at least demonstrate to the world that they do pay their fair share of tax in every location. I think if they don't, the same people who are its users will wake up one day and say 'why do I have to pay my tax if this company is not going to?’".

“He said there was no question Zuckerberg was philanthropic. ‘But if I was running Facebook or a multinational in the modern world we live in, I'd make sure most countries or every country felt tax was being fairly paid. It wasn't so much about whether they pay their fair share of tax in New Zealand or didn't - maybe they do and maybe they don't’”.

“’But I think when the shorthand for a problem around multinationals not paying their tax is 'Facebook' then I can't see how that's a good thing for Facebook. I think as a company they've got a PR issue’” (New Zealand Herald, 20/11/16, “John Key Takes On Mark Zuckerberg Over Facebook’s Tax Reputation”, Claire Trevett, http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11751659). That, of course, was Key’s last APEC Summit. In December 2016, he dropped his bombshell announcement that he was resigning as PM, with a week’s notice, thus sealing the fate of National at the 2017 election.

IRD Asked TNCs To Play Nicely

IRD urged TNCs to be more transparent about their tax affairs. This was met with silence from Google, Facebook and Microsoft. That was the same response Google, Facebook and Apple had given Spark CEO, Simon Moutter, when he wrote an NZ Herald opinion piece calling for them to explain why they don’t pay more tax in NZ (23/6/16, “Spark Boss Simon Moutter Calls On Google, Facebook and Apple To Start Paying Their Fair Share On Tax”, http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11661266).

It was announced that, as of 2017, all foreign businesses with a local turnover of more than $30 million would be required to submit information annually to IRD on their group structure, financial statements and tax reconciliation. However, Google and Facebook would be exempt from that, as they book most of their revenues overseas and their local revenues fall under the $30m threshold. But IRD refused to trigger section 81 (1b) of the Tax Administration Act, which would allow it to comment on the tax practices of individual TNCs.

“But Massey University tax expert Deborah Russell said this fear was overblown. ‘If Inland Revenue was talking about ordinary taxpayers' affairs that would be deeply worrying, but big companies are part of the institutional structure of our society and are much more able to withstand pressure of Government’, she said”.

“‘Ordinary taxpayers see big companies getting away with tax and they think 'why should I pay my taxes?'. I would like to see the Commissioner (of Inland Revenue) being more proactive’" (Press, 3/12/16, “Legal Boss Defends IRD Aura Of Secrecy”, Tom Pullar-Strecker, https://www.stuff.co.nz/business/industries/87115414/inland-revenue-legal-boss-not-qualified-to-make-call-on-trust-in-tax-system).

That same month (December 2016), the Government announced that it was considering taking unilateral action against TNC tax dodgers, rather than waiting for the OECD’s multilateral BEPS process to come into effect. “The proposals include granting broader information-gathering powers to Inland Revenue investigators, shifting the burden of proof to multinational companies in disputes over transfer pricing, and tightening loopholes that allow companies to claim they have no taxable presence in New Zealand”.

“The moves stop short of a full-scale diverted profits tax, as introduced by Australia and the United Kingdom, but Revenue Minister Michael Woodhouse refused to rule out such a measure if this new package failed to achieve results. ‘If we continue to get aggressive tax planning and tax arbitrage I won't rule out - I wouldn't call it the nuclear option, but the stronger option - a diverted profits tax’, Woodhouse said”.

“The discussion paper to Cabinet lays out challenges faced by IRD dealing with multinationals over tax issues, especially ‘a minority that engage in aggressive tax practices’ complicated by ‘difficulties Inland Revenue faces in obtaining the relevant information’. The measures are intended to both tackle sharp tax practice - and have a positive, but as-yet unquantified effect on the Government's tax take - as well as answer public concerns about tax fairness” (NZ Herald, 14/12/16, “Government Planning Action To Target Multinationals Over Tax” , Matt Nippert, http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11766215).

Some of the digital TNCs started preparing themselves to have to pay more NZ tax. In January 2017, Microsoft stated in its annual accounts that IRD was investigating its transfer pricing and was auditing two years of internal company payments. Microsoft listed the IRD audit as a “contingent liability”. Microsoft had transferred the ownership of its NZ subsidiary from the US to Luxembourg in 2014, whilst denying that move was for tax reasons (see the subsection “Luxembourg: An Embarrassment To First World Capitalism”, in my article “Dodge City. The Transnationals’ Favourite Place To Do Business”, in Watchdog 138, April 2015, http://www.converge.org.nz/watchdog/38/01.html).

No Diverted Profits Tax

In March 2017, Revenue Minister Judith Collins announced a raft of measures. “Big foreign multinationals will be prevented from shifting profits from their New Zealand sales overseas, if those sales are actually driven by New Zealand-based staff, Collins announced. The rule will apply to companies that have a global turnover of more than €750 million ($NZ1.1 billion). The move is one of a series of reforms proposed by Collins to clamp down on multinational tax avoidance, but which tax experts have warned may not necessarily see the likes of Google, Apple and Facebook pay much more tax in New Zealand”.

“As expected, Collins also proposed measures to prevent excessive interest charges by foreign firms, transfer pricing abuses and so-called ‘hybrid mismatches’. ‘Closing loopholes and reducing opportunities for gaming the system’ was necessary not only to ensure that multinationals and others paid their fair share of tax, but also to ‘maintain confidence in the fairness of the tax system’, she said…”.

“Officials have suggested the wider crackdown on tax rorts by foreign firms could net Inland Revenue $300 million annually…Collins made no mention in her long-awaited speech in Queenstown of a ‘diverted profit tax’, which has been introduced in Australia and Britain to penalise companies caught manipulating the tax system”.

“Company tax makes up 15% of New Zealand's total tax take of $63 billion, but a Cabinet paper released in December (2016) said there were concerns multinationals were not paying their fair share. United States lobby group Citizens for Tax Justice estimated in October (2016) that the top 500 US corporations – including Apple, Nike and pharmaceutical giant Pfizer – had stockpiled $US2.5 trillion (my emphasis) of profits in tax havens”.

“A key principle of the global company tax system is that businesses are taxed according to where they locate their operations and intellectual property, rather than where they sell products. Many technology companies in particular have opted to keep their operations in New Zealand to a minimum and sell here online. Google is understood to employ only about 20 staff in New Zealand” (Press, 4/3/17, “‘Powerful’ Multinational Tax Clampdown”, Tom Pullar-Strecker, https://www.stuff.co.nz/business/industries/90007639/tax-reforms-important-but-wont-make-good-soundbites-experts-warn).

TNC tax dodging was an issue that was starting to feature on the media’s election year radar. The Press wrote a couple of March 2017 editorials about it (“All We Want Is A Fair Tax System”, 6/3/17, and “The Gnat And The Camel”, 21/3/17. The latter got stuck into Apple for not paying any NZ tax and for “not being a good citizen in New Zealand”).

There was consistent pushback from the likes of the accountancy TNCs who wax fat by servicing the tax affairs of their fellow TNCs. When President Trump announced in 2017 that he would slash US company tax and offer US TNCs a special tax rate to repatriate their $US2.5 trillion offshore stash (Apple announced that it will repatriate $US252 billion held offshore, paying $US38b of that in tax) Deloitte tax partner Allan Bullot said that NZ must realise that it is in a “race to the bottom”.

He added: “For us, when we are looking at what we should do in respect of these BEPS initiatives, we need to be looking at this in terms of ‘what is best for NZ Inc’, not just doing what the OECD thinks we should do. Big countries like the US are not playing the global game” (Press, 1/5/17, “Worries For NZ In Global Tax ‘Race To the Bottom’”, Tom Pullar-Strecker). Funnily enough, these TNCs’ mouthpieces don’t apply that same “New Zealand should go it alone” logic when pontificating about other aspects of globalisation, such as the Trans Pacific Partnership Agreement.

TNC Lobby Group Wins Back-Down

IRD held two public consultations that closed in April 2017 but then refused to make public the 38 submissions it received (after media group, Fairfax, complained to the Ombudsman, IRD released the submissions). One of them turned out to hold more weight than any others. “A shadowy multinational lobby group appears to have achieved a big win lobbying the Government behind closed doors over a proposed tax clampdown”.

“The United States-based Digital Economy Group (DEG) said a proposal put forward in March (2017) to tighten the rules that determine whether multinationals are deemed to have a taxable presence in New Zealand were the ‘most extreme in the world’.  But the lobby group has gone silent on the claim after winning a key concession when the final rules were outlined by the Government this month (August 2017). The DEG described itself in its April submission to Inland Revenue as an ‘informal coalition’ of software, social networking and e-commerce companies… Britain's Guardian newspaper has speculated Apple, Google and Amazon may be members”.

“Inland Revenue's original solution was that multinationals with a global turnover of more than €750 million should be deemed to have a taxable presence in New Zealand if ‘a related entity’ carried out sales-related activities for them here. But the Digital Economy Group said that so-called ‘permanent establishment* (PE) anti-avoidance rule’ would be out of step with plans being drawn up by the OECD under its BEPS tax clampdown and would represent ‘the most extreme unilateral PE measure in the world’”. *A permanent establishment (PE) is a fixed place of business which generally gives rise to income or value-added tax liability in a particular jurisdiction, Wikipedia.

“The Government partially backed-down in August (2017), with Finance Minister Steven Joyce and Revenue Minister Judith Collins agreeing in a Cabinet paper that the changes to permanent establishment rules should be ‘more narrowly targeted at avoidance arrangements’ and committing to further consultations”.

“That may mean the foreign parents of New Zealand subsidiaries would only have a separate taxable presence in New Zealand if Inland Revenue could show they had structured their local activities intentionally to avoid tax” (Press, 18/8/17, “Multinational Lobby Wins Tax Victory”, Tom Pullar-Strecker, https://www.stuff.co.nz/business/industries/95869102/tech-firms-won-concession-after-claiming-nz-tax-proposal-most-extreme-in-the-world).

New BEPS Law

That was as far as things went under National, which finished its nine years in power at the 2017 election (of the Tory Ministers I’ve mentioned in this, Key and Joyce have resigned from Parliament; Collins is still there, as the Opposition’s revenue spokesperson). The new Labour-led government introduced the Taxation (Neutralising Base Erosion and Profit Shifting) Bill in December 2017 to tighten up measures against TNC tax dodging. This Bill was drawn up by officials under the National government and Labour is following on from what National was already doing. There is a bipartisan consensus on this subject.

Facebook took the hint and announced that it will now book revenues in New Zealand that it earns from selling advertising in New Zealand (as opposed to booking those revenues in Ireland, with its 12.5% company tax rate - or 0.0005% if you’re Apple). Facebook earns tens of millions in NZ; the new policy means that it should pay substantially more than the $43,000, which was its last publicly known annual NZ tax payment. Facebook is applying this policy globally, meaning it will be paying more tax in many other countries as well.

Stuart Nash, the new Revenue Minister, reacted to Facebook’s announcement: "It took me by surprise. Facebook is a global leader, there is no doubt about that. It will be interesting to see if the other multinationals in this space follow suit, or hold out, but we think we have got the legislation that will allow us to go after them’”.

“‘The days of organisations being able to structure themselves so they either don't pay tax or pay very little tax on the profits they earn are over’. Past practices had been ‘immoral’, he added. Nash said the work being done in New Zealand and by the OECD was only ‘phase one. There are a whole lot of other work streams that will go on, not only in New Zealand but across the OECD. People are already working on 'phase two'" (Press, 27/12/17, “Minister Hopeful Over Multinational Tax”, Tom Pullar-Strecker, https://www.stuff.co.nz/business/industries/100045770/multination-tax-rorts-in-ministers-sights).

IRD estimates the new Bill will result in an extra $180-190 million of tax paid by TNCs in NZ. And that is money that could be put to good use. “Oxfam New Zealand Executive Director, Rachael Le Mesurier, is calling for a fairer tax system - ‘by ensuring the wealthy and multinationals pay their fair share of tax by cracking down on tax avoidance - then using that money to make our country and the global economy a fairer place’" (Press, 22/1/18, “NZ Wealth Gap Divide Gets Wider”, Tom Hunt, https://www.stuff.co.nz/national/100751224/rich-man-poor-man-inequality-gap-grew-in-2017-oxfam-report-reveals).

Facebook may have seen the writing on the wall but one of its fellow digital tax dodgers is in no hurry to follow suit. In January 2018 it emerged that Apple has been paying tax on its NZ earnings to the Australian Tax Office, not NZ’s IRD (the Aussies take the view that Apple Sales NZ is tax resident in Australia, because none of its three directors is resident in NZ and management control is exercised in Australia). Google, however, joined Facebook and, in February 2018, announced that it would now book in NZ the revenues it earns from selling advertising in NZ (previously, Kiwi customers were billed from Google Singapore). Neither Microsoft nor Amazon has announced whether it will follow suit.

Unilateral Action

Things suddenly changed in March 2018. The OECD released a report deferring the BEPS initiative until 2020, saying that it hopes to broker an agreement between the 110 countries that had become involved in the process (many more than the OECD’s actual membership). This promptly led to some major countries deciding to take unilateral action. India has already imposed a 6% “equalisation tax” on digital advertising sold by Google and Facebook. The European Commission (EC) announced it will impose a 3% tax on the revenues of TNCs such as Google, Facebook, Amazon, Twitter, Uber and Airbnb.

Both the Indian and EC measures break from the previous practice of taxing TNCs only on their profits generated in the host country – these new measures will tax those TNCs’ revenues, potentially increasing their tax bills by billions of dollars each. The underlying principle of these new measures is recognition of the contribution that users make to the profits of “weightless” digital businesses.

The EC announced that this 3% tax is an interim step, pending a longer-term measure. The New Zealand government said that it was awaiting advice from officials on whether it should also introduce similar “interim measures”. At long last, governments are starting to assert themselves in this global power struggle between nation states and “stateless” transnationals.