No point trying to close stable door
From time to time our news headlines are emblazoned with reports about multinational corporations, such as Apple, Facebook, Google, Linkedin and Starbucks, paying very low taxes despite reporting healthy profits.
Such articles talk of multinational companies shifting otherwise taxable profits to low tax jurisdictions and tax havens and claim tax revenue losses larger than all of New Zealand's telephone numbers added together and multiplied by our GDP. Many articles will leave the reader with a sense of moral indignity and outrage that comes out in us all when we see examples of the wealthy ripping off the poor.
In response, governments, political leaders, and international organisations such as the EU and the OECD are all clambering for the headline to tell the story about what they are doing to clamp down on these outrageous practices. Indeed our own minister of revenue in a recent speech highlighted his understanding of the issue with reference to buying a pig off a person who had sold the intellectual property rights to his pig hunting techniques to a related company in the British Virgin Islands.
While I'm not unsympathetic to situations governments find themselves in with their tax bases being eroded, I think the current noise levels on this topic are getting a little past the point of objectivity.
There is nothing new in multinational corporate tax avoidance. Further, a lot of the techniques used to lower multinational corporate tax bills have been around longer than your grandmother's old ironing board. While the media make multinational corporate tax avoidance look like a recent event in a James Bond movie, the reality is that the menu of tools available to shift corporate profits from country to country is more well known to accountants across international borders than a McDonalds restaurant menu.
The other irony in all of this is that many countries continue to offer tax incentives to attract international investment. So while governments around the globe publicly beat up corporates on the one hand for shifting profits into lower tax jurisdictions, on the other hand they continue to turn on the red light to attract foreign investment. A good example of this is the incentives available in many countries for local film content.
So what is the answer to all of this? In my view many of the problems being grappled with stem from the antiquated corporate tax model. This is long past its use-by date. In short, it's a dray. And no matter how many additional horses governments bolt on, it will always lag behind the speed and agility of the corporate tax planners' pen. And every time governments move to close tax loopholes, they inadvertently just open more.
If governments are serious about eliminating multinational corporate tax avoidance then there are two options. Shift the corporate tax base to align with the accounting rules for determining profits, that is, tax the actual declared profits of these companies that are used to determine share prices and executive remuneration, or find another mechanism to tax corporate profits altogether.
Further moves to attach yet more horses to the dray that is the corporate tax model will just create more incentives to find yet further ways to get to the same end point.
» Craig Macalister is tax principal at accounting firm WHK. He can be contacted on 03 211 3355.
The Southland Times