Changes inevitable to tax tech giants
Technology giants are likely face increased global tax bills in the future.
Such is the degree of political outcry by many governments on the low tax take from these companies, and their need to fill empty tax coffers, that changes to long standing international tax rules or some new basis of taxing these new business models seem inevitable.
The British government has launched a full assault. First, a parliamentary committee quizzed executives of Starbucks, Google and Amazon on the apparent lack of tax being paid in the UK. The chairperson of this committee has labelled schemes used by these companies as "completely and utterly and totally immoral".
Now their attention has moved to the Big Four accounting firms where representatives have been summoned to explain their knowledge of the structures used by many global tech companies.
Starbucks is in damage control in the UK after scathing attacks on its historic tax bills. It has even volunteered to pay minimum tax of £20 million (NZ$37m) over the next two years. In a cutting jibe, Prime Minister David Cameron has told other multinationals paying little UK tax to "wake up and smell the coffee".
Apple has recently joined Google and Facebook in attracting media attention in Australia where it has been slammed for paying too little tax based on the level of its reported revenue. Though Apple's tax bill was claimed to be a hefty A$40m (NZ$50m) for 2012, it is being criticised because that represents only a small fraction of its revenue of A$5.5b.
Most governments, including New Zealand's, are seeking a consensus solution from the OECD group currently reviewing what it calls "Base Erosion and Profit Shifting". The OECD is due to give an interim report to the G20 group of countries shortly. Many are also considering their own unilateral solutions. France has drafted a report suggesting a possible levy on user data generated free for the benefit of the tech company.
Whatever solutions the OECD offers up, governments want to increase their own sourced-based taxation. This, they claim, is "fair", given significant consumption of the tech companies' services in their country and the fact that no other country, including the US, is seeking to tax that income. The Obama Administration is working on reforms to ensure the US tax coffers benefit from revenues being generated from intellectual property that has effectively migrated out of the US into tax havens.
In New Zealand, while a tech company may generate considerable revenue from New Zealand buyers of its products, typically few of the real value-adding activities in the group's business process occur in New Zealand.
If New Zealand has a claim to tax the revenues from consumption in New Zealand, the difficult question is determining a reasonable amount of profit that would be subject to income tax here. Transfer pricing rules would dictate New Zealand may claim only a modest share of the tax on the group's overall business profits from sale of the products.
For New Zealand-based technology companies, international tax changes may result in their total worldwide tax bill increasing as foreign governments seek more tax at the expense of New Zealand tax take.
Mark Loveday is a tax partner at Ernst & Young