As business gets more international, and more digital, the tax collector's job gets tougher. Brian Fallow looks at some possible answers.
Large chunks of the tax base resemble icebergs, drifting north into the warm waters of the global and digital economy.
Policymakers have a term for this: "base erosion and profit shifting" - BEPS for short.
They are grappling with the changing nature of international commerce, where the eternal desire to minimise the tax you pay is assisted by the rapid growth of e-commerce, and by the opportunities presented by countries' different tax laws and the ability of multinational firms to locate debt funding and intellectual property wherever will maximise the bottom line.
As part of that effort, finance ministers from 20 major economies, meeting in Sydney last Sunday, agreed to adopt a regime for automatic information sharing among tax authorities.
The Organisation for Economic Co-operation and Development (OECD) calls it the Common Reporting and Due Diligence Standard. You can translate that as: "We are going to make your banks tell on you."
And not just banks, but other financial institutions, including brokerages, certain collective investment vehicles and some insurance companies.
Finance Minister Bill English says New Zealand backs the move and the OECD says more than 40 countries have already committed to early adoption of the standard. It is based on a unilateral United States initiative called FATCA (the Foreign Account Tax Compliance Act) that imposes draconian penalties on any US assets of foreign banks which do not supply information the US tax authorities require.
In New Zealand's case the most obvious, and perhaps most fiscally significant, example of base erosion is the non-payment of GST on goods and services bought online from foreign suppliers.
Because these goods and services are being consumed in New Zealand, they should be subject to GST.
The fact that purchases below a value of $400, and most of those delivered digitally, escape the tax is a sore point with bricks-and-mortar retailers. They see it as unfair competition and a threat not only to their (taxable) profits, but to their ability to employ people, pay rent and so on.
Estimates of the magnitude of the problem vary, but whatever its size, there is wide agreement that it is growing fast.
Marketview, a Wellington-based analytics firm, estimates that in the past year New Zealanders spent about $1.1 billion on international online purchases - twice as much as just four years ago.
And the average value of each purchase is falling, it says.
The $400 threshold is derived from the amount Customs says it costs to inspect a package and its documentation at the border, arguing that it makes no fiscal sense to spend more than $1 to collect $1 of GST or duty.
So one suggestion is to attack the problem through the payments system, using credit card information in particular.
"I understand some work is being done on that," says Robin Oliver. Now a principal of tax practitioners OliverShaw, until 2011 he spent 16 years as deputy commissioner in charge of tax policy at the IRD.
"There are some complications. The banks are not keen. Until you get an international agreement it would be very hard for New Zealand to go it alone."
But the payments system is one way of going after digital wares, Oliver says.
He favours a multi-tiered strategy, which also includes a requirement for large and obvious offshore suppliers to collect and pass on GST if the purchaser's address is in New Zealand.
"They will probably do it, as long as they are not put at a major disadvantage, because they don't want to be seen as non-compliant. What is it to them? The difficulty is how you handle smaller suppliers."
The Government, it seems, is still scratching its head about what can be done about the GST issue. An expected discussion document from Inland Revenue and Customs has not emerged.
Revenue Minister Todd McClay visited Europe late last year to talk BEPS and e-commerce. "Jurisdictions are trying a number of different things and none seems to be overly successful," he says.
"The OECD was pretty clear that individual countries working unilaterally were unlikely to solve any issue and could make them worse.
"For every simple solution that is suggested there seem to be pitfalls and problems, and paramount among them is cost."
The Government is not going to consider creating a greater compliance cost than what would be collected in revenue, McClay says.
"The suggestion is that banks and credit card companies might be able to do it. There would be a burden there and no one in the world seems to be doing that successfully. It wasn't apparent that was the direction European countries are moving in."
Avoiding GST is not the only reason New Zealanders buy goods online from overseas suppliers, he says.
On the GST question and the broader issue of ensuring that multinationals pay their fair share of tax, McLay argues the best approach for New Zealand is to participate fully in the multilateral processes led by the OECD, accept that progress will take time, and in the meantime improve the availability of information to the tax authorities.
"There will be companies in the world which have a really good picture of what trade New Zealanders are doing. We don't have access to that information because they are not in the New Zealand tax jurisdiction."
Hence the move for tax authorities to automatically share information.
In general, international tax law, as enshrined in a spaghetti bowl of bilateral tax treaties, embodies the idea that for tax purposes, the profits of multinational firms should be divided up on the basis of where the activities required to produce and distribute their goods and services occur - not where they are finally consumed (for that you have consumption taxes, like GST). This is often misunderstood by people whose eyes narrow when they hear that some global household name is paying little or no tax in their country.
The distinction, increasingly important in the digital age, is between doing business in New Zealand and doing business with New Zealanders.
Take Google, for example.
The audited accounts for Google New Zealand Ltd, filed with the Companies Office, record revenue of $6.8 million in the December 2012 year but expenses of $7 million, most of which ($4.2 million) relates to employing people. It paid $165,000 in tax.
But industry sources say they would be astonished if $6.8 million represented more than a small fraction of the money Google earned from selling advertising space to Kiwi firms in 2012.
If those firms did business online with some other part of the Google empire not physically in New Zealand, that would give rise to a deductible expense for them, with no corresponding pick-up of tax for the IRD on the other side.
All perfectly legal.
Any concerns about the leakage of tax in Google's case would have to be balanced by contemplating the incalculable benefit New Zealanders derive from being able to google things for free.
The problem with the traditional approach to apportioning a multinational's tax obligations is that value chains are getting longer and crossing more borders.
And an increasing share of what the consumer pays for is intangible: the designer brand on the jeans, not the denim or the skills of some far-off seamstress; or an algorithm, not the insertion of a chip into a motherboard somewhere.
"We have rules which try to carve out the intellectual property and look at where it is located and try to tax the returns on that," says PwC tax partner Geof Nightingale. "But it is very prone to valuation issues and prone to dispute. People put their brands in low tax jurisdictions and that is the underpinning of a lot of the BEPS project really."
Oliver argues that this is not really a problem for New Zealand, which has too few companies producing globally significant intellectual property (IP).
In other words, we should focus more on acquiring the car than on upgrading the lock on the garage door.
But Labour's revenue spokesman, David Clark, argues that New Zealand has more at stake than most countries in terms of tax avoidance by multinationals, if we see our future as an innovative economy producing weightless exports because we are a long way from markets.
Fledgling companies face enough challenges as it is, without having to compete with established firms, which can fatten their profits by locating IP in low-tax jurisdictions, and interest deductions in high-tax ones. Too often, local companies end up bought out and hollowed out.
"If we are constantly putting New Zealand businesses on the wrong side of an uneven playing field that is only going to be bad for us in the long run. You see multinationals undercapitalised in New Zealand and putting their head offices and R&D expenditure overseas."
Clark sees the BEPS work as pointing to a move towards locating the incidence of corporate income tax at the consumption end of the value chain.
"It does seem blatantly unfair that multinational companies are extracting significant value out of New Zealand when the value is only there because we are a well-off country that has paid attention to our health system and education system and roading and so on, and they are not [contributing to that] in the same way that generations of other companies have."
But Oliver warns: Be careful what you wish for. "Even if we wanted to change the international rules and thought we could shift taxation to where the market is, that is not unambiguously to our advantage. For example, it would mean profits from milk produced in New Zealand and sold in China would be taxable in China and not in New Zealand. In return, New Zealand might hope to gain a few dollars from Google and Apple."
Deloitte chief executive head Thomas Pippos says international tax rules designed to prevent double taxation are sometimes exploited to deliver double non-taxation.
"If some corporates are not paying as much tax as some people think is appropriate, we have got to be careful the pendulum doesn't swing from double non-taxation to neutrality then back to double taxation, because if it swings that far you could impede global trade and cut off your nose to spite your face."
While New Zealand does not have a lot of outbound direct investment, there has been a reasonable amount of foreign direct investment into the country, Pippos says.
"The principal tax challenges in that space, as asserted by the IRD, are in relation to the level of related party debt and the interest rate charged on it. It is something the IRD is currently working on. New Zealand has rules - thin capitalisation rules - which limit the level of debt and the pricing is limited by transfer pricing rules."
Identifying and plugging loopholes in such areas is business as usual for tax policymakers. Rust never sleeps.
The tax practitioners see little merit in the suggestion of a generic anti-arbitrage rule to back up specific provisions in the tax laws. Arbitrage - taking advantage of differences between countries' tax rules - will persist as long as there is international trade and investment among sovereign states.
Deciding what constitutes bad arbitrage is difficult, says Oliver, speaking from experience. And a general anti-arbitrage rule is probably redundant when there is a general anti-avoidance rule already in the statute, he says.
The minister seems to agree: "The more general rules are, the less they probably catch."
G20 takes aim at profit shifting
In Sydney last week, the G20 group of economies - which accounts for the vast majority of world economic output - said they were committed to a global response to the problem of base erosion and profit shifting (Beps). "Profits should be taxed where economic activities deriving the profits are performed and where value is created,'' they said.
By November, the group promised, "we will start to deliver effective, practical and sustainable measures to counter Beps across all industries, including traditional, digital and digitalised firms, in an increasingly globalised economy''.
As well, they said, G20 countries expect to begin automatically exchanging tax information by the end of next year.
- Brian Fallow is the Herald economics editor