Not fair that multinationals pay minimal tax in New Zealand – Key

PM seems to be preparing the ground for a policy shift. New Zealand could follow Australia's "Google tax" lead rather than wait for OECD action.

Prime Minister John Key has hinted New Zealand might follow Australia and take unilateral action against profit-shifting multinationals. 

He was talking about companies like Apple, Google and Facebook structuring their business so costs are loaded on to countries like New Zealand. At the same time, New Zealand revenue is invoiced to subsidiaries in lower company tax countries like Ireland and the Netherlands.

After a fresh round of controversy over the practice recently, NBR asked Revenue Minister Michael Woodhouse if NZ should follow Australia, where tougher rules went into effect on January 1.  Mr Woodhouse made brief, bland comments to the effect that New Zealand is content to be part of a multi-year OECD initiative to formulate profit-shifting policy. An OECD task force is expected to make its first recommendations next year.

But today on The Nation, Mr Key took a sharper line. Here's the key exchange:

Lisa Owen: [Multinations] paying very little tax. Do you think that that’s fair?

Key: No. I don’t think it’s fair. Look, there’s a few things happening there. For a start off, I can’t tell you with absolutely precision whether they are doing what’s ethically right. I can tell you that they’re probably doing what’s legally right, because they don’t pay tax on some mythical number; they pay tax on their reported profit in New Zealand.

Owen: So you need to change the law to match the ethics, then.

Key: Potentially. And so what’s happening is the OECD have been looking at that, and we- It’s  a very difficult thing for us to do on our own, because the reason they might be able to – I’m not saying they are – but the reason they might be able to reduce their reported profit in New Zealand is effectively through transfer pricing.

Other countries are doing stuff. As you know, the UK is doing things. Australia is as well. So are you going to look at-?

Key: Well, we’re looking at both issues. We’re looking at how we can work more effectively with the OECD and whether there are any unilateral actions that we could take.

Owen: Law change?

Key: Law change. But to be blunt, we think the fastest way through is through the OECD, because it’s one of those issues where it’s quite difficult on our own. And some numbers aren’t right. I mean, some numbers, you know- When they count the turnover of people, most of the costs and other parts are offshore. We accept that argument. But it feels too low to me for the size of the multinationals and what they’re doing in New Zealand intuitively.

It seems recent pressure from business leaders like Spark chief executive Simon Moutter and NZRise co-founder and Catalyst IT director Don Christie is starting to have an effect. Mr Moutter says his company just wants a level playing field. Mr Christie says local players can be under-bid for contracts by multinationals who skimp on tax, so have lower costs.

My guess is that, as things stand, the PM will probably wait (and wait, and wait), for the OECD to co-ordinate multicountry action.

But with his comments today, he's obviously also preparing the ground for a possible change of tack.

Keep a sharp eye on multinationals' NZ results in the months ahead. One more outrageous report from a big global player, and subsequent public and NZ Inc outcry could be enough to push the government into following the unilateral approach that's been taken across the Tasman.

On January 1, Australia introduced the so-called  “Google tax” measure targeting (in former Treasurer Joe Hockey’s words) multinational companies that artificially avoid having a taxable presence in Australia despite having a significant presence and "permanent establishment" in the Australian market.

If it’s deemed they’ve shifted profit to a subsidiary in another, lower-tax country, they will face a 100% penalty on the tax it is deemed they were due to pay.

The Australian Tax Office (ATO) has been given $A88 million in new funding to enforce the measure.

Mr Hockey said about 30 companies met the criteria of the law change. He did not name them but Apple, Facebook, Google and Microsoft were among those name-checked by a senate inquiry in the build-up to the law change.

In the UK, a recently introduced 25% diverted profits tax has seen Facebook pay millions more to Her Majesty.

Wheels are turning. Inland Revenue is actively assessing the issue, and New Zealand is an active player in the OECD push. 

But Mr Moutter says can't understand why things aren't moving faster around what he calls "global tax dodging." It seems possible that soon they will. 

No plans to turn off immigration tap
Earlier this week, Labour leader Andrew Little said the immigration tap should be turned down to a trickle until the economy picks up.

On the Nation, the PM said 17 months of record immigration was “a good thing” and he’s happy for records to keep being broken “as long as they add value to New Zealand”.

With 70,000 non-New Zealanders arriving in 2015, Mr Key said that’s “a sign of success” and “we need these people.”

"The question is, you know, would we be a better country if either fewer people came or nobody came? And in my view, we wouldn’t be," he said.


RAW DATA: Lisa Owen interviews Prime Minister John Key on The Nation

Lisa Owen: Good morning, Prime Minister.

John Key: Good morning.

As Paddy says, I do want to start with immigration, and I want to talk about non-New Zealanders coming here. In the year to January, figures show 70,000 foreigners arrived here. That’s 17 record months in a row. How much longer are you happy to see these records being broken?

Well, for as long as they add value to New Zealand because some of those 70,000 will be coming, for instance, as students coming to study in our country. They come for short-term, you know, working holidays and the like. So there’s a variety of reasons why people come. But, you know, I just think, ultimately, when people want to come to a country for whatever reason, for tourism, for study, for work, that’s a sign of success. People don’t want to go to some other far-flung countries because they don’t think they can have a good life there. And so we should see it as a badge of honour that people want to come to New Zealand.

So if it is a badge of honour, if it is a good thing, as you say it is, what do you think the ideal figure is? Is it 70,000 people a year? Where’s the sweet spot? Is it 40,000? Is it 80,000?

I don’t honestly know, but I know it’ll move around a bit. What is important to understand is that when it comes to migrants coming to New Zealand for long-term work, that number has— for those people, they come under a points category, and we turn that up and down in terms of what’s on the skill approved list and what is not. In fact, actually, the biggest howls of outcry we get is not when we let people in. It’s actually when we say, ‘We’re no longer letting, for instance, truck drivers in because we’ve got enough in New Zealand.’ So we do change the points. We do make it easier, for instance, to move around the regions, and we do take approved categories off the list. So we don’t just let anybody in. We do move it and massage it quite a lot.

So, okay, well, how high would that number need to be before you start turning the tap down a little?

Well, again, it just depends on what is required in skills. So if you think about our economy – I know you’re going to move to it in a moment – yes, dairy is having a downturn, but a lot of other sectors are having quite a big increase, and they need those skills.

Yeah, that’s 17 record months in a row for immigration, Prime Minister, so whereabouts is the right place?

But isn’t that a good thing, though? When I was the leader of the Opposition, 35,000 Kiwis a year got up and left on a net basis for Australia. So when you look at the breakdown of those migration numbers, they are New Zealanders coming home, they are people coming here to study, they are people coming here to work because we needed the skills.

I’m just talking about foreigners coming into the country. Is there no ceiling for the number that you’re happy to have coming in?

Realistically, we obviously need to be able to accommodate them. And, you know, while on the one hand they put some pressure on the system – they increase the number of people going to hospitals, whatever it might be, they need to be accommodated and the likes – they’re also a source of growth and, actually, they add to the richness of New Zealand.

But they are already putting pressure on the system. Your finance minister has told us – these are his words – surging migration is putting pressure on early childhood growth, on our schools and at our hospitals. How do you plan for that pressure when you don’t have a number, you don’t seem to have a ceiling?

Well, you can only plan by saying, look, these things move in cycles to a certain degree, so it’s like exchange rates. It’s always measuring one against the other, so it’s all relativity. Part of this is people coming from Australia to New Zealand, and when Australia starts going through a stronger period, you may see that moving the other way around. That’s the first point. The second point is it comes back to, as I said earlier, do we need these people? So I think my view is we do.

But given you’ve got pressure on services already and the Finance Minister has acknowledged that, is it time now to turn that tap down?

I don’t think so. You know, I think within reason we can see broadly what’s happening. Yes, those numbers have been strong, but as I said, I think that they add value, they’re adding to the economic growth of the country, and they’re adding to the opportunities that we ultimately have. I mean, the question is, you know, would we be a better country if either fewer people came or nobody came? And in my view, we wouldn’t be. We actually had a bit of a crisis of confidence when a lot of people were leaving, so we should sort of celebrate it the other way.

Prime Minister, yeah, I’m talking about foreigners coming in here, not the returning New Zealanders. So to be clear, you do not have a number? You don’t know what is the optimum number?

Well, what we have is we have an approved set of skills that are required and occupations that are on that list. All we—

Don’t you move that criteria to get an optimum number, an ideal number?

Yeah.

So are you saying – we just need to be clear about this – that there is no optimum number? You don’t have a number?

Well, there’s an optimum number, for instance, of, let’s say, truck drivers. If they’re on the approved category, then they can fit within the 120 points or whatever they need.

But a total number for foreigners coming into New Zealand – what’s the ideal number for us on a yearly basis, Prime Minister?

Well, I’m not going to put a number on that, because I think it will vary a bit. And I don’t think it’s a perfect science, because to go back to the overall point, I know you’re saying, okay, let’s just take non-New Zealanders, but it’s not quite as simple as that. For instance, within that non-New Zealanders category, there are people that come from the Pacific Islands, and we take them because we either have agreements or whatever it might be. The people that come on working holidays – well, actually, that’s a good thing. They’re people that come and study. So there’s a range of reasons.

I want to look at the kind of pressure that there might be on our resources. So Bernard Hickey has crunched the numbers. It works out at about 120 people arriving in Auckland every day, yet there’s housing space for 80. Doesn’t that tell us that the level of immigration is unsustainable?

Well, not everybody needs to buy a house, so that’s the important point. So if you come here, for instance, as a student—

But they need to live somewhere, and so that’s immigration figures versus spots in houses.

Yeah, but, I mean—

And there’s a shortfall.

A, it’s not a perfect science. B, you know, it depends on where people live and if they go around the country, so they move. But if they’re coming to Auckland, yeah, they might be flatting; they might be going to a variety of other places. They might buy a house, but you’re right – we need to build the supply side of housing, and that’s exactly what the government’s been doing. And that’s been the whole argument around housing, that yes, you can try and turn down the tap in certain places.

But at the moment, you have a volume of people coming in where there’s insufficient space for them in housing. We know that, you know, schools in Auckland – one school in Auckland’s putting prefabs in their car parks. So the infrastructure is not coping with the level of people.

Well, we’re then building. You know, if you look at the infrastructure programme of the government, we’ve been spending literally hundreds of millions of dollars building new schools and expanding the school and the capacity for those schools. That’s the first point.

And they’re still not coping. That’s the point, isn’t it?

Well, again, it depends on how you want to look at it. I mean, if I said to you Sydney, what pops up in your head? I suspect you would say, you know, ‘Quite a prosperous, successful city.’ And Auckland has re-rated itself. And that is what I keep telling audiences, because I believe it to be true, which is Auckland is now competing with some of those best cities around the world. What Auckland is experiencing is not different to London or Dubai or Sydney or Brisbane or Melbourne.

Let’s look on home turf. What constitutes an affordable house in Auckland, do you think, right now, Prime Minister? What’s the price?

That depends enormously on whether you’re a two-income household. It depends whether you’ve got much equity in savings, but what we know is through the government’s KiwiSaver HomeStart scheme.

No, for a figure. Can you give me a figure? What is an affordable house?

Well, it just varies, doesn’t it? I mean, what I might be able to afford or what you might be able to afford could be very different to a first-home buyer.

No, well, actually, under your special housing accord, an affordable house two years ago was $436,000 in Auckland, and it’s now more than $570,000. Can we really call that affordable?

But here’s the question, isn’t it? If you go on to Trade Me and put up Auckland homes today, can you find any under $550,000?

That’s what is an affordable house according to your own measure.

Well, it’s a fair question, though, isn’t it? And the answer is thousands.

That’s an affordable house according to the government’s own measure.

But that’s because the government has to have a series of measures for the basis of things like its Welcome Home Loan schemes and various other things that we do, but the point being, interest rates are now on the 60-year loan.

But then you’re not passing your own test, then, are you, Prime Minister, if, like, $570,000 – is that really affordable for people?

Well, again, it depends. But certainly, if you look at interest rates, interest rates at the lowest they’ve been in 60 years. So yes, they are more affordable in that regard. In fact, actually, if you look at those affordability studies, one of them, they look at that.

So are you comfortable with that price, then?

Well, obviously, I would like to make sure that wages keep rising faster than inflation, which is what they’re doing.

But are you comfortable with that price, $570,000-plus as an affordable house in Auckland?

Well, I suspect in Auckland, house prices aren’t going to fall. You know, they will always have fluctuations, so I can’t say to anyone given a year, they won’t go down, but my overall point is again, if you go and have a look in fast-growing cities around the world, house prices typically have gone up. The question is not whether they can or should go up; the question is, can you manage the increase in a more acceptable way. And the answer is yes, when you have volume of supply.

Okay. I want to look at tourism.

And Christchurch actually proved that point, to be honest with you. Christchurch house prices aren’t going up any more. Rents have actually been coming down, because we have got on top of the supply issues there.

All right, that was the affordable house price in Auckland. Let’s move on to tourism. So, tourism looks like it is going to overtake dairy as our biggest export on an annual basis. When do you anticipate that that will actually happen?

I don’t know exactly. It depends a little bit on dairy, but we certainly know those numbers are very strong, so 3.2 million tourists came to New Zealand last year. Every market is growing, including Australia, which where about 1.35 million tourists come. Our largest market is China, and depending on how you measure it, it is growing between 35% and 40% a year – about 400,000 Chinese tourists came last year.

So those are big numbers, but we have been talking to people in the industry this week, and they say that we are not ready for that expansion, that we are struggling, there is not enough quality hotel beds. Tongariro Crossing and Cathedral Cove are bursting at the seam. What is the plan to deal with that? I mean, is it time to start charging international tourists to visit those places?

Well, let me make the first point. If you think about the growth, you are absolutely right at one level, that there is potentially an infrastructure deficit around hotel rooms and the like.

So we’re not ready?

Well, you can see in Auckland, the occupancy rates have been running very very high and yields have been going up in hotels. It is a great thing for hoteliers – they have been doing well.

Yes, but simply put, we are not ready, then.

No, I think the main point is, what has been typically the pattern in New Zealand is that we have had tourists coming in the peak season, from November to March. What the government has been trying to do through the variety of programmes that we run is broaden it out. So that, for instance, in Australia, the peak season runs for 10 months of the year, not for the, sort of, four or five months that we have. So that’s, for instance, why a thing like the SkyCity convention centre matters, because it is likely to bring in more tourists outside of the peak time.

Okay, the likes of Tongariro Crossing, though - we are bumper-to-bumper traffic over there sometimes. Do we need to start charging foreign tourists?

Well, there is always an argument that runs around about whether we should charge in our national parks. So for instance, if you go to Yosemite National Park in the United States as a foreigner, you pay.

But simple question for us here, Prime Minister – yes or no, is that something we need to investigate?

Well, my officials quite like it, and they have looked at that idea. Generally speaking, our guys have been a bit of the view as in the, sort of, finance team, that we would prefer not to do that, and so we have just put more money into tourism. So we have not typically charged. The sector would say don’t charge, cos they say that tourists already pay about a billion dollars in New Zealand, so they are already making a big contribution.

There’s a few things I want to get through in the time that we’ve got left. Very quickly – freedom camping this week. You would’ve seen the agro, people pooing all over the place. Now, that’s been left to councils, really, to deal with in the last past five years. It’s clearly not working. Did you need to take a look at that?

Yes, I think, is right. We do need to take a look at that and see whether there’s more support we need to provide those councils.

And what do you think that might be?

Well, it’s money, isn’t it, ultimately. I mean, what you’re dealing with is while the increase in tourists have been generally quite high quality… So just to give you an idea, the value of what tourists are spending in New Zealand is rising about three or four times as fast as the volume, so they’re spending more. But in terms of freedom campers, you’ve just got some people who are, you know, fundamentally, dumping waste product in the environment, and that’s very upsetting for everybody else. The councils would argue they don’t have enough money.

So you need to get in there and help them some more.

The question is whether we need to help them. I think there’s an argument we do.

And, as you say, that would be more money.

It’s more money.

Aimed at what?

Well, it would be at the tourists who go to the places where the councils are small and don’t have the capacity to do that. So you think about places like the West Coast of the South Island, Queenstown, where you get a big influx of tourists but a very small rating.

Okay. I also want to ask you about the story The Herald has been running this week about multinational companies based in New Zealand who apparently are avoiding-

Don’t pay tax.

Paying very little tax. Do you think that that’s fair?

No. I don’t think it’s fair. Look, there’s a few things happening there. For a start off, I can’t tell you with absolutely precision whether they are doing what’s ethically right. I can tell you that they’re probably doing what’s legally right, because they don’t pay tax on some mythical number; they pay tax on their reported profit in New Zealand.

So you need to change the law to match the ethics, then.

Potentially. And so what’s happening is the OECD have been looking at that, and we- It’s  a very difficult thing for us to do on our own, because the reason they might be able to – I’m not saying they are – but the reason they might be able to reduce their reported profit in New Zealand is effectively through transfer pricing.

Other countries are doing stuff. As you know, the UK is doing things. Australia is as well. So are you going to look at-?

Well, we’re looking at both issues. We’re looking at how we can work more effectively with the OECD and whether there are any unilateral actions that we could take.

Law change?

Law change. But to be blunt, we think the fastest way through is through the OECD, because it’s one of those issues where it’s quite difficult on our own. And some numbers aren’t right. I mean, some numbers, you know- When they count the turnover of people, most of the costs and other parts are offshore. We accept that argument. But it feels too low to me for the size of the multinationals and what they’re doing in New Zealand intuitively.

All right. One other issue this week has been the so-called ‘jihadi brides’. Muslim leaders that we spoke to said that they were victimised and confused as a result of your comments around jihadi brides. Do you owe them an apology?

I don’t think so, and the reason for that is, I think, if you just look at the sequence of events, the first thing is that- I’m not distancing myself, but I didn’t raise the issue. The SIS directed it, and I wasn’t-

No, you used the phrase ‘jihadi brides’, Prime Minister. I’ve looked at the transcript. It was you that used that phrase, not Rebecca Kitteridge.

I didn’t coin that phrase. That phrase is used all around the world.

But you were the first one to use it.

Not around the world, I’m not. It’s a common term.

In the Select Committee, you were the one who raised it, and you raised it in relation to New Zealand women. You perpetuated it.

The point is that she raised the issue. So that’s fine. I didn’t know she was going to do it, but absolutely the right term is jihadi brides. That’s what people use around the world.

You didn’t correct it, though.

But there’s nothing to correct. This is the point. The point is not about where they leave from. The point is – are they New Zealanders? If they’re New Zealanders, under the New Zealand intelligence law, the only salient point is – are they New Zealanders? Because when you’re talking about risk-

Okay. So you don’t owe them an apology in your view?

No, because if you look at, say, Kim Dotcom on the other side, the issue wasn’t that he was German or that he’d come to New Zealand- I don’t even think he was actually a resident for the purposes of other law, but he was a New Zealander for the purposes for GCSB law. The issue is whether someone is a New Zealander.

All right. Just very quickly before we go – this time last year, you offered to meet with Muslim leaders and to go to a mosque sometime soon. Have you done that?

I’ve definitely met with Muslim leaders. I don’t remember whether I’ve been to a mosque in the last 12 months, but I’m bound to go. I think I probably have, because I go to lots of different events. But I’ve definitely met with the Muslim leaders.

So are you going to go to a mosque, then, and keep that undertaking?

If I haven’t in the last 12 months, I certainly will. I go to quite a few. I just can’t remember my exact diary. But the- In terms of- Chris Finlayson met with them last night. But the point- the really important point here is that there are some risks, and the risk are fundamentally- the most significant risks are returning people to New Zealand, whether they are jihadi brides or whether they are foreign fighters, and actually, the salient point there is – are they New Zealanders? If they’re New Zealanders, they can come back to New Zealand.

We’re out of time. Very quickly – I see you’re not wearing your flag badge this morning. Have you given up on that one, Prime Minister?

Do you know what? Everywhere I go, people try and take it off me. I don’t whether we’re winning or losing the debate, but everywhere I go, people take- So I’ve got two left in my office in Wellington. That’s it. So I would love to be wearing it, but they’re so popular, I keep losing them.

Thank you so much for joining us this morning.

Thanks a lot.

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