Doors closing for tax dodge schemes
Tax loopholes used by multinationals to avoid paying billions of corporation tax could be closed within two years, the Organisation for Economic Co-operation and Development's top tax official told BusinessDay.
New Zealand threw its weight behind the OECD's work to shore up taxation last month when Revenue Minister Peter Dunne ordered Inland Revenue to actively engage in the OECD's "Base Erosion and Profit-Shifting" (Beps) project.
That followed statements of support for Beps from British Chancellor George Osborne, German Finance Minister Wolfgang Schauble, and the French and Australian governments.
Beps' goal is to clamp down on controversial tax avoidance schemes, including those reportedly used by the likes of Google, Starbucks, Microsoft, Apple and pharmaceutical giant Pfizer to avoid paying billions of dollars in corporation tax.
Labour Party revenue spokesman David Clark said in November that the New Zealand arm of the world's most used online social networking tool, Facebook, paid only $14,497 in tax during 2011 up from $5238 in 2010.
"For a company that has 2.2 million users in New Zealand and makes billions worldwide, that's barely believable. It appears Facebook is using the ‘double Irish' tax technique. That's where it uses Irish Facebook, which pays just 12.5 per cent tax, to determine revenue and expenses. This ensures the company can put most of its revenue through countries with low-tax systems," Clark said.
"It's not just Facebook that structures its affairs to take advantage of a low-tax Irish counterpart. Google New Zealand does it too. That company paid just $109,038 tax on $4,447,898 in revenue. That's 2 per cent. These companies should pay the right amount of tax here. That's only fair."
Speaking to BusinessDay from Mexico, OECD tax policy director Pascal Saint-Amans, said momentum for action was building and it could result in the biggest changes to international tax rules since the 1920s.
"For a few years now, press campaigns have been raising awareness of the fact that laws can result in very low taxation of multinationals, particularly those involved in the digital economy.
"There is a strong push from some key ‘G20' countries to address this issue quickly, which is new. Look at the debate in New Zealand which has been very supportive and enthusiastic in supporting our work."
The OECD's governing body on tax is due to meet on January 21 to consider a draft report on Beps that would then be submitted to the next meeting of the G20 in Moscow on February 15, he said. Saint-Amans hoped that would lead on to a "comprehensive action plan" in June or July.
Google chief executive Eric Schmidt inflamed public opinion in Britain in December when he defended rorts such as the "double Irish" and "Dutch sandwich" accounting schemes that news agency Bloomberg said had resulted in the company paying just 2.5 per cent tax on its profits outside the US in 2010 and avoiding US$2 billion (NZ$2.3b) in taxes last year. Schmidt said Google was very proud of its tax arrangements and "proudly capitalistic".
A Google spokesman said it made a broad contribution in New Zealand for example by helping thousands of local businesses grow online and making charitable donations of its products, and it complied with the law.
Saint-Amans said multinationals were generally acting legally but some had been too "aggressive" and he encouraged them to follow the spirit as well as the letter of tax laws.
"My response to [Schmidt's comments] is to conduct properly the work on Beps," he said.
Businesses represented on the OECD's Business and Industry Advisory Committee had been supportive of Beps, he said. "We have worked with businesses to eliminate double taxation and we want them to support us in our work to eliminate double non-taxation."
Saint-Amans warned of dire consequences if the effort lapsed. "If we do nothing we will put corporate income tax in jeopardy. The other risk which is even bigger I think is that China, India, South Africa and some others will put in place some very harsh withholding taxes to protect themselves. Then you would have the mess of double-taxation or triple-taxation which will not be good for business or governments. If we want to use the political momentum, we need to go fast."
The contribution of corporate income tax to GDP had not yet collapsed, he said. But the declining contribution of multinationals had been disguised by a shift from personal to corporate tax as small businesses chose to become incorporated to take advantage of a global trend toward lower corporate tax rates.
Although Irish and Dutch laws have been blamed for some of the rorts, Saint-Amans said both countries had expressed support for Beps.
"It is not about bashing businesses who use what is available to them, or the fault of any country.
"More importantly, the way to address the problem is to make the use of such instruments impossible. We need an overall, comprehensive, global answer and to do that we need to go back to basics."
Saint-Amans said there was no magic bullet but designing general anti-avoidance rules and better rules surrounding controlled foreign companies (CFCs) was "definitely part of the project".
Inland Revenue said in its briefing to Dunne that while many technology multinationals did not have a significant presence in New Zealand so might pay little tax here regardless, tightening up international tax rules would reduce their incentive to conduct their business here from overseas.