In a welcome development, the Prime Minister has signaled that they will seek to tax digital companies from overseas. The commentary from the Monday post-Cabinet press conference from the Prime Minister is worth listening to in this NZHerald piece.
Minister of Revenue Stuart Nash indicates there is between $30-$80 million of extra tax potentially coming in to the government coffers as a result of this tax, giving the government a massive opportunity to make even larger anti-poverty tax shifts in the package of commentary that it will release in three days’ time from the Tax Working Group.
Apple, Google, Starbucks, and companies like them all claim to be socially responsible, but the first element of social responsibility should be paying your fair share of tax. As Zuckerberg demonstrated when he deigned to visit the United States committee last, year, and simply refused all other country’s investigation, he does not give a damn about democratic participation or accountability in any form.
Globalization has enabled multinationals to encourage a race to the bottom, threatening the revenues that governments need to function properly.
Globalization has enabled large multinationals, like Apple, Google, Uber and Baidu, to avoid paying tax. Just today, Viagogo yesterday successfully resisted legal action by the Commerce Commission because the Judge viewed that Viagogo was based in Switzerland so the New Zealand court simply did not have jurisdiction over them. To be successful the Commerce Commission should have served Viagogo in Switzerland. Slippery is the word.
If everyone avoided and evaded taxes like these companies, society could not function, much less make the public investments that led to the Internet, on which Apple and Google depend.
For years, multinational corporations have encouraged a race to the bottom, telling each country that it must lower its taxes below that of its competitors. U.S. President Donald Trump’s 2017 tax cut culminated that race. A year later, we can see the results: the sugar high it brought to the U.S. economy is quickly fading, leaving behind a mountain of debt (which increased by more than $1 trillion dollars last year).
The digital economy has in some ways been great, but not for government business. The tax package this Thursday is a signal that it is time to take back some of the balance in favour of the great majority of New Zealanders.
Spurred on by the threat that the digital economy will deprive governments of the revenues to fund public functions (as well as distorting the economy away from traditional ways of selling), the international community is at long last recognizing that something is wrong. But the flaws in the current framework of multinational taxation – based on so-called transfer pricing – have long been known.
Transfer pricing relies on the well-accepted principle that taxes should reflect where an economic activity occurs. But how is that determined? In a globalized economy, products move repeatedly across borders, typically in an unfinished state: a shirt without buttons, a car without a transmission, a wafer without a chip. The transfer price system assumes that we can establish arms-length values for each stage of production, and thereby assess the value added within a country.
But we can’t.
The growing role of intellectual property and intangibles makes matters even worse, because ownership claims can easily be moved around the world. That’s why the United States long ago abandoned using the transfer price system within the U.S., in favor of a formula that attributes companies’ total profits to each state in proportion to the share of sales, employment, and capital there. We need to move toward such a system at the global level.
How that is actually done, however, makes a great deal of difference. If the formula is based largely on final sales, which occur disproportionately in developed countries, developing countries will be deprived of needed revenues, which will be increasingly missed as fiscal constraints diminish aid flows. Final sales may be appropriate for taxation of digital transactions, but not for manufacturing or other sectors, where it is vital to include employment as well.
Since its inception, the OECD/G20 Base Erosion and Profit Shifting Project has made an important contribution to rethinking the taxation of multinationals by advancing understanding of some of the fundamental issues. For example, if there is true value in multinationals, the whole is greater than the sum of the parts.
Standard tax principles of simplicity, efficiency, and equity should guide our thinking in allocating the “residual value,” as the Independent Commission for the Reform of International Corporate Taxation (of which I am a member) advocates. But these principles are inconsistent either with retaining the transfer price system or with basing taxes primarily on sales.
Politics matters in blunting this race to the bottom. In its spatial form you saw this recently in the game Amazon played with different U.S. states to attract its headquarters. New York, after striking a bargain with Amazon, recently developed a rejuvenated spine from the stronger core of the left of the Democratic Party.
Deal is now off.
That is a great signal to companies that democratic civil society has a real cost and it’s time that the digital multinationals paid their fair share to sustain it. There is plenty of rising agreement that, in the absence of global regulation of the internet, it’s time to control them by other means such as tax.
There is as Minister Nash indicates a lot of work being done in the OECD to standardize how such companies can have a common tax net around them, so that tax revenues are more predictable, their costs easier to predict, and governments can still determine the size of the mesh of the net while having common mechanisms. Nowhere to globally hide, in short.
Governments in some advanced countries where these companies have significant political influence will demur from these efforts – even if doing so disadvantages the rest of the country. The long-run example of Ireland is the classic case. Other advanced countries, focusing on their own budgets, will simply see this as another opportunity to benefit at the expense of developing countries.
It’s a really helpful signal too for Thursday’s announcement that the government is working on useful ways to give itself for a Great Tradeoff: soak the rich of New Zealand with Capital Income Tax, but potentially proffer much larger tax decreases to the poorer of New Zealand. For example: take tax off benefits, or off NZSuper, or off the first $20,000 of income. They have stated that that the package will be fiscally neutral, so this extra income gives them headroom to achieve a deeper balancing.
That helps blunt the primary wedge that National has to win the next election from Labour on the issue of tax.
So not only is Prime Minister Ardern’s digital corporate tax fiscally smart, it’s also smart politics.