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Global revenue crackdown behind Facebook tax row

Rob Hosking
Fri, 30 Nov 2012

Behind this week's parliamentary stoush about what little tax the likes of Google, Facebook and Starbucks pay in New Zealand is a worldwide crackdown by tax authorities.

The Australians are already moving. Earlier this week the Australian Tax Office released a proposed set of rules for "transfer pricing" – arrangements whereby international firms route as much of their profits as possible through branches which are based in low tax jurisdictions.

Companies such as Google, Apple, Starbucks, and McDonalds are just some of the firms which have attracted public ire for use of transfer pricing arrangements.

A key aspect is the tax treatment of "intangibles" – primarily intellectual property owned by the company. If this can be located in one of the low tax regimes, much more of the taxable revenue can be routed there.

This is obviously relatively easy for globalised information technology firms such as Facebook and Google, but other global firms are following suit.

This is why McDonald's, for example, has classified its burgers as intellectual property.

Labour MP David Clark raised the issue in Parliament this week, saying Facebook should pay more tax in New Zealand than the $14,497 it paid last year, and also that New Zealand needs to do something about it.

Not quite correct

That’s not quite correct. In general terms, Inland Revenue has been told to get as much tax as it can out of existing tax settings, and this includes the whole transfer pricing issue.

Deloittes annual tax conference was told last week that IRD is focusing on international firms, with particular reference to issues such as intangibles, downward shifts in profitability of the New Zealand company and any significant difference in the financial performance between the New Zealand company and other members of the group.

“A New Zealand company might make a payment to bump up its US profit and the IRD might ask some questions about that,” Deloitte associate tax director Kirsti Longley told the conference.

“They will also look at the treatment of things like research and development, intangibles, high payment of top executives.”

The Australian crackdown may have implications for New Zealand’s approach but that is not clear yet.

The ATO’s move was triggered by its loss of a court action against the Australian branch of French chemicals group SNF.

“The Australian Tax Office is saying that wasn’t the right outcome so they’re looking at changing the law,” Deloitte Australia partner and leader of its Asia Pacific transfer pricing team Paul Riley told the same conference.

There are three other cases which have been taken by the ATO, with the amount in dispute totally $A1.9 billion, and the Australian law change is retrospective.

The new ATO approach is based on OECD guidelines and therefore New Zealand is not unlikely to take a dissimilar stance to the Australians.

It is understood Revenue Minister Peter Dunne has asked for an urgent report from officials on what changes New Zealand might have to make in the wake of the Australian shift.

The OECD and the G20 are putting much more effort into the transfer pricing issue. 

The issue is also shaping up as one of tension between globalised firms and smaller firms, as governments cite the transfer pricing issue as a reason for not cutting the headline company tax rate. 

Rob Hosking
Fri, 30 Nov 2012
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Global revenue crackdown behind Facebook tax row