Many will have seen the Herald’s excellent investigation into tax avoidance by large multinationals operating in New Zealand.
It shows global firms are collectively paying only $1.8m in tax, while reporting around $10b in New Zealand sales. That means they’re collectively claiming a profit margin in New Zealand, after expenses, deferrals, and so on, of 0.06 of one percent of revenue. Globally, the profits of those same (parent) firms appear to be around 17%, some 270 times higher than reported New Zealand profit.
The cost is estimated anywhere from $500 million a year upwards. Those costs end up being borne by every New Zealander in the form of lower levels of public service and/or higher levels of their own tax.
I had four reactions to this report:
1. Generalized indignation and outrage
It is, of course, blindingly obvious that these taxes bear almost no resemblance to actual profits from multinationals’ New Zealand operations. Pernod-Ricard, for example, says it somehow made a loss selling booze to New Zealanders. As a county, we drink pretty heavily – more per person than the USA, more than Canada, and only a little less than Aussies, the Brits, and the Germans. If they can’t sell us Jacob’s Creek and Absolut Vodka at a profit, there really is little hope for them in business.
I’ve got slightly more sympathy for the oil companies than for many of the rest. Separate from their operating profits, energy firms do pay New Zealand over $200m in royalties for the oil and gas they extract. Exactly how they net off those payments in their accounts I don’t know.
Additionally, I am willing to buy that oil companies have a lower profit margin in far flung, spread out New Zealand than elsewhere. They have a cumbersome, heavy product to distribute all over the world, and the transport costs per litre here must be much higher than in Asia, Europe, or North America, where there are masses more consumers living much closer together.
I’m not saying I actually believe ExxonMobil made a $50m loss on $2.8b worth of sales. But the situation for them is slightly more complex than for some others, especially the tech companies, who have many products that don’t suffer from the tyranny of distance at all…
There’s a special place in tax avoidance hell reserved for Facebook. Facebook has around 1.4 billion users, 2.5 million of whom live in New Zealand. We’re about a sixth of one percent of the global market. But from the nonsense accounts Facebook filed, they’re claiming only NZ$1 million of their US$18 billion in sales is attributable to New Zealand. That’s one 250th of one percent.
Do we really believe a single Facebook users’ attention is forty times as valuable to an advertiser outside New Zealand as it is inside New Zealand? Of course not. It’s a fucking lie, and it’s ripping every New Zealander off. Facebook looks free right? Well, the way Facebook runs its business costs all of us money.
Here’s an especially revealing paragraph from Matt Nippert’s investigation:
Apple Inc's New Zealand subsidiary Apple Sales New Zealand recorded $732 million in sales for the year, up nearly a third from 2014. But despite this stellar growth in sales the company reported relatively meager profit margins here of only 3.6 percent, after its parent billed $702m for costs of goods sold.
Here’s the thing. I can buy the same 13 inch Macbook Pro (2.6GHZ, 128GB HDD, 8GB RAM) from Apple for $2,399 and from JB HiFi for exactly the same price. There’s no way JB HiFi puts up with all the normal risks around stocking goods that can get superseded, get broken, and so on in return for a meager 3.6% return.
I’m willing to bet JB HiFi gets a better deal than that from Apple, which means Apple (worldwide) is – on paper at least - charging its own subsidiary in New Zealand a higher wholesale price than it charges it’s New Zealand competitors. As a business practice, that makes zero sense except as a way to hide profits and stiff taxpayers. I’d be surprised if the IRD found nothing chargeable here if it did a proper investigation.
I reckon Facebook and Apple are two good cases to make an example of. You don’t necessarily need a law change – more aggressive enforcement of existing laws, including testing grey areas in court, could get us on a good path. That helps not only collect proper amounts in current years, but encourage these multinationals to submit more reality-based accounts in future years.
I say this as a lover of both company’s products – I’ve got Facebook open on by Macbook Pro right now. But having a cool product doesn’t get you out of paying your fair share.