Editorial: The taxman cometh

18:54, Jan 17 2013

New Zealand is being rorted out of hundreds of millions of dollars of tax revenue because international conglomerates that have subsidiaries in this country are artificially inflating their costs and expenses to shift their real profits into tax havens overseas.

The multinationals are acting within New Zealand and international law, but it is still a rort.

Companies such as Google, Starbucks, Microsoft, Apple, Amazon and Facebook pay almost no corporate tax in many countries and are quite blatant when justifying their behaviour.

Google chief executive Eric Schmidt caused public outrage in Britain last month when, questioned about how his company could pay just 2.5 per cent tax on all of its profits in countries other than the United States in 2010, he boasted that Google was proudly capitalistic and "very proud of its tax arrangements".

Google uses such exotic methods as the "double Irish" and "Dutch sandwich" accounting systems to load up debt and other charges on its operations in most countries, so siphoning off the real profits into much more benign tax regimes.

That's why Google's New Zealand operation was able to pay just $109,038 in corporate tax in 2010, about 2 per cent of the cash it generated, says Labour revenue spokesman David Clark.


It wasn't shy about defending those figures either, claiming it was a good corporate citizen because it helped thousands of New Zealand businesses grow their presence online. Oh, and it also donated some of its products to charities.

Starbucks' corporate behaviour is equally self-serving. It claims it has operated in Britain at a loss and hasn't paid any corporate tax there since 2009, even though it has more than 900 outlets and generates hundreds of millions of dollars in revenues in there each year.

It, too, is quite blatant about how it rorts the system. Among a range of devices it uses to avoid paying its real share of taxes, it hands over to its Dutch operation a 4.7 per cent licensing fee for "image rights". It also buys its coffee from a Swiss division of Starbucks that charges a 20 per cent premium on the product.

And so the real profits are moved on and on until they reach a tax haven where the corporate is required to pay little tax and, in some instances, none at all.

Given those attitudes, the reaction of leading New Zealand businessmen was entirely predictable this week when the Department of Inland Revenue issued a discussion paper on "thin capitalisation", a proposal to close loopholes that allow privately-owned companies with head offices registered overseas from loading their New Zealand subsidiaries with excessive levels of tax-deductible debt and various types of patent or royalty payments, then transferring the real profits overseas tax-free.

Employers and Manufacturers Association chief executive Kim Campbell warned such a move could threaten the Christchurch rebuild and other large infrastructure projects and urged Inland Revenue to concentrate instead on attracting more foreign investment by "for example" lowering taxes.

Other leading businessmen were quick to add to the clamour of complaint.

Worse is to come, though, for those who think they can continue rorting the tax system with impunity. New Zealand is supporting a move by the Organisation for Economic Development, the OECD, to draft international tax laws that would close the loopholes that have allowed the multinationals to avoid paying billions of dollars.

The OECD's governing body on tax meets next week to consider that draft and, if it is approved, its officials predict changes could be introduced as soon as later this year.

The Southland Times