Editorial: Labour right to tackle tax avoidance by online giants

Revenue Minister Todd McClay. Photo / APN

The statements political parties make in the summer recess can be more considered than those they issue in daily argument during the rest of the year. The Labour Party is thinking about tax avoidance by multi-national internet companies such as Facebook and Google who contribute a tiny fraction of their New Zealand earnings towards the costs of public services. Tax avoidance is an easy populist button for parties of the centre-left but Labour appears to be doing some serious research of the subject and could propose worthwhile policy at this year's election.

New Zealand, of course, is not unusual in its failure to properly tax the earnings of multi-national companies. Britain, Australia and many other countries are grappling with the same problem in the age of e-commerce. And Labour is not the only party in this country to be concerned about it. Revenue Minister Todd McClay says the Government wants to tighten the taxation of foreign companies but it is waiting for solutions to be found internationally.

It could wait a long time. It is more than a year since New Zealand began taking part in OECD talks on a comprehensive action plan. Tax is as hard as trade rules to co-ordinate internationally. Countries that have become a multi-national tax base by undertaxing companies do so because they think they are enriching their economies. In fact they are either impoverishing their public sector or overtaxing other parts of their economy, usually their wage earners.

Tax avoidance is a wretched business. Nobody in business who stops to think about the benefits they derive from public services can feel comfortable avoiding their fair share of tax. That guilt should be felt particularly by internet companies based in the United States when they consider how university and military investment founded their industry. Their debt to US taxpayers far exceeds the taxes they ought to be paying.

Many firms that practice tax avoidance probably do feel wretched about it. But they owe it to their shareholders to pay no more tax than their lawyers and accountants say they must, and they transfer the blame to the legislators who leave loopholes for them, or who set taxes too high or spend the revenue unwisely. With the company tax rate at 28 per cent in New Zealand, lower than the top personal income rate, it is hard to justify corporate avoidance here.

Labour should go to the election promising to leave tax rates as they are and to tighten the law to ensure everyone pays their share. It will recall the present Government's first term tax working group that found only half the income earners in the highest bracket paying the top rate.

Global information networks present a particular taxation problem. They are akin to exporters of goods and services and exporters do now normally have to pay tax in their foreign markets. But exporters of manufactured goods and physical services have a production centre somewhere in the world. Companies that design websites, run servers and make money online can base themselves wherever taxation is minimal.

This is a global problem requiring a global solution that might involve each country taxing everything sold on the internet in the same way that they tax ordinary consumption. If Labour can suggest a practical way to levy GST on internet sales, retailers would be grateful.

Amazon made $46.5 million in sales to New Zealand in 2012 and paid $1.6 million in tax to this country. Google made the best part of $140 million from New Zealand advertisers that year and paid a paltry $165,000 tax.

"Aggressive avoidance", as this is called, deserves an aggressive response. It is a mission Labour should vigorously pursue in the national interest.

Debate on this article is now closed.