Govt's Google tax less flashy, but could be more effective

6:16 pm on 19 July 2017

Opinion - Labour's chief of staff Neale Jones was busy on Twitter in the wake of his party's announcement of a diverted profits tax, proclaiming the current government had done nothing in "nine long years".

Facebook and Google

Photo: AFP

The tax is designed to recoup hundreds of millions of dollars a year from multinationals such as Apple, Facebook and Google that send profits offshore to minimise their tax bill.

The "nine long years" thing is, to be frank, getting a bit old, just as it was when National wheeled it out in almost every statement in 2008.

Does he have a point?

Well, part of a point. It's not true to say nothing has been done.

Revenue Minister Judith Collins did wheel out options for what amounted to a modified diverted profits tax back in March and it looks as though they will go ahead in some form.

But that was a shift in thinking from her predecessor Michael Woodhouse, who was less inclined to challenge his officials on such matters.

Labour had seemed to ignore the government's change in stance in March, and it is right that some more work on it should have been done earlier.

Andrew Little and Judith Collins

Labour Party leader Andrew Little and Revenue Minister Judith Collins Photo: RNZ

But the bigger point of Labour's announcement is more problematic.

Labour want to be able to say they would do something concrete by imposing a new tax, but this puts too much emphasis on the slogan rather than the substance.

The government's proposals change existing rules to achieve a not dissimilar effect to a diverted profits tax enacted in other countries. It's not as bumper-sticker friendly as a new tax but it's probably more effective - and certainly less economically and administratively disruptive - in the long run.

As is happening increasingly with tax policy, it is less about the effect of the policy, and more about how it makes people feel.

"Diverted profits tax" sounds quite a bit better - especially for left wing voters who are angry at Labour for ditching its capital gains tax.

Ms Collins defended the government's gradualist approach: and here she, too, has part of a point.

While other countries have imposed separate diverted profits taxes, they were shoring up bigger gaps in the tax base than were in New Zealand.

New Zealand's thin capitalisation rules were strengthened in 2010 which closed some of the gaps and increased the amount of tax paid by multinational corporations operating there.

Inland Revenue targeted a group of mostly Australian firms using convertible notes to avoid paying tax between 2003 and 2006 in New Zealand to minimise their tax.

Eventually, the Supreme Court found in Inland Revenue's favour in the Alesco case in 2012.

Other companies using the method settled without going to court and in 2015 Treasury reported a $113 million windfall in non-resident withholding tax, which came mostly from this group.

Treasury also reported that "these one-offs are likely to be a permanent difference," that is, the firms will keep having to pay more tax.

It is one reason - a rather large one, in fact - that corporate taxes paid have been increasing well above the increase in GDP in the past year.

The new government proposals would make the convertible notes rules even tougher and tighten up what firms can claim as deductible interest for financing in New Zealand.

Most crucial of all, the existing transfer pricing and permanent establishment rules are designed to make firms which operate and make profits in New Zealand pay tax here - whether or not they have a physical presence in the country.

The shift is not minor - the burden of proof is on multinationals to prove they are not engaging in transfer pricing arrangements to minimise tax, and if they are deemed "uncooperative" early in the process they have to pay a withholding tax upfront.

For all this to work there has a lot more information sharing between businesses and Inland Revenue, and between Inland Revenue and other governments.

That is a crucial component of the global, OECD crackdown on tax being run under the rubric of "BEPs" or the base erosion and profit shifting project.

The result is a huge increase in information gathered by governments and shared between them - and probably, ultimately, some sort of global tax authority along the lines of how the World Trade Organisation works for trade disputes between countries.

It has implications for national sovereignty which dwarf anything in, for example, the Trans-Pacific Partnership.

And it has implications for privacy which are only beginning to be grappled with.

It all goes beyond easy bumper-sticker taxes.

* Rob Hosking is a freelance journalist specialising in economic, tax, financial and superannuation issues, and regulatory/legal matters. He is a regular contributor to NBR.

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