Global corporates and taxation – a discussion worth having

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Facebook ‘refused to listen to the voice’ of the British public by channelling profits through Ireland to avoid the taxman in the UK, an MP said last night.

The move by the social network meant it paid just £1.8million in Irish tax on more than £2.3billion of global sales, but none in Britain.  

The accusation came as details of the social network’s efforts to avoid paying UK tax emerged, just days after Chancellor George Osborne announced a crackdown on multinational companies using ‘elaborate structures’ to avoid paying up.

Around 46 per cent (£2.35billion) of Facebook’s global sales where channelled through Ireland – allowing the company to make profits of £2.3billion.

Its tax bill was reduced further by paying £2.29billion in ‘administrative expenses’ to Facebook’s parent company, The Guardian reported.

Shifting the money meant Mark Zuckerberg’s company only paid the equivalent of £1.81million in Irish tax on taxable profits of £5.76million.

By channelling its UK sales through Ireland, Facebook has avoided paying any tax in Britain for two years running – despite 33 million Brits having accounts.

It is a tricky problem.  On the one hand, there is nothing wrong with companies reducing their tax liabilities using legal means.  On the other hand, the numbers involved with companies like Facebook and Google are staggering.

For Facebook to organise its affairs so it only makes a five million pound profit from approximately 1.2 billion pounds in sales seems intuitively wrong.

We have simply assumed that if, for example, Facebook doesn’t pay taxes in New Zealand for the business it does with New Zealanders, they will pay these taxes elsewhere.   But that’s not really the case – they pay very few taxes.  In practical terms, we have companies with billions of sales world-wide getting away with paying next to no tax at all.

The answer may lie with a kind of transaction levy.   The country where the consumer lives gets to clip the ticket as the sale is made.

The purists will howl in outrage, but the problem needs addressing:  how do we set up rules that ensure global corporates shoulder the same burden as your local panel beater, or in fact, you.

– Daily Mail

 


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  • EveryWhichWayButLeft

    Embedding IRD auditors in every business (a-la Labour policy) is not the answer, that’s for sure. The idea of clipping the ticket or some sort of financial transaction tax paid for international transactions is worth exploring, but we all know who will wear the cost. Hint: it won’t be the corporates.

    It’s a worthy discussion, but needs an international solution not a local one. A tax on payments or donations to an offshore parent company is another idea, but just imagine the howls of outrage from Greenpeace though :)

  • Dave_1924

    There will be no movement on this while it is American Multi National’s making the money. What we need is an Internet company doing Billions in sales in the US and paying no state or federal taxes by legally moving profits offshore. Then all hell will break loose, lead by some Southern Republican, and we may see some traction for a bit more equity in the taxation situation.

    But I note when we had the GST on Internet sales discussion recently few posters on this site where keen on sorting something out to ensure no erosion of a sovereign countries tax base….

    • jcpry

      From what I understand there is considerable disquiet in the US about these structures as they are not paying tax there as well. I don’t see these companies as contributing much to wealth. They do not produce anything and are really just glorified advertising companies (especially Facebook). Tax them I say and relieve some of the burden on the rest of us.

  • RightofSingapore

    This is another reason raising taxes on the “rich” never raises the revenue proponents expect-the “rich” find all sorts of way around the taxes.

  • Sally

    Is this how KDC made all his money from Mega? I would think tax avoidance would be big on his radar.

  • The other Neil

    Reducing taxes and the size of government would be a good start. The higher the tax rate the greater the benefit from tax structuring. Once that was done then the tax avoiders would be truly identifiable. The reality of international tax and transactions is that the global economy exposes crazy taxation. The Irish should be commended for slicing a couple of million for doing nothing!

  • JC

    When an NZer pays income tax he does so in the expectation that he will benefit in some way for it be it health, social welfare, education, infrastructure or policing. But what does the foreign company get?

    The company is a thing so all it gets is the right to trade peacefully.. meanwhile it pays rates to the locals, GST, does community projects and most of all it employs locals who pay their full share of tax. Remember too that foreign owned companies are better paying employers than the locals, bring in new ideas, markets, technology and additional productivity to the host country. Thats why every sensible country wants to encourage overseas capital and expertise to come here.

    What too many are thinking is that foreigners should shoulder local responsibilities to the people.. thats rubbish.. the foreign company has delivered vastly more to the host country in other ways than tax, how they sort out their own tax issues is for them to decide and if Ireland is sensible enough to create a tax haven then good on it.. maybe thats why those dumb Micks are more wealthy per capita than grasping NZers.

    JC

    • Dave_1924

      JC – what do they get? In NZ, for their tax dollar they get:

      > The right to their property, protected by NZ Law and enforced by the Judiciary and Police force
      > Access to NZ infrastructure provided by Central and Local government like roads.
      > An educated and healthy workforce, based on NZ’s public health and education systems

      These 3 things off the top of my head… sure there are more. And they need paying for.

      All for a reasonable tax contribution – no backhanders expected in NZ, no condoning death squads etc unlike other places around the globe.

      No doubt foreign companies bring great benefits to NZ but that is no reason to allow them to pay no company tax by utilising profit shifting techniques to other low tax jursidictions….

    • jcpry

      Fine if they are actually contributing to the wealth of the nation. However Facebook for example adds absolutely nothing to the country. Zip, nada, zero. If Facebook disappeared tomorrow the effect on the economy would be a net gain in productivity perhaps the telcos would lose a bit of traffic but other than that it would be negligible.
      So they should be paying tax and the full wack as pretty much the sum total of the NZ revenue would be without direct costs.

      • JC

        But if they aren’t contributing to the country neither are they imposing costs on it, ie a neutral situation.

        However, as any economist will tell you you cannot do a study without identifying the intangible benefits such as the enjoyment that people get from Facebook. Its the same argument with alcohol.. the nannies see only costs but the billions who drink regard it as a benefit.

        JC

        • jcpry

          Intangibles benefits of enjoyment? Face it we would find something else to do with our time and energy.
          Really the whole social media thing is just a waste of time and a house of cards waiting for the next big thing to come along and blow it over. Remember MySpace? Bebo?

          • Elinor_Dashwood

            Yes, because you’re the arbiter of what It’s acceptable for other people to find enjoyable and what it’s not.

    • Mikev

      You are onto it

      • JC

        One of the reasons I’m against chasing such tax dollars is its a cheap and lazy way of perpetuating the current tax system without trying to determine what is a moral and sensible limit.

        My own experience as a management consultant suggests a top end of about 20% and intuitively that seems about right for Govt, ie, Govt should receive no more than about 20% of GDP.

        Other international experience suggests that tax exceeding around 30% is getting close to the cutoff point where the economy slows down under the weight of tax and said tax becomes an impediment to growth and productivity but I’m focused on 20% because our economy has constraints and vulnerabilities that we all know about.

        That means we can’t afford an all seeing and all knowing bureaucracy designed to scratch our every itch, we cant afford to do most of the research and development for industry or engage in crony capitalism and it means we cant afford to segregate the population into smaller pressure groups to respond to specific minority groups.

        You see? when you limit the Govt to spending less of our money you don’t need to go hunting for taxes in 1km over the speed limit and all encompassing actions that penalise 95% of the innocent for the sins of the 5%.

        Thats a more moral and inclusive society and one with a fair chance of creating the surpluses needed to improve the lives of the deserving needy.

        JC

        • Mike Webber

          Studies all allround the world, including in NZ show that if total tax goes above 20% of GDP, it will nosedive the economy and that 10% is the recomended take by the state. We are about 50% which goes up and down with economic activity. The NZ study was done by a team from the IRD led by Patrick Caragata. The USA total is quite a bit higher than ours and they have already been declared bankrupt by the IMF.

  • JeffW2

    Revenue is not the same as profit.
    One thing that needs to be accepted is that government will never stop; it will take 100% of our money and still need more. Until Leviathon is forced to change its ways, the West (the home of re-distribution) will tend to bankruptcy.
    Personally, I think at least some government expenditure actively does harm, so morally I think it is great that companies such as Facebook can mitigate the worst of IRD and their ilk. I wish individuals could do this as well.

  • Bruce1122

    Probably worth starting at home with the likes of Sanitarium, a massive business who masquerade as a charity/religious organisation so they can avoid tax but I suspect that’s a bit too close to home for comfort.

    • Dave_1924

      I tiotally agree they should pay tax. Its a rort as it stands…

      • Bruce1122

        WO are generally very sympathetic to Sanitarium and the SDA church so don’t expect too much support of your view here.

        • Andy

          Hey Bruce1122,

          Do you think Green Peace should be taxed too?
          they are a global business after all !

          • Bruce1122

            Pretty sure Greenpeace don’t make products like Weet Bix Andy. I’m all for reducing taxation but I’m an even bigger advocate of a level playing field whether a local or os company is concerned.

          • jcpry

            Cripes the biggest competitor is that purveyor of such fine “foods” as Fruit Loops. Don’t get me started on that! I’m not one for PC stuff but that company is toxic!

            Edit – Needed the inverted commas.

          • Andy

            Who cares what the product is.
            Sanitarium sells weet bix, Green Peace sells hot air.
            The matter of fact is that both are corporations and both aren’t paying tax under the disguise of being a charity.
            So what’s your point Bruce?

          • Mikev

            yes for sure

        • Dave_1924

          Any Church engage in business should be taxed on its business activities like the rest of us. Simple as. No tax on donations/tithes as long as they are used for Charitable purposes and running the church itself. otherwise they should be exactly like the rest of us….

      • jcpry

        The difference is that Sanitarium are an employer, they purchase raw materials locally and contribute to the community. They even sponsor sports events. Unlike the software giants, the chemical companies who use transfer pricing and the drug companies who do likewise who just strip out profit.

        • Bruce1122

          So local employers who buy materials locally and sponsor sporting events should be tax exempt?!?

          • jcpry

            No. Just merely pointing out that there is a fundamental difference in the businesses. One actually produces something tangible the other nothing.

        • Dave_1924

          Transfer pricing needs cracking down on as well.. As for Sanitarium, sorry they should be paying local company tax on their profits like everyone else, no logical reason to treat them differently to any NZ company…

  • cows4me

    While not trying to defend facebook or any other corporate how much taxable income have they produced for a local economy. If they produced 2.3 billion for themselves how much did those using their systems produce, it must be many times more than 2.3 billion. Besides having 2.3 billion pounds in a bank account will one day be spent on goods and services or further research and development. The end result will result in a greater GDP in all countries over time.

    • jcpry

      R&D in what? How to expand the use of Facebook? How to repatriate profits without paying tax? The only way the likes of Apple for example will contribute is if they finally get told pay your tax or we will tax you at the border.

  • Mikev

    The whole concept of tax on income is flawed and the globalisation of business will make this even more evident. Governments need to look to other forms of taxation to fund their activities as this problem will grow. The idea of no tax on income whether personal or corporate needs to be considered with all taxes being raised on a consumption basis. Perhaps the likes of Facebook & Google operating in the UK or here should be allowed to do whatever they like with their profits but they should pay a level of consumption tax that compensates for this. The same with individuals…earn low or high income, keep it all but pay a tax on their consumption that will compensate for this. A much fairer system based on user pays.

    • AlanB

      Strongly agree Mikev! Income is not an efficient base for gathering tax and has become grotesquely complex in computation. Income taxes are “blind” to what happens next, taxed income can be used for consumption or investment, is it rational to tax investment?
      Consumption taxes are the way to go. GST is IMHOP an excellent tax, hard to avoid and a tax on consumption. Rules for money transfer are also needed, not the daft transaction tax the left were pushing (what happened to that?) but robust rules to stop income shifting domestically and internationally. An aspect of the foreign ownership debate I believe is a valid criticism is that foreign capital often repatriates its profits tax free. There is nothing wrong in foreign ownership per se, and being a capital short country it’s inevitable, but no person or business should freeload on our population and infrastructure

    • AF

      An issue with increasing consumption taxes is that it is the consumers who pay, not the corporates. The corporates are quasi-tax collectors and they remit the difference between what they collect off consumers and what they pay to other corporates. The nett position is that it costs the corporate nothing, other than administration time and effort given it is the consumers who pay. There must be another way for the NZ Government to get a cut of the NZ taxes due on local profits – even if there is a withholding tax of sorts on payments / remittances to head office and / or related companies.

      • Elinor_Dashwood

        Whatever the design of any tax, it’s /always/ the consumer who pays, eventually.

  • Kiwibabe

    Corporate tax evasion and lax government allowing loop holes is worse than welfare.

    • Champagneshane

      this is not tax evasion. It is tax minimisation, working within the existing laws of the states of the world. But it doesn’t matter Kiwibabe, eventually the money gets taxed along the way somewhere.

      If I want to put up an ad on Facebook in New Zealand then I will ask for a tax invoice for my expense. Otherwise I wouldn’t do it. So. yes, they do pay tax but they claim it back and work within the law.

      If you want change then change the law.

      • Platinum Fox

        It actually doesn’t get “taxed along the way somewhere” as US tax only kicks in if offshore profits are repatriated. US-based multi-nationals typically have cash on their balance sheets that they cannot tax efficiently repatriate, so they increase their borrowings to fund investment and any return to shareholders (dividends, or more commonly share buybacks that increase the value of the remaining shares).

  • Hakaru

    Looking at some figures from the US regarding a person making 50 thousand per year, they pay from their taxes about 3700.00 per year to offset subsidies, corporate loopholes and losses from overseas tax havens. Good indication as to what it costs individual taxpayers there. Wonder how we compare in New Zealand.

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