The Green Party is pushing the revenue minister for answers on what is being done to tackle “tax minimisation practices” adopted by Big Tech companies.
As part of a revenue committee during a Scrutiny Week hearing on Wednesday, co-leader Chlöe Swarbrick asked Minister for Revenue Simon Watts whether these practices were a concern and argued there was a “compelling case” for applying the 5 percent withholding tax allowed under the NZ-US treaty by treating some servicing and licensing fees as royalties.
Withholding tax is a small levy New Zealand can deduct from certain cross-border payments, in this case, up to 5 percent of royalties paid to foreign companies.
“This is a matter of policy priority,” Swarbrick says.
“If you are to genuinely believe that point that you were making before about the equivalence between the little guy and the big guy then why have you not contemplated giving direction to IRD or progressing policy work or legislative change to make it clear that you will either apply that 5 percent withholding rate to the practices of these big tech companies or look at alternatives?
“How do you think that it could or should be perceived by New Zealanders that right now we have the IRD chasing those who have loans for small businesses in arrears, or you know, student loan holders, as opposed to multinational tech companies?”
The matter of how little tax Big Tech pays has long been a topic of discussion – and ire – in New Zealand.
A report published late last year by Tax Justice Aotearoa titled Big Tech Little Tax says NZ is missing out on revenue due to practices undertaken by tech giants, such as paying substantial ‘service fees’ to related offshore subsidiaries.
These ‘fees’, which account for a majority of that firm’s revenue, are subsequently removed from the income that New Zealand can tax. By way of example, the report says: “Google New Zealand appeared to earn revenues of $1.139bn but paid ‘service fees’ of $1.052bn to a Singapore subsidiary, leaving an operating profit of just over $29m.”
The service fees in this case account for 92 percent of earnings. Google paid $4.362 million in tax on what remained.
The discussion between ministers comes hot on the heels of the latest analysis from the Better Taxes for a Better Future coalition, which says the practice is widespread among multinational tech companies, including the two Uber operating companies.
Responding to Swarbrick’s questioning, Watts says he’s not looking at legislative change but is “happy to come back to that specific area of policy”.
His concern is whether companies’ behaviour is legal under the current law, rather than whether outcomes are equitable. The way in which IRD deals with the enforcement activities of different types of customers, including large significant enterprises, is an “operational matter”, he says.
“The way in which companies move profits between jurisdictions is complex, however, is well understood in the context of how those firms do so. I think it’d be fair to say that those entities that are operating in an international area will be very aware of what the rules are.
“Tax policy and in the drafting of that legislation … lies with the minister, and the operational delivery of that tax legislation to taxpayers is the obligation of IRD.
“I can’t direct Inland Revenue to focus on this group of people over that group – that is not within the bounds – but what I can do is where we are made aware of potentially areas of gaps in the legislation that may not be aligned with the expectations or objectives of a government.”
Inland Revenue commissioner and chief executive Peter Mersi says the key question, aside from working out whether a ‘service fee’ is a royalty or not, is whether the tax being imposed would be an “arm’s length price”?
An arm’s length price is what a willing buyer and willing unrelated seller would freely agree to, or a trade between related parties conducted as if they were unrelated.
“We’re pretty good at transfer pricing here in New Zealand. We’ve got quite good expertise, so our people would be looking to see whether that service fee was a market price, an arm’s length price, and it’s a conversation between us and the taxpayer.”
Mersi says a multilateral solution is always going to be better than each country doing its own thing; however multilateral discussions have “stalled”.
Tax Justice Aotearoa argues that a portion of these payments are in substance royalties for the use of intellectual property, and so could attract New Zealand’s 5 percent withholding tax under double tax treaties.
“The use of proprietary intellectual property is likely woven through all activities undertaken by New Zealand subsidiaries of the tech giants. This suggests that proportions of ‘service fees’ paid may in fact constitute royalties that would attract withholding tax, payable under New Zealand’s double-tax treaties,” it reads.
The foundation says big American tech firms are essentially avoiding their statutory obligations to pay withholding tax on royalties through the mischaracterisation of payments.
The multilateral efforts mentioned by Mersi are touched upon: “Apparent inertia at the OECD negotiations coupled with the time that it will take for UN negotiations to progress means that there is space available for global leadership,” the report reads.
The OECD previously tabled a plan with two ‘pillars’ of action: the first was to allocate a quarter of the profits of such companies according to each country’s market share, so tax would be paid in the countries where income is earned instead of being sent to friendly tax jurisdictions such as Singapore.
Pillar 2 would have ensured companies would pay at least 15 percent tax, wherever they were headquartered. This would in effect render tax havens obsolete.
