Global Tax - time to look for a cure

The sign outside Facebook's California headquarters - do the world's biggest companies pay enough tax? Govt here in NZ is now indicating it might take unilateral steps on the issue, after agitation from the public and political opponents. Photo / AP

The debate over corporate tax is moving on - and fast. Matt Nippert reports

What a difference a week makes. In the seven days following the launch of the Herald's Tax Gap series - exposing the surprisingly small tax bills paid by some of the worlds' largest companies operating in this country -- public debate has rapidly moved from questioning the symptoms to discussing a cure.

This progress was best demonstrated by the rapid change from the position expressed by Revenue Minister Michael Woodhouse, who last week described New Zealand's tax system as a model of fairness with no missed opportunities; 24 hours later, Prime Minister John Key was saying he thought the opposite.

Key toured the weekend morning political talk shows and was asked straight up whether the Herald's revelation that 20 multinationals paid just $1.8 million in income tax, despite recording nearly $10 billion in sales, was fair.

"No. I don't think it's fair," he told Lisa Owen on The Nation. Key went on to say the level of income tax being paid by multinational companies, especially given their huge revenues, "feels too low to me".

Key also opened the door to New Zealand acting independently of, and perhaps in advance of, the long-brewing multilateral Base Erosion and Profit-Shifting programme being coordinated by the OECD. "We're looking at how we can work more effectively with the OECD and whether there are any unilateral actions that we could take," he said.

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This shift in rhetoric followed sustained agitation by the Prime Minister's opponents in Parliament, with both the Labour Party's Grant Robertson and the Green Party's James Shaw calling for a crackdown and pointing to the response of the Australian Tax Office (ATO) to near-identical problems.

This week, new transparency measures adopted by the ATO saw the figures for revenue, income and income tax paid for more than 300 large, privately-held companies made public.

Issues surrounding low-to-nonexistent payment of income tax were shown to be wider than just the multinational sector, with nearly a third of the companies in the group revealed to be paying virtually no income tax. (Similar data released in December, covering more than 1000 of Australia's listed companies, showed near-identical results.)

Closer to home, the Herald's inbox and mailbag was stuffed with the responses of dozens of readers expressing their own concerns that the tax system was unfair. "This is a big story. Keep the hounds barking," said Susan Robinson-Derus. Dr Joshua Freeman expressed similar sentiments: "Thank you for your excellent investigative reporting on an extremely important issue."

Several readers also shared their experiences from the pointy end of corporate tax minimisation, raising the possibility that issues identified across the Tasman have also long been a problem in New Zealand.

This is a big story. Keep the hounds barking.

Susan Robinson-Derus

One reader said he used to work for a multinational in Auckland where massaging local profit downwards was an explicit policy, complete with its own terminology.

"It was well-known within the senior part of the company that they had a policy of actively changing the profit boundaries according to the local tax rules. They had terms called NP1 and NP2 (net profit) -- these figures varied according to how much the head office could charge in 'head office fees'. The more local profit that was made, the higher these 'head office fees' would become," he said.

WATCH: The Tax Gap - Matt Nippert speaks to former IRD man Adam Hunt:

Another reader said he had worked for a number of multinationals in New Zealand over the past few decades and noticed consistent tricks being played. "This practice was common in all of them: Large cost-of-goods charges or transfer pricing between the head office and the New Zealand branch. It was hidden but profit in the New Zealand subsidiary was clearly significantly different than in the head office. And this has been going on for multiple decades."

And yet another, who worked for a tech firm, said suppressing profits was used to stiff not only the NZ taxman but also local employees.

"It's been going on for decades, but doesn't get much attention," he said. "It was explained to me how they exported profits via 'technology charges' from head office. The deliberate policy was to avoid making any local profit at all and a small loss was even better as they would use it to say they didn't have enough money for pay rises."

The deliberate policy was to avoid making any local profit at all and a small loss was even better as they would use it to say they didn't have enough money for pay rises.

Another reader, former chartered accountant Grant Diggle, said he had worked for several international companies in New Zealand, and said transfer pricing made income easy to hide, but more reliable measures should be focused on.

"It is much harder to hide turnover or gross sales," he said, arguing that Inland Revenue needed to be more aggressive in estimating actual profitability and making tax assessments.

"All it requires, as with so many matters, is the capacity, the capability, and most importantly the will to make the changes.

"For the Government it would also be a very populist move," said Diggle.

"Can't see too many, other than far-right-wing businesspeople, opposing international companies paying their fair share of tax."

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