Editorial: Point scoring outbursts will not solve tax conundrum

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Companies should pay tax in the countries where they operate. Photo / Thinkstock
Companies should pay tax in the countries where they operate. Photo / Thinkstock

Labour's revenue spokesman, David Cunliffe, was hardly ploughing new ground when he accused Apple, the world's biggest tech company, of failing to meet its tax obligations in New Zealand. The issue has become a magnet for opportunist politicians eager to score easy points. Multinationals like Facebook, Starbucks and Google have all faced similar criticism, not least in Britain and Australia, for structuring their global businesses to minimise tax payments. This has prompted the OECD to call for a worldwide crackdown on such behaviour. But it knows, as surely does Mr Cunliffe, that the situation is about far more than simplistic accusations.

Companies should pay tax in the countries where they operate. Indeed, that is their responsibility. But the current international and domestic tax rules were created in a world of factories and farms, not that of e-commerce where companies can operate virtually with a limited physical presence. The source of the current problem is that international tax rules have not kept pace with this change.

So it is hardly surprising that sophisticated multinationals have chosen to take advantage of the law as it is, not as it ideally might be. They have, for example, become expert in shifting profits between their firms based in different countries.

None of this is illegal. But that has not deterred populist politicians. Their pressure has secured some successes. In Britain, Starbucks has said it will not claim deductions for company charges and royalties, resulting in almost $40 million of tax payments in the next two years. There has also been much activity in Australia, where new anti-avoidance and profit-shifting legislation was introduced into Parliament last month.

Before Mr Cunliffe's outburst, the response in New Zealand had been rather more considered. A joint Treasury and Inland Revenue officials' report, released last December, put the issue in perspective. It pointed out that traditional exporters of goods and services did not pay income tax on their products in the country where the products were consumed. The situation changed if an exporter set up a manufacturing operation, or customer supply services in, say, China. The activities of technology companies could, therefore, be likened to exporters of goods who traded with New Zealand, rather than in New Zealand.

"Since the bulk of what these companies do in terms of programming, designing websites, running servers and selling advertising space is done overseas, New Zealand, like other countries, may have very limited taxing rights," the report said. That situation would change only if Facebook, for example, employed a lot of people in New Zealand and gained large sums from local advertisers, offsetting that by payments for services of debatable value to their parent or sibling companies. But that does not appear to be the case.

It is also notable that New Zealand's corporate tax take is near the top end of the OECD range, bettered only by Australia, Norway and Luxembourg. The first priority, therefore, should be to ensure the tax base is being actively protected. Nonetheless, New Zealand is also, quite rightly, taking part in OECD talks that aim to deliver a comprehensive action plan to beat tax avoidance. The problem, as Revenue Minister Peter Dunne says, is that many multinationals are not paying substantial tax anywhere.

To some degree, therefore, this is a global problem that will require a global response. The source of profits may have to be redefined. But while this is being thrashed out - over of years, rather than months, because of the complexity of the issue - it will doubtless continue to present fertile ground for populist politics.

- NZ Herald

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