Progress made in effort to stop tech companies' tax rorting

17:00, Jul 07 2014

Few people have much time for the tax rorts that multinationals operating in the "weightless" digital economy have used to route profits to tax havens.

Notorious accounting techniques such as the "double Irish" and "Dutch sandwich" have reportedly allowed Google to pay just 2.4 per cent tax on profits it makes outside the United States.

As digital business grows, such rorts threaten the tax streams needed to support the progressive social policies of European-style social democracies, such as New Zealand.

The National Government argues the best solution lies in an ambitious, multilateral initiative by the Organisation for Economic Co-operation and Development, called Beps (Base Erosion and Profit Shifting). The initiative aims to close the loopholes and completely eliminate "double non-taxation" within a couple of years.

Labour has argued the Government could and should do more unilaterally. It has even suggested Inland Revenue officials should be "embedded" in the local subsidiaries of overseas-owned firms.

The chances of progress are best if both parties stick to their slightly different guns.


The best way to repair the international tax system is to take the multilateral approach.

But given the different national interests involved, it is unrealistic to expect the OECD to pull off an agreement unless other forces are breathing down the neck of global business, threatening unilateral actions.

Ernst & Young quoted US Treasury deputy assistant Robert Stack last month as citing "tax competition and tax sovereignty" as among the issues complicating Beps negotiations.

Revenue Minister Todd McClay said last week that the OECD's work had taken a step forward at a meeting attended by officials from Inland Revenue in Paris earlier this month.

Specifically, the OECD finalised recommendations and reports on seven of 15 "action points" that form the Beps programme. These will be put to a meeting of finance ministers from the G20 in Cairns in September.

The recommendations are confidential, but will be designed to ensure companies pay tax on all their income somewhere, by addressing technical issues such as hybrid mismatch instruments and tax-treaty abuse.

That doesn't necessarily mean the likes of Apple, Google and Microsoft would pay tax locally on all the profits they derived from New Zealand customers, however.

The OECD published a discussion paper in March which canvassed two nuclear options that would have the effect of making billions of dollars of international technology business profit liable for company tax in New Zealand for the first time.

But the OECD appeared to rule them out by arguing "ring-fencing the digital economy as a separate sector . . . would be neither appropriate nor feasible".

One of the ideas was that multinationals that traded primarily in digital goods and services might be liable to pay tax on profits in countries where their services were bought, rather than where their services were provided or billed from.

The OECD said an alternative was to allow countries to impose a withholding tax on certain payments for digital goods or services to a foreign e-commerce provider.

None of the multinationals accused of aggressive tax planning made direct submissions to the OECD paper.

But TechAmerica Europe, which appears to represent most large US IT companies doing business in Europe, submitted that it was not appropriate for multinationals to be taxed in a "jurisdiction where they have no assets, functions or employees".

Those are just the kind of extreme threats that may need to be thrown around, however, to end the tax rorts and help save social democracies from the worst of Silicon Valley's unbridled capitalism.