The missing billions of multinational tax

It’s easy to stoke outrage at multinationals’ low taxes but harder to do something about it.

According to the Organisation for Economic Co-operation and Development (OECD) – the so-called rich-countries club – tax avoidance by multinational companies is worth US$100-240 billion a year. That’s 4-10% of total global corporate income tax.
In other words, the amount of tax not paid by corporations worldwide roughly equals the size of the New Zealand economy – about US$200 billion.
Renewed interest in this perennial problem was sparked by a New Zealand Herald investigation showing how little income tax multinationals with local operations are paying. On the face of it, foreign companies with New Zealand sales of $10 billion a year paid a mere $1.8 million of income tax. Clearly there is jiggery-pokery going on.
A big part of the problem is the universally shared agreement that though tax should be paid, it should not be paid more than once. The ¬resulting web of international treaties to prevent double taxation is unlikely to be unwound, even though it represents one of the foundations on which multinational companies can organise their affairs to try to pay tax nowhere.
When Apple sells a phone in New Zealand, almost every aspect of production occurred somewhere else. Just about the only taxable activity here is GST paid by the consumer. Apple might have a warehouse and salespeople in this country, but those are costs to the business. It would be unsurprising if it didn’t generate a profit.
As tax specialist Robin Oliver puts it, “When I look at some of the ¬numbers that come up, I’m surprised at how much [income tax] they pay in New Zealand, because what the hell do they do here?”
Think of the problem the other way around. As this country’s only company of global scale, Fonterra pays most of its income tax here while operating in dozens of countries. What would the effect on the tax base be if Fonterra was levied proportionately to its operations elsewhere? Says Oliver, “Be careful what you wish for.”
Meanwhile, the Government is moving to impose GST on low-value items bought from overseas websites, making it harder for consumers to avoid tax on the consumption of those multinationals’ activities. For the likes of Amazon, concern for its global reputation will make it comply when it could theoretically dodge collecting sales tax for a foreign country, says Rob McLeod, former Oceania chairman of accounting firm EY and a leading tax expert on both sides of the Tasman. Granted, these are still taxes paid by the little guy, collected by the big guy. But McLeod is sceptical of claims that there are easy wins against corporate taxpayers by clamping down on transfer pricing and thin capitalisation – two of the most common forms of cross-border tax avoidance – in the way Australia tried to do last year.
First, New Zealand already has stringent rules in that area. Second, the Australian Taxation Office has backed off some elements of the proposed new regimes. The urge to move aggressively against avoidance can backfire if it stifles investment.
And there’s the rub. The OECD is achieving strong momentum in its Base Erosion and Profit-Shifting project to reduce multinational tax avoidance partly because many governments desperately need tax revenue to fix their budgets ¬following the global financial crisis.
At the same time, however, the worst offenders at encouraging tax dodging are often ¬governments themselves. “Competition for the tax base is as much a competition between governments as it is between taxpayers and tax authorities,” says McLeod. Look no further than this month’s cut to the British corporate tax rate to 17%, he says.
Companies operating in countries with higher corporate income tax rates will be tempted to shift, if the grass is green enough, says McLeod, although bricks-and-¬mortar operations are far harder to relocate than digital businesses such as Google, which exists in the ether and whose tax ¬practices excite the most ¬opprobrium.