Shaw on ‘multinational’ tax avoidance

Green co-leader James Shaw questioned Revenue Minister Michael Woodhouse in Parliament yesterday on tax avoidance by multinational companies.

4. JAMES SHAW (Co-Leader—Green) to the Minister of Revenue: What estimates, if any, does he have for the total amount of tax multinational enterprises operating in New Zealand may have avoided paying in the last tax year through incorrect transfer pricing practices?

Hon MICHAEL WOODHOUSE (Minister of Revenue): The Inland Revenue Department does not distinguish between companies based on whether they are multinational or not. This is because we expect all companies to pay the correct amount of tax, regardless of where they are owned. But to the extent that incorrect transfer pricing practices are identified by the Inland Revenue Department, they would be disallowed.

What is a multinational company? Presumably New Zealand based companies like Fonterra, ENZA, Silver Fern Farms, Fisher & Paykel Healthcare and Scott Technology could be called multinational.

But the term seems to be used by Shaw here to diss overseas companies.

James Shaw: Is New Zealand Herald investigative journalist Matt Nippert’s figure of $500 million of lost tax revenue from multinationals in the last financial year about right, or is tax expert Professor Craig Elliffe’s estimate of $1 billion more accurate?

Hon MICHAEL WOODHOUSE: Well, both estimates are speculative, based on their value judgments about what companies with that level of turnover should pay. It is not the Inland Revenue Department’s job to estimate based on gross turnover. As I am sure the member is aware, the amount of tax paid is assessed on the taxable profit, and that is what they pay.

If there are ‘incorrect transfer pricing practices’ that can be identified then  Inland Revenue should be addressing them, but Shaw is not specific.

James Shaw: So is the Minister of Revenue saying that he has less of an idea about how much revenue is being lost than Matt Nippert and Craig Elliffe?

Hon MICHAEL WOODHOUSE: I should hope so. But look—if the member is saying that this does not look right or does not look fair, I have some sympathy with that point of view. But what is considered unfair is multinationals not paying tax anywhere in the world, and for that reason this is a global issue that requires a global response. I think the OECD is the best place in which to have that analysis.

There’s two separate issues that Shaw has not clearly differentiated between – avoidance of tax on profits disclosed in New Zealand, which Inland revenue should deal with, and international avoidance through profit transfers that are much more difficult to address without cooperation between countries.

James Shaw: Given that the Inland Revenue Department advised his office in 2013 that “We will be closely involved in, and guided by, the OECD work. However, this does not prevent us from addressing potential deficiencies in our own rules, which we have concerns about.”, why is he still to address these deficiencies in our own tax rules?

Hon MICHAEL WOODHOUSE: I do not accept that they have not been addressed, to the degree that there are robust tax policies already in place for the establishment of rules around permanent establishment and for the unfair transfer pricing for the purpose of avoiding tax. I think we have a really good tax policy framework. The Government invested nearly $20 million in last year’s Budget for the audit and compliance work that needs to go on in those large businesses, and I think we have a good system.

A claim that ‘deficiencies’ have not been addressed and a counter claim that specific directives and resources have been made available.

James Shaw: Well, given that answer, how many staff at the Inland Revenue Department currently work on base erosion and profit shifting, to address multinational tax avoidance?

Hon MICHAEL WOODHOUSE: I do not have that specific number to hand, but I would be very happy to get it to the member if he wanted to put that question down in writing.

James Shaw: Then will he introduce new law, like Australia has recently, to better police multinationals to require greater transparency and to collect a fair share of tax revenue from them?

Hon MICHAEL WOODHOUSE: The member is referring to laws that have been passed in both the UK and Australia on what is known as diverted profits tax, which disallow arrangements where foreign companies exploit permanent establishment rules and contrive tax advantage by having deductions that lack economic substance. I am getting some advice about that, but I am satisfied in the interim that we already have those sorts of rules in the Income Tax Act.

Greens were tweeting in parallel to this exchange:

The Revenue Minister needs to stop hiding behind the OECD’s slow progress and take action on tax avoidance, like Australia has

Australia cracked down on multinational tax avoidance last year: larger penalties, more enforcement resources, increased transparency

New Zealand also put more resources towards it last year.

I’d be surprised if Australian and UK measures have totally solved the problems associated with offshore profit shifting.

James Shaw: What does he have to say to New Zealanders and domestic businesses that are paying their fair share of taxes while international businesses that are operating in New Zealand can avoid them?

Hon MICHAEL WOODHOUSE: Putting aside that I do not absolutely agree with the second part of the question, I think all New Zealanders would agree that it is appropriate that everybody, regardless of their ownership, pay their fair share of tax on transactions that take place here in New Zealand. I am confident that we have good policies to enable that to occur and good resources deployed to check compliance with them, and where there are improvements that can be made, they will be.

I don’t know if the Greens have any specific proposals for handling taxation of overseas owned companies any differently to what is already being done.

It’s a lot more complex than waving a tax wand can fix.

I think this is an appropriate line of questioning from an opposition party, it’s their job to put pressure on the Government to do things like improve the means of fair taxation.

But it’s difficult to see how things could be substantially improved, especially without international cooperation on what is a complex and difficult issue.

One thing Governments tend to be good at is gathering as much tax as they legally can.

And large companies tend to be good at finding ways of avoiding paying any more tax than they legally have to.

Shaw followed up with a press release:

Govt has no idea how much tax multinationals are avoiding

The National Government has admitted it has no idea of the amount of tax it is missing out on from multinational companies that are avoiding paying their fair share of tax, the Green Party said today.

How is it possible to know how much tax companies are ‘avoiding’? Tax avoidance is not illegal and just about everyone tries to avoid paying more tax than they have to.

I avoid paying a million dollars of tax annually, because I don’t have to pay it.

“The National Government’s see no evil, hear no evil approach, means big international companies have been free to avoid paying some taxes. That’s not fair on ordinary Kiwis and businesses who have to pay ours.”

Shaw has switched from ‘multinational companies’ to ‘big international companies’.

“IRD warned the Government in 2013 that tax avoidance by multinationals was a big problem. Today, it’s clear the Government can’t – or won’t – say just how big the problem is.

“I would have thought the most important thing a Minister of Finance could be doing right now is finding a way to stop the loss of hundreds-of-millions of tax dollars offshore,” Mr Shaw said.

One thing the Greens are very good at is coordinating social media campaigns and media releases with questions asked in Parliament.

But apart from the framing of bad National and evil international companies Shaw is really not making any specific claims. Tax avoidance is not illegal and is common practice for large companies right down to individuals.

If companies (no matter how big they are or where they are owned) are illegally evading tax then that should be addressed, but Shaw doesn’t address evasion at all.

Shaw and the Greens seem to want to increase the taxation of large international companies. But their policy last election included:

9. Cut the company tax rate from 28 percent to 27 percent;

10. Increase the top marginal income tax rate to 40 percent for all income over $140,000, with a matching increase in the trust tax rate;

That would reduce the taxation of companies, including large international companies, and raise personal tax rates.

Is that fair on ordinary Kiwis?

And it’s fairly certain that substantially increasing the gap between company tax (27%) and personal tax (40%) will encourage more tax avoidance.

Leave a comment

17 Comments

  1. Alan Wilkinson

     /  30th March 2016

    Businesses don’t pay tax. Their customers and staff do. Their after tax profits pay for the investments and risks they undertake. The more they are taxed the higher their prices, the less they can pay staff and the less likely they are to invest in this country.

    Who cares, say the Left. It’s unfair so tax them more. And all of the above happen.

    Reply
    • Mefrostate

       /  30th March 2016

      Your caricatures of the Left aren’t really conducive to debate, Alan. I could paint an equivalent picture of you: “business taxes make prices higher and wages lower so we should have exactly zero business taxes”.

      NZ’s taxation principles are a broad base and low rate. Obviously every tax is paid by an individual at the end of the day, but BBLR helps minimise avoidance and behaviour distortions. Profit is one of the bases.

      All ‘the Left’ are saying here is that steps should be taken to reduce business use of loopholes to avoid paying their share, and thus undermining the above principles. It’s a perfectly legitimate issue for the opposition to put pressure on.

      Reply
      • Alan Wilkinson

         /  30th March 2016

        Go right ahead, I’m more than happy with that caricature. There is indeed a perfectly good argument for zero business tax which is that profits are rightly taxed as income for individuals and business tax is just double taxation as well as reducing the ability of businesses and individuals to invest their profits into growth and jobs.

        Your case is otherwise wrong from start to finish. Business taxes are distortionary. The Left is engaging in anti-business dog-whistling and the politics of envy. They do not care about the consequences.

        Reply
        • Mefrostate

           /  30th March 2016

          My case is factual – those are the principles used for taxation in New Zealand. It is currently the case that we have a corporate tax. Given those two facts, tax avoidance by business a perfectly legitimate issue.

          I hadn’t expected you to be so extreme that you agreed with my caricature. Here’s another: “personal income taxes and consumption taxes are just double taxation, and reduce the ability of individuals to invest their incomes into consumption and therefore jobs and wealth creation. We should have zero consumption taxes.”

          I’ll also note that you’re not arguing the issue. Woodhouse didn’t make the defense “NZ shouldn’t have a corporate tax”. The whole argument takes place under the condition that NZ currently does have a corporate tax. You essentially argue “I don’t think NZ should have a corporate tax, therefore the Lefties are “engaging in anti-business dog-whistling and the politics of envy.”

          Reply
          • Alan Wilkinson

             /  30th March 2016

            Personal income tax and consumption taxes are double taxation favouring investment over consumption. However compared with business tax they are universal rather than discriminatory.

            I’m not arguing with Woodhouse, I’m arguing with Shaw, and you. On principle, not as a lawyer, but looking at the big picture. And the Lefties are engaging in anti-business dog-whistling and the politics of envy because they always do, not because I don’t think NZ should have a corporate tax.

            Apart from that, I don’t think you got anything right.

            Reply
            • Mefrostate

               /  31st March 2016

              “Apart from that, I don’t think you got anything right.”

              This is personal and sweeping unless you actually identify the things which I got wrong.

              “However compared with business tax they are universal rather than discriminatory.”

              Can you explain what you mean by discriminatory in that context?

              “And the Lefties are engaging in anti-business dog-whistling and the politics of envy because they always do”

              Taking it as given that NZ has a corporate tax rate, do you believe that the government should attempt to close loopholes which benefit multi-nationals? Yes or no.

              I note that both Woodhouse and Shaw implicitly answer yes to this question in their debate. Their debate is very specific about how significant corporate avoidance is, and the measures NZ should take to combat it.

              But instead you choose to “look at the big picture”, and attack just “the Left”, even though “the Right” also seem to accept corporate taxes in the topic at hand. Talk about dog-whistles.

            • Alan Wilkinson

               /  31st March 2016

              Obviously everyone is subject to income tax and GST but only business owners and investors are subject to company tax.

              The loopholes you complain about are international tax rules. IRD already enforces them as best it can and moaning about them is not going to change anything. So looking at the fundamental issues is simply uncommon sense. Very uncommon obviously.

            • Mefrostate

               /  31st March 2016

              Obviously everyone is subject to income tax and GST but only business owners and investors are subject to company tax.

              But you pointed out that the customers are the ones who pay it anyway. And the same way that everyone who consumes pays GST, everyone running a business pays company tax. I don’t see the discrimination.

              The loopholes you complain about are international tax rules. IRD already enforces them as best it can and moaning about them is not going to change anything. So looking at the fundamental issues is simply uncommon sense. Very uncommon obviously.

              Both Shaw and Woodhouse acknowledge that there’s improvements to be made both domestically and internationally.

            • Alan Wilkinson

               /  31st March 2016

              I doubt either Shaw or Woodhouse have the faintest idea about how such improvements can be made. It is fearsomely technical.

  2. Brown

     /  30th March 2016

    No one is asking about the potential to tax everyone less or on a different basis. Income tax is a relatively recent invention that has allowed all sorts of largesse by stupid and greedy people yet we assume that i the way it has to be. I think the idea of taxing wealth rather than spend is inherently wrong.

    Reply
    • Mefrostate

       /  30th March 2016

      “Income tax is a relatively recent invention that has allowed all sorts of largesse by stupid and greedy people”

      Can you explain more about what you mean here?

      “I think the idea of taxing wealth rather than spend is inherently wrong.”

      When you say “wealth” here, do you actually mean “income”?

      Reply
      • David

         /  30th March 2016

        Income tax didn’t exist really before WW1

        Reply
        • Mefrostate

           /  30th March 2016

          I’m more interested in the ways in which it has allowed all sorts of largess by stupid and greedy people.

          Reply
          • Brown

             /  31st March 2016

            When you gather tax by way of duties and excise it limits spend because tax income is limited to what you collect on consumption – its a finely balanced tax. Get greedy and people stop buying stuff (or make their own booze and cigs) and income falls.

            When you can take a chunk of wages there’s no limit to what you can do because you just keep raising the tax rate. People can complain but can’t stop working so politicians have them in their sweaty palms. That allows wish list spending and pet projects that would not be affordable under a sales tax regime. In NZ income tax arose in 1913 to break up land holdings that were unproductive. Locals at the time moaned about 3 pence in the pound rates, not because of the amount, but because they could see where it would lead. They were right. Today govts borrow huge sums because they can fleece the tax payer to keep the banking system on side.

            Pre income tax days saw projects like railway networks undertaken. They were expensive in their day yet there was no robbing the worker to pay for them. It was, in my view, a better way.

            Reply
  3. David

     /  30th March 2016

    Does this now mean Fonterra will have to pay tax on all it’s earning to China? Does BMW pay tax in NZ for the cars it made in Germany? Does Twitter get shut down for avoiding tax by making huge losses instead of profits?

    Reply
    • Pantsdownbrown

       /  30th March 2016

      Don’t worry – Like the TPPA Labour/Greens if made govt will ‘renegotiate’ all the stuff that they don’t like, leaving just all the good stuff.

      So the NZL govt will get all the tax payments of New Zealand company earnings made in China whilst also making all the Chinese companies operating in NZL pay tax on all their earnings to the NZL govt.

      Can’t see the Chinese not agreeing to that?

      Reply
  4. Ratty

     /  30th March 2016

    Transfer Pricing is only an issue when done in breach of two nations double tax agreement (as is Thin Capitalisation)..

    Companies are primarily taxed on Worldwide Earnings at place of abode.

    Tax paid is usually repatriated through the DTA to the Parent Company

    Reply

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