Bernard Hickey: War on the high-tech dodgers

We pay our taxes. Why won’t they? It’s the topic every tax official and finance minister in the developed world is talking about and acting on, yet we hear little about it in New Zealand.

Cracking down on tax avoidance by the world’s biggest technology companies – among them Google, Facebook, Apple and Microsoft – is at the top of the agenda for the OECD and the G20.

This week, Britain’s Chancellor of the Exchequer, George Osborne, flagged new tax avoidance rules, and the European Commission announced Apple would have to pay billions of euros in back taxes because of the way it used Ireland’s tax rules to lower its tax bills.

“Some technology companies go to extraordinary lengths to pay little or no tax here,” Osborne said. “If you abuse our tax system, you abuse the trust of the British people. And my message to those companies is clear. We will put a stop to it.”

Britain has seen large-scale street protests against the Starbucks coffee chain, which has also been accused of tax avoidance.

The use of tax havens and Ireland’s extremely low corporate tax rate are a common theme for companies such as Google and Apple. One tactic is the “Double Irish with a Dutch sandwich,” whereby an American-based company has a subsidiary in Ireland that owns the company’s intellectual property.

Revenue for the product or service is then paid to the Irish subsidiary, which is then able to route the profits to a tax haven, often via the Netherlands, because of some quirks in Irish and European tax law.

Hey presto, and the revenue for a product or service designed in America, manufactured in China or hosted in Finland, but bought and consumed in New Zealand, are routed through Ireland and end up as profits in a tax haven. It is, of course, perfectly legal.

But it is deeply unsettling for governments, particularly as more products and services are being bought from such multi-nationals.

Previously, a product or service might have been produced in New Zealand and the company that made it paid corporate taxes, the employees were paid wages and GST was paid when it was sold.

Now, the revenue goes straight to Ireland and no GST and little or no corporate tax is paid.

For example, Google New Zealand reported revenue last year of $10.1 million and paid $227,074 in tax.

New Zealand companies, meanwhile, are estimated to have spent more than $200m on advertising with Google last year, aiming to reach other New Zealanders using Google in New Zealand. That revenue was routed through Ireland.

Apple Sales New Zealand reported revenue in the year to September 28 last year of $564.6m and paid $3.9m in tax.

New Zealand is not alone, and it cannot act alone, but it will have to soon think about how to act. Yet there is very little political discussion or Government focus on the topic.

The topic of tax avoidance by multi-nationals will be the main topic of discussion at the G20 leaders meeting on November 15 and 16 in Brisbane, where Prime Minister John Key will attend as a guest of the host, Australian PM Tony Abbott.

The G20’s finance ministers met in Cairns on the same weekend as New Zealand’s election and agreed to work on cross-border tax avoidance plans.

But the success of these plans will depend on governments, which means politicians, co-operating with each other and avoiding the temptation to poach international business off each other or turn a blind eye to please their corporate backers. Only political pressure will keep them honest.

We need look only across the Tasman, where a confidante of Tony Abbott, Liberal Senator Bill Heffernan, this week warned: “If you’re willing to turn a blind eye to billions of dollars going out the door and offshore, you’re doomed in terms of providing what people expect from government: roads, schools and hospitals. This is the greatest financial challenge facing the Western world and if not addressed it could redefine sovereignty in the Western world.”