And that’s just the rate on reported earnings – industry sources confirmed their real earnings are much higher than what they declare…

A Herald investigation into profit shifting by multinational companies found internet giants have structured their affairs to remove hundreds of millions of dollars of their New Zealand business from the reach of Inland Revenue taxation.

Facebook and Google were included last week in a list of 20 companies assessed by the Herald as being the most aggressive in legally shifting profits out of the country. The 20 companies collectively paid just $1.8 million in income tax on nearly $10 billion in revenues – that’s just 0.02%!

According to companies office filings, the New Zealand subsidiaries of Facebook and Google respectively recorded revenues of $1.2 million and $14.9 million and paid just $43,261 and $361,542 in income taxes. However, industry sources said revenues from New Zealand clients for Facebook and Google were likely to be significantly higher than reported, as both were dominant players in a local online advertising market which was assessed last year as being worth more than $800 million.

Several sources spoken to by the Herald, many declining to be named as they regularly conducted business with Google and Facebook, said the companies appeared to make, respectively, $400 million and $100 million from New Zealand clients.

Richard Thompson, of creative agency Contagion, said the shift of business online and overseas was significant and a growing threat to government revenues.

“The issue is bigger than reported, but the potential issue is also much bigger than reported. If you look at the speed of growth in this space, the lost taxation from traditional sources to new ones is scary,” Thompson said.

The two companies appear to structure their advertising contracts for New Zealand clients to see them settled offshore in low-tax jurisdictions like Ireland and Singapore.

Both of the internet firms declined to address the estimates of their revenues from New Zealand customers, but in similar responses stressed that their operations complied with New Zealand tax laws.

The revelation of the alleged scale of Facebook and Google’s New Zealand business came as Revenue Minister Michael Woodhouse this week promised his tax officials would be “turning over every stone” in a bid to ensure large international companies paid their fair share of tax.

Woodhouse said the low tax bills by multinationals “failed the sniff test”.

He said that although he was unable to comment or ask questions of officials about specific companies, he shared the concerns of Prime Minister John Key that it appeared the tax take from large multinational companies was too low.

“The boss said quite rightly it doesn’t seem fair on the face of it, and the last thing we want to do is let people off the hook,” he said.

Woodhouse said he expected legislation requiring internet firms to pay GST would come into force later this year, but declined to set a timetable for other action as he expected the issue would take some time to resolve.

“I’m not naive enough to think this is the end of the story. These guys have probably got the best tax accountants in the country to ensure they comply with their basic obligations and no more,” he said.

Woodhouse said issues surrounding technology companies, whose business was often described as “weightless” and easily able to pass through borders, were at the “front and centre” of international debates at the OECD about how to deal with base erosion and profit shifting.

But Green Party co-leader James Shaw said relying on international debate to solve the problem of declining revenues as internet giants routed cash offshore and beyond the reach of Inland Revenue would fail to address a growing problem.

“It’s out of control, because the numbers we’re seeing are enormous in terms of revenues being made … and taxes not being paid. That’s money that could be spent on schools and hospitals,” Shaw said.

“I’m extremely concerned that you’ve got large multinational corporations who are able to use aggressive tax planning to avoid paying taxes almost anywhere, just because they can. This isn’t an option available to New Zealand businesses who have to pay the tax they owe.”

Companies Office filings for the two firms suggest the bulk of their business reported here is related-party administration.

The notes for Facebook’s accounts said all of the company’s income came from the provision of unspecified “services” for Facebook Ireland, the same company appearing on invoices to New Zealand clients.

The notes to Google’s accounts similarly listed “service fees” from its parent and “other related parties” as making up nearly all its revenue.

Google invoices from a number of different subsidiaries, depending on services provided, including those registered in Singapore and Ireland.

The use of Ireland as a place to rout income through has become infamous in recent years, and has become popularly known as the “Double Irish”, relying mostly on Ireland’s 12.5 per cent corporate tax rate being the lowest in Europe. Singapore’s 17.5 per cent is also considerably lower than the 28 per cent legislated for in New Zealand.

Inland Revenue’s head of international audit, John Nash, said he was aware of the significant revenues of technology giants being directly charged offshore, but said the Government had no claim to these funds as the deals were structured to occur outside of New Zealand.

“It’s not a quirk of law – it’s the law – and it’s based on where the contracts are negotiated. If it’s an offshore party and a New Zealand consumer we’ve got no rights to that income, whether we like it or not,” Nash said.

Speaking generally about the technology sector, he said firms operating in the space were of considerable interest to tax authorities.

“We’ve had a really strong focus on the sector for some time. That shouldn’t be a surprise, really, as put simply their reputation internationally is for aggressive tax planning and we’ve certainly seen that in New Zealand.” A spokesperson for Facebook said: “We comply with New Zealand tax law, as we do in all countries where we operate. We take tax obligations seriously and work closely with national tax authorities to comply with local law.” A representative for Google said: “Google complies with the law in every country where we operate.”

– so the law has to change…

Source: Matt Nippert 26 March 2016 NZ Herald