Time to pay some tax, Facebook?

PATTRICK SMELLIE
Last updated 05:00 19/06/2014

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OPINION: So let me get this straight.

Facebook, the vast, online, global web of family, friends and contacts, worth US$165 billion (NZ$190b) at last count and with global revenues in the first quarter of the current financial year of US$2.5b, made a loss in New Zealand last year of $82,810.

What an oddly specific number.

This "loss" was "earned" on total revenue in this country of just $846,391 - also oddly specific, and a sum rendered in return for unspecified services by the New Zealand arm of Facebook, whatever that is, to Facebook Ireland.

Ireland has very accommodating corporate tax laws, often involving a structure known as "the double Irish", where two subsidiaries are registered in Ireland and one routes its revenue through a fully-fledged tax haven, as often as not located in the Caribbean.

Other multi-national firms taking advantage of such cosy arrangements include Apple, Microsoft, Google, Oracle, Cisco, eBay, Johnson & Johnson, Pfizer, Merck, and Bristol-Myers Squibb.

One of the fringe benefits of owning a global social network empire is that you can domicile the thing wherever you like and pay only as much tax as you choose.

In Facebook's case, it declared tax of $23,034 in New Zealand last year in its mandatory Companies Office filings - just about the only detail discoverable about Facebook's New Zealand operations - which is a bit odd, since the local unit also declared a loss, so it's not obvious why any tax was owing.

What is clear is not only that these numbers are as close to a convenient fiction as it's possible to get while remaining within the law, but cash-strapped First World governments are losing patience with such arrangements.

The European Commission last week declared it was launching a formal investigation into the relationship between Apple and the Irish tax authorities, while in the United States Congress, the joint committee on taxation warned that American companies were incurring debt servicing costs they wouldn't face if they stopped hoarding cash outside the US to avoid tax, and borrowing to invest for growth instead.

To gain tax benefits, they were running their companies inefficiently just to get a tax break that was cutting their tax burdens by up to a quarter.

According to The Financial Times, investors are also concerned that companies are reporting earnings growth based on tax efficiency rather than improved underlying performance. In other words, they may be growing lazy or complacent as tax breaks make them look good on paper.

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How quickly or effectively governments can move against such arrangements remains moot. While OECD member nations have been talking a tough game on measures to contain the inelegantly named phenomenon known as BEPS - base erosion and profit shifting -any action will require an unusually united front and could take years to implement.

However, sometimes, the taxpayer wins. The latest such win in New Zealand, buried in the prospectus for the Hirepool float announced on Monday, is the company's abandonment of some $58.3 million of tax losses, involving not quite clever enough use of convertible notes to fudge debt and equity between New Zealand and Australian interests.

Both "optional" and "mandatory" convertible notes - OCNs and MCNs - were widely used to turn debt into equity and vice versa to exploit differences between the Australian and New Zealand tax codes in the first half of the last decade.

Among those caught in a dragnet of Inland Revenue Department anti-tax avoidance operations targeting these devices have been Qantas, Transfield, Telstra Corp, Toll Holdings, and Ironbridge, the former owners of Mediaworks, which runs the TV3 and RadioLive networks.

A test case, involving West Australian firm Alesco, nearly went all the way on appeal to the Supreme Court, before Alesco's owners decided to cut a deal with the IRD rather than fight an apparently lost cause.

Hirepool's MCNs are likely to have dated the deal in 2006 when Auckland investor couple Sharon Hunter and Tenby Powell sold 80 per cent of Hirepool to Next Capital, an Australian private equity investor, for $174m.

By selling some of their shares into next month's float, Next and other shareholders expect to bank between $43.2m and $125.2m, depending on the strike price.

No doubt, they had hoped at one time to crystallise at least some value from the $58.3m of tax losses accrued on the Hirepool balance sheet.

Assuming a dollar of tax loss converts to 28 cents in the hand at the current company tax rate of 28 per cent, those losses may have been worth around $16.3m in avoided tax.

However, those efforts were formally abandoned on June 9, less than a fortnight ago, when a settlement was reached with IRD.

The tax losses appear to have been a loose end needing a tidy-up before the Hirepool prospectus could be registered.

While $16.3m in tax clawed back might not sound much, every $16.3m won for the taxpayer adds up, and action against abuses involving MCNs and OCNs are expected to realise as much as $300m in back tax and penalties.

However, victories of this size don't start to touch what could be achieved if multi-national corporations that play the tax field were paying a fair whack in every country where they make money. 

- BusinessDesk

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