No missing pot of gold to be found says PM as he states a preference for the OECD's multi-year process to address profit-shifting by multinationals. With special feature audio.
Four options were put on the table for foreign trust reform yesterday. There’s a feeling that real change is in the air. Prime Minister John Key expects action by the end of the year.
At the same time, the IRD and the prime minister gave an update on efforts to address BEPS (tax base erosion and profit-shifting), the syndrome that has seen companies like Google and Facebook declare tiny revenue and profit in New Zealand as they invoice substantial revenue from New Zealand clients to their subsidiaries in lower-tax Ireland and Singapore.
The BEPS update had the feel of a PR whitewash. There was no feel of change in the air, and the prime minister actively sought to downplay the need for any change, or that it would prove practical.
In follow-up comments, Mr Key said his government preferred sticking with the OECD’s coordinated plan on BEPS, which might see reform legislation introduced in March next year for possible changes from July 2017, including requirng multinationals to prepare country by country reports, which would be shared between OECD members.
"By far, the only really robust way to work is with the OECD. There's quite a lot of scepticism that unilateral taxes would work," he said.
"In our view and the advice we had initially was that New Zealand wouldn't earn a lot more revenue" from a tax based on multinationals' local turnover, the prime minister said. "The officials don't think there's a missing pot of gold out there.”
That missing pot of gold in full
To those working in media in New Zealand, there definitely seems to be a pot of gold in online advertising, which will reach just under $1 billion this year. Figures released justifying the Fairfax-NZME merger indicate Google and Facebook are now utterly dominating this market. Clever them. But to then shift almost all the (highly profitable) revenue from their New Zealand customers offshore is just not cricket.
Google NZ’s annual report says it took in $10.7 million revenue last year. Fairfax and NZME told the Commerce Commission that Google's ad bookings from New Zealand clients were six times that total – and even that seems very conservative next to IAB and PwC estimates.
In its most recent Companies Office filing (for the year to December 31, 2014), Facebook NZ reported just $1.2 million. Fairfax and NZME say the social network booked $29.5 million in ad business in New Zealand last year.
As the IRD notes in its latest paper to the cabinet, released yesterday, there can be a good reason for a multinational subsidiary in New Zealand to pay money to its parent.
For example, for the year to 2016, Apple paid $8.9 million in tax on a profit of $17.7 million on revenue of $732 million for its New Zealand subsidiary. That seems like a suspiciously thin profit margin but I can accept there is an element of paying its US parent for the cost of production and the cost of developing its intellectual property. With Google and Facebook, it seems more like simply taking the Mickey as they shuffle highly-profitable revenue between countries purely to escape tax.
Spark boss toughens his attack
After a recent NBR article on Google NZ’s strikingly low reported revenue, Spark chief executive Simon Moutter accused the multinational of “despicable behaviour.”
Over the weekend, he expanded, “At the moment, my company pays $140 million of tax last year. Google paid $250,000. It’s just not right, and they should be making a contribution.”
It’s particularly galling for Spark in that Google piggybacks on telco networks, and calling and other “over-the-top” services suck away revenue.
“[New Zealanders] love and embrace their services and willingly support them and pay them hundreds of millions of dollars in revenue. Why aren’t they prepared to make a contribution back to fund our hospitals, our schools and our welfare system?” Mr Moutter says.
What of the government’s promise of co-ordinated OECD action next year? (Bearing in mind that key player Ireland is circumspect about fully supporting the BEPS plan).
“It’ll move along at glacial speed, that’s my concern,” Mr Moutter says.
“This is the committee process, it’ll take forever, and all I’m saying is let’s put some interim things in place and the sort of policy that says, ‘As an interim measure, Google or Facebook – you need to pay tax on a share of revenue that would be equivalent per dollar you would earn in New Zealand on what you would pay on your profitability worldwide. So if you make a 20% margin, then make sure you show a 20% profit on revenue in New Zealand and pay the tax on that. That’s a pretty simple way to do that.”
Against the grain
In setting a preference to wait for the OECD’s multi-year BEPS process to wrap up, Mr Key goes against:
conservative governments in Australia and the UK who have recently made unilateral moves to crack down on profit shifting;
New Zealand corporates like Spark who say faster, unilateral action to level the playing field;
NBR readers, 89% of whom say the government should move faster to crack down on profit-shifting;
those on the right who want New Zealand to go in the opposite direction and match the tax regimes of countries like Ireland with its 6.2% rate for revenue generated by IP;
the spirit of his own comments in March when he said “I don’t think it’s fair” after it was put to him that multinationals pay little in New Zealand; and
the French government, which sent police to raid Google’s Paris HQ (admittedly, there’s not much to raid in New Zealand with Google’s local office only boasting around a dozen sales reps, compared to Google’s office in Sydney – since January, subject to the ‘Google tax’ – which has around 1200 staff). The French government has rejected subsequent offers of settlement, holding out for what it says it claims is €1.6 billion owing in back taxes.
POSTSCRIPT
Google has consistently declined to answer specific comments about its tax situation in New Zealand.
Earlier this month, a spokeperson offered the general comment: “Google complies with the law in every country where we operate. We believe international forums like the OECD are the right places to decide tax rules for multinational businesses because everyone would benefit from a simpler and more transparent system. Google’s average global corporate tax rate in recent years is around 19%, and we incurred taxes of more than $US3.3 billion in 2015."
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