Matt Nippert is a business investigations journalist.

The Tax Gap - Where do their profits go? How Apple, Facebook and Google move their earnings overseas

In high-rise offices around the world, small armies of tax accountants and lawyers are playing their own, insanely high-stakes version of The Biggest Loser. As business has become detached from bricks and mortar and national ties, companies are now free to shed profits in one country and send them to another -- out of New Zealand, to low-tax territories or no-tax havens.

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Graphic / NZ Herald
Graphic / NZ Herald

This reality production occasionally descends into comedy, when participants argue self-interest plays no role in their shifting of profits.

Last year, oil giant Chevron was hauled before an Australian Senate inquiry and questioned about 200 companies it had registered in Bermuda, insisting this location was chosen entirely because of its superlative record in "maritime safety", and had nothing to do with the haven's zero per cent corporate tax rate.

New Zealand is not just a spectator to all this profit-shuffling. A Herald analysis of financial data from more than 100 multinational companies with operations in this country reveals how the game is played: most report much lower levels of profit in this country than their parent companies do in other, lower-tax jurisdictions.

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For example, the 20 companies listed in the table opposite made an average profit of only 1.3 per cent on their reported NZ revenue. Their parent companies, however, reported an average profit margin of more than 20 per cent on their revenue.

Victoria University Emeritus Professor of accounting Don Trow, who suggested comparing the profit margins on pre-tax income as a simple measure of profit shifting, says the big difference between subsidiaries and their parents raises worthwhile questions.

WATCH: Adam Hunt talks accounting tricks:

Video

"It's reasonable speculation that they're shoving costs to those countries where there's more tax to be paid and transferring revenue to those areas where the tax is lower," he says.

The motivation to save money shouldn't surprise anyone, says Trow, even though New Zealand's 28 per cent corporate tax rate per cent is hardly punitive and sits in the middle of the OECD pack. "It's just human nature, isn't it?" he says.

Out of the sea of numbers thrown up by the analysis, some striking trends and observations emerge.

For example, it's not a stretch to say New Zealand's oft-maligned banking sector more than pulls its weight in contributions to Inland Revenue. The sector has revenue of $19 billion, which accounts for less than 30 per cent of the data set, but its income tax contribution of $1.8 billion makes up 80 per cent of all taxes paid by the companies analysed.

(Calls to the Bankers Association to congratulate the sector on its sterling contribution to government coffers were not returned. Taxation may still be a tender subject: in 2009, a settlement with Inland Revenue saw the four Australian-owned banks pay $2.2 billion in taxes after allegations they had been using structured finance arrangements to artificially suppress taxable profits.)

Graphic / NZ Herald
Graphic / NZ Herald

The 20 companies whose subsidiary profit margins varied most from those of their parents -- a cluster of technology, energy and drug companies -- collectively booked $10 billion in revenue in New Zealand, but only $133 million in profit and, after a range of deductions, paid only $1.8 million in income tax.

The 1.3 per cent average local profit margin reported by those 20 companies stood in stark contrast to the rude health of their parents, which profited at a rate of 20.6 per cent on their revenue.

Former senior Inland Revenue manager Adam Hunt says that while the Herald's analysis is simple, it measures discrepancies that should interest authorities and at least spark a once-over.

It's reasonable speculation that they're shoving costs to those countries where there's more tax to be paid and transferring revenue to those areas where the tax is lower.

"It's not rocket science," he says. "What we did was exactly what you've done: go through the database looking at profit and tax paid."

Hunt cautions against thinking there's any definitive way to count missed income taxes, but suggests ballpark estimates thrown up by the Herald analysis of $500 million annually -- calculated by the overall gap between local and overseas profitability rates -- are likely to be on the low side. "It's probably about half of what's at stake," he says, noting that, while it is a lot of money, it represents only 5 per cent of the corporate income tax take.

Speaking generally, Hunt says there are two main ways to play The Biggest Loser and massage profits downwards and back to a lower-tax jurisdiction. The first -- what he characterises as "hardcore transfer pricing" -- involves internal charges between different branches of a company, allowing money to be moved from one country to another.

The second approach is more involved, but relies on either loading a subsidiary in a higher-tax jurisdiction with debt -- the interest payments count against profit -- or charges for things such as royalties, licences, marketing or management.

WATCH: James Shaw talks why the government should crack down on profit-shifting:

Video

Hunt says the principal question is "how do you capture a tax and where does it arise?" While consumer goods are generally counted at the point of consumption, he says the field is shrouded in mist when it comes to services and intellectual property, and it becomes less clear where these should be counted.

The problems with capturing income tax have become so tricky, Hunt argues, that the only way forward may be to rely more on indirect taxes like GST. "It's the only way you can really assure yourself you'll capture this stuff, because income floats around," he says.

It's worth noting here that this is not a story about criminality, and is instead about the messy world of accounting and tax law that is evolving and strewn with intangibles.

All companies approached by the Herald were keen to stress their compliance with local laws. ("It is always the priority for Roche to follow local laws and regulation," says drug company Roche, for example.) Many stressed they had arrangements with Inland Revenue on agreed levels of income, or noted substantive differences in the nature of their New Zealand business to explain the difference in margins.

[Some companies] are profit-shifting and stripping a lot of value out of the country and not leaving much behind.
Simon Moutter, Spark

Other companies, notably from the alcohol industry, stress that their total tax payments -- including PAYE for local employees, GST and excise taxes on the sale of alcohol -- are a better measure of their contribution to New Zealand than income taxes alone.

However, Labour Party finance spokesman Grant Robertson and Green Party co-leader James Shaw are both calling for Revenue Minister Michael Woodhouse to ensure everyone operating in the economy is paying their fair share.

Robertson wants Inland Revenue to get a shot in the arm to allow it to more closely scrutinise the torrent of money leaving the country. "We already know from IRD that every dollar we give them in enforcement we make back manifold," he says.

Shaw argues that without government action, the economy will tilt further out of balance. "This is a government problem, where we've created a legal scenario where large multinational companies don't have to pay tax in New Zealand, but New Zealand companies do," he says.

Woodhouse, despite repeated requests, declined to comment.

The issue exercises more than just Opposition MPs. Rumbles are also beginning to be heard at the highest levels of the New Zealand business community, as concerns mount about competitors capitalising on their tax advantage and the potential consequences of hollowed-out national economies.

Simon Moutter, chief executive of telecommunications giant Spark, says profit-shifting undercuts domestic businesses competing in the same industry and threatens the ability of governments to provide essential services.

"It is a material advantage to pay no tax in a country," he says.

"What we're seeing is the emergence, particularly with these digital businesses, which are very lightweight and don't have much economic footprint on the ground of New Zealand. They are profit-shifting and stripping a lot of value out of the country and not leaving much behind."

Moutter -- like Robertson and Shaw -- points to Australia as an example of how governments can respond. Last year the Australian Tax Office announced a crackdown on profit-shifting by the pharmaceutical and technology industries, helping secure A$1 billion in additional tax payments.

Moutter says such a dragnet would help share the tax load presently borne mostly by New Zealand individual taxpayers and companies. "A few hundred million dollars is a prize worth having: that would make a material difference in New Zealand today if we had that tax being paid in," he says.

International debate about the issue has been bubbling under the auspices of the OECD's Base Erosion and Profit-Shifting (BEPS) talks. There, officials have been locked in discussions since 2012, looking for ways to co-ordinate tax policy in order to present a wide-ranging response to the problem and minimise the risk of regulation pushing economic activity further offshore.

Moutter agrees with the thrust of a multilateral approach but argues that specific action could complement and reinforce moves taken internationally. "In the short term, let's put some interim measures in place which ensure that these large corporations who're paying no tax anyway, effectively, make a fair contribution to the countries from which they take that value," he says.

Inland Revenue's head of international audits, John Nash, calls the Herald from Paris, where, as it turns out, he's been sitting through more talks on BEPs.

Nash says he is unsurprised by the numbers thrown up by the Herald analysis, but says the issue is more complex than a mere comparison of profitability ratios.

We totally agree with the sentiment, but some people don't understand that it's complex when they say 'why can't corporations pay more tax?' It's not as simple as that.

"Take the pharmaceuticals sector. It's amongst the most profitable corporate sectors in the world, absolutely no question about that," he says. But the local pharma industry is effectively just a distribution agent.

"In terms of the way we tax, is you tax the value-add. I wish it wasn't like this. But you can only tax what gets added in New Zealand and we're right at the end of the value chain. Unfortunately, that's the state of the industry in New Zealand; it's not necessarily a reflection of profit-shifting," he says.

Nash, perhaps unsurprisingly for a public servant, isn't lobbying for a radical change in policy or a fresh crusade against specific industries as suggested by Opposition MPs. He says the struggle to define profits and keep them in New Zealand is a "continuous battle" - one that he is not willing to say we are winning.

"I'd never say winning; we're trying to hold our own. I don't think there's a country out there saying they're winning that battle. It is becoming progressively difficult to maintain levels of tax, there's no doubt about that. That's why we really have been so involved in the global debate."

What $500m of additional taxpayer money could buy:

Graphic / NZ Herald
Graphic / NZ Herald

And beyond the faceless boilerplate responses from the multinational corporations topping the Herald's list, there is also debate and opinions being expressed. One representative who spoke only on the condition that neither they nor their globe-spanning employer would be identified, says they sympathise with those crying foul but are concerned about the solutions being touted.

"We totally agree with the sentiment, but some people don't understand that it's complex when they say 'why can't corporations pay more tax?' It's not as simple as that," the corporate spokesperson says.

The prospect of new laws or regulations sprouting in countries where the issue of profit shifting is a hot-button political issue is the worst-case outcome, the spokesperson says, and would crimp a country's export earnings. "It cuts both ways and you only end up with increased red tape. We don't think unilateral action makes the most sense."

That argument has attracted some sympathy from within Inland Revenue, with tax policy director Emma Grigg agreeing that authorities have to simultaneously play good cop and bad cop in a bid to achieve compliance, while also trying to attract new businesses.

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"We try to walk with that balance. A lot of the concern is that you end up with a huge amount of complex legislation that could put people off investing in New Zealand," she says. "But at the same time, you want people to pay their fair share of tax."

But it's this quest for fairness that drives Spark's Moutter, and others, to make the debate more public, in a bid for change sooner rather than later.

"It's complex, I get that, and the sort of the thrust of the logic here is that we need New Zealand to be one of the dozens of countries in some large consensus solution," he says. "That's probably the right answer in the long term, but that's my fear: it's the long term and we'll be waiting for too long for that to result in anything."

So far, he says, in New Zealand The Biggest Loser has been only of niche interest.

"Anything about tax," he says, laughing at his own intense interest in the subject, "is probably considered relatively uninteresting and complicated."

Getting to the numbers

The Herald's analysis compared tax paid and profitability margins (the ratio of pre-tax profit to revenue) of multinational corporations with their New Zealand subsidiaries.

Using Deloitte's top-200 list of New Zealand's biggest firms as a starting point, then adding subsidiaries of the world's largest listed companies, and high-profile companies involved in overseas debates on the tax issue, the Herald identified 103 local companies whose performance could be directly compared with the audited accounts of their listed parent.

The process was laborious, involving collecting more than 500 annual and financial reports -- many comprising hundreds of pages -- with each having to be read in order to pluck out the required numbers from statements of consolidated income.

Companies were excluded if they reported particularly unusual results, typically from business sales or write-downs, and multinationals whose New Zealand operations were split across several subsidiaries had their domestic results combined.

The data fails to capture income from New Zealand which is directly booked by offshore firms. For example, Facebook New Zealand's reported revenue of $1.2 million is clearly only a fraction of the sum Kiwi businesses spent advertising on the world's largest online platform.

The data also omits the New Zealand operations of firms which are owned offshore, but not by listed companies, as audited information about their profitability is not readily available. This means outfits such as salmon and forestry conglomerate Oregon Group, owned privately by Malaysia's billionaire Tiong family, escapes measure.

Despite these caveats, and the group being non-comprehensive, the Herald data nevertheless captures a surprisingly large chunk of the economy. The 103 companies recorded $67 billion in annual revenue, accounting for 30 per cent of New Zealand's gross domestic product, and the dataset appears to be one of the most comprehensive of its kind.

Parliamentary written questions to Inland Revenue, asking whether authorities had an estimate of the scale of multinational companies in New Zealand, or the tax they paid, were answered by Revenue Minister Michael Woodhouse.

"I am advised that Inland Revenue does not hold information in a way that enables it to readily identify multinational companies. I am therefore unable to provide the figures requested."

- NZ Herald

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