Global revenue crackdown behind Facebook tax row

Behind this week's parliamentary stoush about what little tax the likes of Google, Facebook and Starbucks pay in New Zealand is a worldwide crackdown by tax authorities.

The Australians are already moving. Earlier this week the Australian Tax Office released a proposed set of rules for "transfer pricing" – arrangements whereby international firms route as much of their profits as possible through branches which are based in low tax jurisdictions.

Companies such as Google, Apple, Starbucks, and McDonalds are just some of the firms which have attracted public ire for use of transfer pricing arrangements.

A key aspect is the tax treatment of "intangibles" – primarily intellectual property owned by the company. If this can be located in one of the low tax regimes, much more of the taxable revenue can be routed there.

This is obviously relatively easy for globalised information technology firms such as Facebook and Google, but other global firms are following suit.

This is why McDonald's, for example, has classified its burgers as intellectual property.

Labour MP David Clark raised the issue in Parliament this week, saying Facebook should pay more tax in New Zealand than the $14,497 it paid last year, and also that New Zealand needs to do something about it.

Not quite correct

That’s not quite correct. In general terms, Inland Revenue has been told to get as much tax as it can out of existing tax settings, and this includes the whole transfer pricing issue.

Deloittes annual tax conference was told last week that IRD is focusing on international firms, with particular reference to issues such as intangibles, downward shifts in profitability of the New Zealand company and any significant difference in the financial performance between the New Zealand company and other members of the group.

“A New Zealand company might make a payment to bump up its US profit and the IRD might ask some questions about that,” Deloitte associate tax director Kirsti Longley told the conference.

“They will also look at the treatment of things like research and development, intangibles, high payment of top executives.”

The Australian crackdown may have implications for New Zealand’s approach but that is not clear yet.

The ATO’s move was triggered by its loss of a court action against the Australian branch of French chemicals group SNF.

“The Australian Tax Office is saying that wasn’t the right outcome so they’re looking at changing the law,” Deloitte Australia partner and leader of its Asia Pacific transfer pricing team Paul Riley told the same conference.

There are three other cases which have been taken by the ATO, with the amount in dispute totally $A1.9 billion, and the Australian law change is retrospective.

The new ATO approach is based on OECD guidelines and therefore New Zealand is not unlikely to take a dissimilar stance to the Australians.

It is understood Revenue Minister Peter Dunne has asked for an urgent report from officials on what changes New Zealand might have to make in the wake of the Australian shift.

The OECD and the G20 are putting much more effort into the transfer pricing issue. 

The issue is also shaping up as one of tension between globalised firms and smaller firms, as governments cite the transfer pricing issue as a reason for not cutting the headline company tax rate. 

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9 Comments & Questions

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I don't care what tax authority we're talking about, and apart from all the substantive matters above, retrospective law and enforcement, as with ATO, and more and more IRD, is for tinpot little tyrannies, not for the free West ... so it speaks bucket-loads that the IR's employ it as a matter of course now. A pox on every revenue minister not prudently putting an intelligent veto to this practice.

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For all the dislikes on this, you're saying you're happy with a country that can change a law, then enforce it retrospectively. For example, you buy product A over 2010 and it is perfectly legal to do so. There is an election and a party wins that campaigned against purchase of product A, and on winning they criminalise it. But not just from that date, they now go back and prosecute all who bought product A when it was legal.

You are no longer living under the rule of law, but at the whim of politicians. My post has four dislikes, so all four of you are happy living under a system like that?

Grow up.

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What was that the revenue minister said: they avoided paying tax so as to evade a poor quarterly earnings report, or was it: they evaded paying tax to avoid a poor quarterly earnings report.

Seems the same to me!

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Tax is theft. How about this for an idea. Drop the rate to a point where it is easier (cheaper) just to pay rather than circumvent. Oh. but that would mean govt's not being able to give so much of my hard-earned away to buy votes.

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Go and live on an island you've bought yourself.

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Two very important points in this comment. The moment tax is reducing business effort and application it becomes self defeating for a nation.

The assumption that government knows better than individuals about expenditure of someone elses money. Tax that is used to buy votes instead of providing basic needs for citizens is infuriating for the few people who actually pay tax.

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The issue I have with this crusade is, based on the numbers shown on TV3 last night, both Google and Facebook are chump change in terms of the New Zealand revenue base. I think the total Google revenue in New Zealand was just under $5m if all of that was taxable (and clearly they will have some non-transfer pricing deductions in here) that is 1.4m - yes that is much more than $14k but it is not going to balance the Government's books. However, take a look at the big numbers in the software, banking, pharmacutical and oil industries which are not the sexy names of Google and Facebook but have much bigger transfer pricing issues with substantial numbers involved.

Transfer pricing rules in New Zealand have been around for many years. I think the rules are there it is just the application that may be the issue but New Zealand needs to be a little careful here as there may be many New Zealand companies that are transfer pricing into New Zealand to benefit from our imputation regime which is a good thing for New Zealand.

Yes we need to focus on how much multinationals are earning in New Zealand but focus on the big dollars and not the high profile chump change which is sexy to report in the media.

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It's the Amazons & Apple's we need to knock over.... they are both robbing the world blind.

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The issue with the Apples and Amazons of the world is the ability for them to locate operations in low-tax juridictions. Take Ireland, for example, which, a few years ago, was held out as one of the model tax juridictions with a low tax rates which encouraged corporates to base their operations there. Look at Ireland now. No money and a lot of those corporates which were there have left or scaled down their operations because of tax changes. As long as countries are willing to let these multinationals base their operations in a low-tax enviroment there is not much you can do other than try to tax non-residents on a source of transaction basis (ie, where ever the transaction is initiated is the taxing point) which would mean an entity who has no presence in a country being tax in that country.

That is like Wellington City Council trying to impose rates on someone living in Auckland, which is extremely difficult to do let alone collect.

As long as countries are willing to allow these multinationals to base operations in their country for little or no return we will never see our tax share of the transactions generated from New Zealand. That is the global market!

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