Deborah Russell: Govt has the means to make multinationals pay

While New Zealand doesn’t have a very high company tax rate, neither does it have a very low company tax rate. Photo / iStock

Opinion

Dr Deborah Russell, a lecturer in taxation at Massey University, was Labour's candidate for Rangitikei in 2014.

It's become increasingly clear that multinationals are not paying much tax in New Zealand. They're shifting profits around the world through charging internal fees and royalties, and increasing the "cost" of products sold from one part of a company to another, and through various other tax practices.

The mechanisms they use enable them to locate profits in jurisdictions with very low corporate tax rates. It's a simple thing to do, even when there are robust anti-avoidance laws.

While New Zealand doesn't have a very high company tax rate, neither does it have a very low company tax rate. So multinationals earning significant revenues here can find it advantageous to shift their profits to countries with much lower tax rates.

If you think, as some people do, that all taxation is theft, you might not be troubled by this. On the other hand, if you think taxation is the price of civilisation, then what the multinationals are doing is taking us for a ride.

Taxation pays for all sorts of benefits that make New Zealand a good place to live and do business. Health, education, welfare, infrastructure - these all help to ensure we have a population that can withstand the bad times, and afford to buy the products the multinationals sell.

More than that, the tax we pay supports parliamentary democracy, the robust rule of law, our highly regarded judicial system, and all the smoothly functioning systems that make it easy for multinationals to do business here. We're a low-risk location for business.

The law at present permits multinationals to minimise their tax. While they might be engaged in unfair practices, they're not doing anything illegal. If a government wants to collect more in taxes from them, it can change the law. This ensures governments' tax-collecting activities are exposed to the full scrutiny of our democratic processes.

Some form of transaction tax might be feasible. We already have a tax based on adding a certain amount to each transaction in New Zealand in the form of GST. Perhaps we could add a new transaction tax for companies whose head office is not in New Zealand. We could even allow them to offset any company tax paid in New Zealand against the total transaction taxes they pay here. That would make the point very clear: either pay a reasonable amount of company tax, or pay the full transaction tax.

Multinationals are of course objecting, saying they already make a contribution to the price of civilisation in New Zealand by paying GST and PAYE on their employees' wages. That is misleading. While companies bear some of the cost of GST, ultimately the full cost of GST is borne by end users. That's the ordinary citizens of New Zealand, you and me, the consumers purchasing goods and services. By and large, companies act as tax collectors for GST, but they don't by any means bear the full cost themselves.

As for PAYE on their employees' wages, again, that's not the company paying tax. It's the employee paying tax. All the company is doing is collecting the tax on behalf of government. This imposes a cost on companies, but they can claim a tax deduction for it.

So these big international companies are engaging in some fairly interesting tax minimisation activities, and they're trying to claim some kind of social credit for their employees' taxes too. "We're good citizens because our employees pay tax."

They're simply wrong about this. That would be like giving some money to an accountant for your taxes, and the accountant paying it over to IRD and claiming it towards her or his own tax.

We need multinational companies to be more honest and open about tax. They get all the benefits of operating in New Zealand, so it's only fair that they contribute towards that. It's time for them to pay their share of the price of civilisation.

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