Multinational tax avoidance

Tax avoidance by multinational companies is matched by interview avoidance by New Zealand’s finance minister.

Multinational companies have devised ways of avoiding paying tax around the world. It is a widespread problem, but with no easy solutions.

The herald has done a ‘major investigation into large scale tax avoidance.

Top multinationals pay almost no tax in New Zealand

A major Herald investigation has found the 20 multinational companies most aggressive in shifting profits out of New Zealand overall paid virtually no income tax, despite recording nearly $10 billion in annual sales to Kiwi consumers.

The analysis of financial information of more than 100 multinational corporations and their New Zealand subsidiaries showed that, had the New Zealand branches of these 20 firms reported profits at the same healthy rate as their parents, their combined income tax bill would have been nearly $490 million.

But according to their most-recent accounts filed with the Companies Office, most covering the 2014 calender year, these 20 companies overall paid just $1.8m in income taxes after several claimed tens of millions of dollars in tax deferments and losses.

The companies in question, including Facebook, Google, Pfizer and Pernod Ricard, said they followed New Zealand laws and differences in profitability between its New Zealand operations and elsewhere were the results of different business models.

Minister for Revenue Michael Woodhouse declined repeated interview requests over the past fortnight.

Of those companies who responded to questions, all insisted they were meeting their legal obligations. Several pointed to their New Zealand operations being almost solely as distributors, with the vast majority of their employment, research and manufacturing taking place offshore.

The problem is it is tax avoidance using international sleight of hand and loopholes. There needs to be international solutions.

Inland Revenue’s manager for international audits John Nash said he was aware of the difference in profitability rates that underpinned the Herald analysis and that as a result certain industries – which he would not name directly – were more prominent on his radar.

“Certain industries are more susceptible to profit shifting and playing games with us. Logically that’s where we put more resources in terms of monitoring,” he said.

Nash disagreed with suggestions Australia or the United Kingdom were more active in clamping down on profits illegitimately leaving the country and said the difference was mostly down to volume. “We’re just a little more low-key, while they tend to perhaps be a bit more vocal,” he said.

There’s more that could and should be done, but it will be a battle.

See also The tax gap: Playing the game of profit-shifting

How do companies move their profits overseas? Matt Nippert investigates

The problems are well known. The solutions are tricky.

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74 Comments

  1. Brown

     /  18th March 2016

    No solution is needed beyond dumping income tax and going to sales taxes. Avoidance is legal and its not the govt’s money to take and waste on rubbish like flag changes anyway. We would all be better off if the govt treated us as individuals with as much caution as they treat multinationals. If it offends you don’t buy the product or service.

    Reply
  2. Oliver

     /  18th March 2016

    The government with its head in the sand again. In Labour was in charge they would have clamped down on this by now.

    Reply
    • alloytoo

       /  18th March 2016

      And done what exactly?

      Reply
    • Pantsdownbrown

       /  18th March 2016

      So Labour clamped down on it when they were in power for a nine year period and the global economy was on a huge upswing? No?

      Reply
    • Kitty Catkin

       /  18th March 2016

      Tax avoidance is legal, Oliver Twit. Tax evasion is not. It was quite legal for me to avoid tax on some things when I was self-employed. If I had not declared my earnings, that would have been tax evasion. If it was all right for me to write things off-IRD told me what I could do this with-it should be all right for other people to do it.

      Reply
  3. The Accountant

     /  18th March 2016

    Bit of a tricky one. Tax law and accounting standards state profits should be taxed where the actual work takes place. In the case of Google etc, this is hardly ever in New Zealand which basically acts as a distributor. The research and development, server farms etc which is what generate income on a global scale are all elsewhere therefore should be taxed elsewhere. Hence ‘profit shifting’ through transfer pricing.

    Reply
    • Oliver

       /  18th March 2016

      Easy solution change the law.

      Reply
      • Brown

         /  18th March 2016

        Nope and in any case its not that easy unless you want to ban the products and services as punishment because they won’t play ball when they are domiciled overseas somewhere. Govts have met their match when it comes to greed and about time. If it upsets you so much that a law change is required you should already have dumped the I Pod and closed the Facebook account. That would be the ethical and fair thing to do. This reminds me of the 99% who hate corporations but were draped, cossetted, connected, shod and STD avoided by their products. Morons, and hypocrites to boot.

        Reply
        • Oliver

           /  18th March 2016

          I think we could all do without Facebook and Apple. It hasn’t enhanced our lives.

          Reply
          • Oliver

             /  18th March 2016

            And by the way I got rid of fb years ago. I can’t believe there are morons still using it.

            Reply
            • Kitty Catkin

               /  18th March 2016

              There are many things you can’t believe. The idea that people who like something that you don’t are morons is childish.

            • Kitty Catkin

               /  18th March 2016

              I am not on Facebook, by the way.

      • Alan Wilkinson

         /  18th March 2016

        Better solution, reduce company taxes to incentivise big companies to operate and pay tax here.

        Reply
        • jamie

           /  18th March 2016

          How does that incentivise them when they’re already operating here for free?

          Reply
          • Alan Wilkinson

             /  18th March 2016

            They are just operating distribution or web services here. Get them to move the taxable value-creating operations here like R&D and support.

            Reply
            • Oliver

               /  18th March 2016

              Tax distribution and web services.

            • Alan Wilkinson

               /  18th March 2016

              That is what they do, Oliver. But the value add over and above costs is small so the tax is small.

            • jamie

               /  18th March 2016

              Where are those parts of the operations currently taxed?

              Probably nowhere.

            • Alan Wilkinson

               /  18th March 2016

              According to a media report the average income tax rate on the overseas earnings is 22%. NZ would currently tax it at 28% but gets nothing. Meeting the international tax market would seem not only attainable but desirable, yielding both jobs and tax.

            • jamie

               /  18th March 2016

              How would meeting the average incentivise anyone to move here unless they were currently taxed in a jurisdiction with rates well above the average?

              Are they? Or are they already domiciled in low-to-zero-tax havens?

              Are you saying we should compete with the Cayman Islands?

            • Alan Wilkinson

               /  18th March 2016

              Not with the Cayman Islands, rather with Ireland, Singapore, Switzerland, Denmark, Sweden, Iceland, UK – all of which have company tax rates well below ours. Stupidity generally goes unrewarded and this is no exception.

            • jamie

               /  18th March 2016

              Are the countries you listed above or below the average? If they’re below, then again I ask how does meeting the average provide any incentive?

              Anyway none of this addresses the question, which was where are these companies currently domiciled for tax purposes.

              If you don’t know the answer, then it is meaningless to say we should compete with Ireland but not with the Caymans.

            • Alan Wilkinson

               /  18th March 2016

              Here you are: https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/corporate-tax-rates-table.html

              “If you don’t know the answer, then it is meaningless to say we should compete with Ireland but not with the Caymans.”

              Nope. NZ compares with the countries I listed as we can provide similar kinds of facilities and skilled services, not merely a paper office like the Caymans. Nothing meaningless about it.

            • jamie

               /  18th March 2016

              Again, only relevant if those countries are where these companies are actually domiciled for tax purposes already.

            • Alan Wilkinson

               /  18th March 2016

              @jamie, those countries have huge numbers of large corporate tax payers and their tax rates explain why. Theirs incentivise, ours disincentivise. That is the simple story which you can ignore if you are determined or simply don’t care whether we get more jobs, opportunities and tax contributions.

              NZ will never attract much of the top 20 global multi-national’s operations, but we could certainly do more to attract more of theirs and of thousands of other smaller global enterprises.

        • tax revenue on sales in country..

          Reply
          • Missy

             /  18th March 2016

            Dave, if taxing sales revenue was introduced it would hurt small NZ businesses And so long term damage to our economy. Not a good idea. And if your idea is only to target specific businesses, that will make the tax system a lot more complicated and expensive, thus wiping out any benefits due to the extra costs for policing and collection.

            Reply
            • Long post below Missy. Its a suggestion of a targeted revenue tax on multi national corporations operating in NZ… not a NZ small business tax…

        • David

           /  18th March 2016

          Not reduce, get rid of. Company tax is simply a distortion of the tax system to pretend that tax isn’t entirely based on individuals paying it.

          Reply
        • Mefrostate

           /  18th March 2016

          Sounds like a race to the bottom Alan.

          Reply
          • Alan Wilkinson

             /  18th March 2016

            The problem is we are already at the bottom, Mefro. The only way is up.

            Reply
    • Ratty

       /  18th March 2016

      Where is Apple primarily taxed … USA ? (40%) or a Tax Haven ?.. And I would have thought Tax would have been expatriated under a DTA (if USA)

      Reply
      • jamie

         /  18th March 2016

        Almost certainly a tax haven. Without that, there’s not much point to the rest of the shell game.

        Reply
  4. jamie

     /  18th March 2016

    I think Pete is right, only a global solution will ever work. Until then they will just keep the shell game going no matter what we or any other country does.

    Reply
  5. Nelly Smickers

     /  18th March 2016

    I remember my hubby’s parents saying they were great supporters of someone called Bruce Beetham.

    From what I can recall, they reckoned he had some pretty innovative tax polices that revolved around things like barter, which he maintained would have been the answer to the problems we face today Apparently he was voted out before they could be implemented.

    Maybe it might be worth resurrecting?

    Reply
    • jamie

       /  18th March 2016

      Why do have to invent these totally unconvincing characters? Why not just write in your own voice?

      Reply
      • Nelly Smickers

         /  18th March 2016

        Excuse me – what on earth has it got to do with you ‘jamie’?

        Unlike yourself, I have a great number of friends and family who follow me on this site 😀

        Reply
        • jamie

           /  18th March 2016

          What have your comments got to do with me? Nothing, except that I read them and decided to reply to one, just like you did to mine.

          Sorry Nelly but I am finding your stories totally unconvincing and very boring.

          Reply
          • Nelly Smickers

             /  18th March 2016

            Hiyaa jamie – I just showed Wayne your comments when he got home from work, and he said “up-tick them anyway” 😀

            He thort you have may have gotten a little bit upset about his comments earlier today on the other post about Diversity, in relation to the ‘rainbow-brigade’?

            Reply
            • jamie

               /  18th March 2016

              That’s funny, because I showed your comments to Mrs Plumbottom, my 19th century housekeeper.

              She said Wayne is a just a literary device to allow you to say sexist and racist things with no responsibility for them.

            • Nelly Smickers

               /  18th March 2016

              Perhaps you should show them to Eleanor Rigby 😀

            • [37] The judge thought that even if Mr Slater had not been party to any illegality, it was likely hat the information had been obtained illegally by others. He reasoned that in the ordinary course of events persons do not legitimately come by the personal hard drive and file cabinets of others.

        • Alan Wilkinson

           /  18th March 2016

          jamie’s on a roll. Having dealt to the mega-multi-nationals he’s ready to take on you, Nelly. My guess is he’ll have about the same amount of luck with that.

          Reply
        • jamie

           /  18th March 2016

          (Alan has had such great success today convincing companies who currently pay zero taxes to move to NZ and start paying them that he has decided to invest the revenue in a vanity publication of your memoirs.)

          Reply
          • Alan Wilkinson

             /  18th March 2016

            You seem to confusing me with IRD. Last time I looked in my account they weren’t paying the company tax take into it. As for Nelly’s memoirs, I think she will auction them. Probably be a rush of bidders trying to make sure they are never published.

            Reply
      • Klik Bate

         /  18th March 2016

        For a moment there jamie, you were starting to come across a bit like the old ‘Mike C’ 😦

        Reply
        • jamie

           /  18th March 2016

          Really? Well I was just chatting to Mr Patel, the greengrocer down the road, and he said I came across like nothing of the sort!

          Reply
  6. Ratty

     /  18th March 2016

    Hmmm

    This is far more of a Political red herring than a Tax one…

    Facebook for example… $114,127 of Imputation credits (and a further 4@7k to pay) against retained earnings (losses) of (250.322). Thats $514k of over reported Tax Income against Company income (at 28%).. and FB parent is still in US (40%) , not Ireland

    Reply
  7. Klik Bate

     /  18th March 2016

    The numbers are indeed staggering! As the majority shareholder of an SME (16 staff), we have been with the same Accounting Firm, (one of the ‘Big 4’), for nearly thirty years. And we have had the same ‘Partner’ the entire time

    The ONLY tax advice we have ever received: ‘Just. pay. your. taxes’

    Now to be honest, we’ve always joked that the most exciting thing that probably ever happens in this blokes daily life, is when he opens his clip-lid lunchbox to see what sort of sandwiches his wife has made him for lunch – marmite, or cheese?

    On a positive note, we have only ever been subject to one major tax-audit.. It took place off-site, in one of the Accountants ‘special meeting rooms’. The outcome, after two worrying weeks, was a small credit on overpaid GST. (The fees incurred were another matter 😦 )

    I don’t know, maybe I’ve been a bit hard on the poor bloke all these years in thinking he actually worked for the IRD……….. at least I still sleep at night.

    Reply
    • Alan Wilkinson

       /  18th March 2016

      For exactly that reason we switched accountants from a Big Four to a smarter, smaller, local business and received advice that entirely legally saved us a huge tax bill.

      Reply
      • Klik Bate

         /  18th March 2016

        Yes, know exactly what you mean Alan. We have certainly had the same discussion many times ourselves.

        And thinking about it, the Directors of those ’20 multinationals’, probably slept as well as I did – if not better 🙂

        Reply
      • Brown

         /  18th March 2016

        Yep, the big four. I listen to them spouting off on the radio at times and think I’m listening to IRD staff speaking.

        Reply
  8. Multinationals want to trade in NZ and use transfer pricing to avoid tax? There re laws around that already – though probably tough to enforce on the more wily operators….

    It is a major issue – just google US company repatriation of profits. The US House is always floating sweet low tax deals to get US based multi nationals to bring the money home form the tax havens

    So why not just place the identified operators into a REVENUE and not A PROFIT Taxation scheme. 7.5% of turnover say…… so 7.5 million in tax per 100 Million in revenue. I don’t know the normal margins but if your cost structure is say 60% of revenue, then 40 million net profit at 28% corporate tax is 11.2 Million so you would still be ahead as a company but the pressure would be off politically. Heck why not 10% of Revenue, that is really close to a fair tax no?

    Plus points are its simple, its not onerous and anyone whining about it would need to front up to say why it was unfair…. doubtless there are tricks to avoid like booking through offshore entities, but put a nasty penalty tax regime in place for that type of behaviour and allow limited judicial review of penalties

    I’m all for free enterprise but some of the dodges via Caymans, Luxembourg etc etc etc are just not on and are a colossal waste of smart peoples time and effort which should be put to better use creating new product and service not avoiding taxes…

    Oh and the quid pro quo is Governments getting their spending shit in order and not being more than 25% of the economy – wouldn’t need to fret bout taxing everything so much if the politicians would stop slopping cash aorund all the time…

    Reply
    • Alan Wilkinson

       /  18th March 2016

      They might make 40% gross profit but not net. That is the kind of imposition that might well trigger an ISDS as well as a withdrawal of services from this country.

      http://www.forbes.com/sites/liyanchen/2014/05/13/best-of-the-biggest-how-profitable-are-the-worlds-largest-companies/

      Reply
      • Might. They re rorting the system by not contributing. Its a valid taxation policy option. i would prefer they crack down hard on business expenses claimed and transfer pricing. Make sure its all legit.

        But ultimately the predators need a viable flock to survive. Current rapine practacises by large tax haven using corporates are not maintaining a viable flock… so the predators need to be thinned out

        Reply
        • Alan Wilkinson

           /  18th March 2016

          That’s nonsense. If the flock was not viable the predators would be thinned by starvation already. There’s nothing new or recent about tax havens.

          Reply
          • True there is nothing new about them…. but that doesn’t make it right Alan.

            Reply
            • Alan Wilkinson

               /  18th March 2016

              I was querying whether your scenario was true, not whether it was right. Tax havens have existed for long enough that any unviable flock would have long since starved out predators.

    • David

       /  18th March 2016

      A revenue tax will simply get passed onto the customers.

      Reply
      • Why? Ultimately the consumer pays the corporate taxes on profit as well. No difference with a revenue tax just taking a slice upfront and saying play your paper shuffling games all you like but the government has taken its legitimate share for the benefit of the whole country.

        Reply
        • Alan Wilkinson

           /  18th March 2016

          Of course it will get passed on in higher consumer prices, certainly at the rates you propose. The net effect will be a regressive transfer from consumers to income tax payers. You can paint that as a benefit if you wish.

          Reply
          • jamie

             /  18th March 2016

            As Dave says that applies to any tax on profit or on revenue.

            Seems you’re now arguing that companies should be allowed to sell things here and make money and not pay any tax.

            Reply
          • Alan they are paying virtually no tax.. defend it all you want. I find it interesting that taxing net profit at 28% is ok, but its also ok to avoid it if you have the ability to set up domicile in a low or no tax backwater so you pay around 1-2% in tax if that.

            Why should some have that advantage? Why not the plumber running his own business?

            I am no fan of big government or high taxes. But I dislike people rorting even more Alan. Its parastic behaviour..

            Reply
            • Alan Wilkinson

               /  18th March 2016

              The law is that tax is payable in the jurisdiction where the profit is earned and that is how IRD applies it. You don’t earn a profit simply by selling something, you have to create it and make it first and that is where the issues arise when these occur in a different country. That is international law, not a rort. To show a rort you have to show that the value creation happens here and not there.

            • Ahhhhhhh….. Yes Alan. BUT the point is through playing accounting games to SHIFT the profit from one jurisdiction to another is not being taxed where the value is created.

              I like people making a profit, innovating – all good stuff. But the elaborate tax schemes engaged in to shield profit from tax in the country where the profit was generated is wrong. Sorry but that is my position. We will have to agree to disagree. And I still maintain a headline revenue tax is a valid tax policy

            • Alan Wilkinson

               /  18th March 2016

              If you look at the Forbes link I gave above it is clear that there are great differences in corporate profitability, that your 40% is at the extreme end of unlikeliness, and that any tax based solely on revenue is going to be a blunt instrument that will have unintended consequences.

            • No dubt unintended consequences, but charging inflated IP related charges in to a country to ship profit out to a tax haven deserves a slap. Its about a little equity in the the way business conduct themselves.

            • Kitty Catkin

               /  20th March 2016

              I bought a very beautiful handbag from Farmers clearance table-I can’t see why it and others were there, they weren’t an extreme trend that was now out-it was reduced from $169 to $50 to ‘half the red dot price’. Farmers have to have been making a loss on these bags, as I don’t believe that they paid $25 for them. So that sort of thing has to be taken into account with a business.

              I remember when I was managing a shop in Lambton Quay that sold things like South American rugs and hammocks among other covetable items. One American man came in and said loudly and at length that he could buy the hammocks that we were selling for I forget what for something like 1/4 of the price from a Mexican roadside seller.Yes, but the Mexican didn’t have to fly thousands of km, buy it, import it, pay rent on a shop in Lambton Quay and pay staff to sell it and so on. Business is not as simple as some people think.

            • jamie

               /  20th March 2016

              Kitty, none of that is relevant to this simple fact:

              Apple and Starbucks are making money by doing business in NZ.

              If they weren’t, they’d pack up and leave.

            • Nelly Smickers

               /  20th March 2016

              @ kitty

              I don’t think that Farmers are in the business of losing money kitcat.

              Chances are, that if the handbags were advertised at half the ‘Red Dot’ price, they would have been sourced real cheap out of India 😀

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