Simon Moutter says offshore online rivals enjoy an unfair tax advantage and should have to make an equal contribution to NZ society

By Simon Moutter*

It has been said taxes are the price we pay for a civilized society.

So what happens when some of the wealthiest companies in the world don’t pay toward the upkeep of the societies they operate in?

No one likes paying taxes.

In my opinion taxes should be as low as possible to stimulate economic growth, but high enough to cover essentials like health, education, defence, welfare for those in need and the maintenance of law and order.

These services are funded from income, corporate and consumption taxes and while we may grumble about them, generally most fair-minded people and businesses accept the need to contribute, as long as it’s fair and everyone does their bit.

However, in the modern environment, some companies have found ways of structuring themselves so they skip paying taxes in the countries they operate in. That’s a worry for all of us - and as a committed New Zealander, parent and business leader, I am very concerned.

If a large slice of the tax base is reduced because multinational companies take value out of New Zealand and leave virtually nothing behind (no local profits/no corporate tax, no employees/no income tax, non-resident status/no GST) then the Government will by definition need to increase taxes on the rest of us if we want to keep the same level of services.

While New Zealand consumers are behaving entirely rationally in terms of shopping online for best value in a global market, the question we need to ask ourselves is: are we all willing to pay more taxes so that the Amazons, Googles, Apples and Netflixes of the world can pay virtually none?

Is it fair these companies collectively extract hundreds of millions of dollars of profit each year from the New Zealand economy, yet contribute little or nothing to the funding of a civil society?

And not only that, cause New Zealanders to pay more tax to pick up the financial slack?

To take a recent example: Netflix is a US$25 billion company - that’s bigger than the combined value of the seven biggest companies on the NZX stock exchange. This week the US-based company is launching a “New Zealand” service, directly competing with local online video providers, yet it has been reported as saying it won’t collect GST in this country.

Nor, presumably, will it pay any taxes on the profits it makes here.

In effect, Netflix is telling New Zealand consumers it’s here for business, but it seems to be telling the IRD it’s not really here ... A disclosure: last year Spark New Zealand set up Lightbox, on a virtually identical business model to Netflix NZ. We compete against Netflix NZ to buy New Zealand content rights on the international market, we process that content offshore, we have elements of our products and services both built and managed offshore (and onshore), and we deliver services via the internet to New Zealanders.

The only differences are we are a New Zealand owned company and we have chosen to employ locals who pay tax here in New Zealand.

This means we are required to charge GST on Lightbox subscriptions, which means we pass on about $2 a month GST per customer from our standard  retail price. Our other New Zealand internet TV competitors pay GST also.

By not doing the same, Netflix NZ has an immediate cost advantage over all New Zealand companies in this space.

But there is a far bigger issue at stake.

Household names like Google, Apple, Amazon and Facebook are structuring their businesses in a way that means that while they make loads of money from New Zealand, they declare little “profit” here and therefore pay little company tax.

It’s no small beans either - Apple sold $568 million of products in New Zealand last year but its accounts showed it apparently only made these sales at a 3% gross margin, meaning it paid less than $7 million in New Zealand corporate tax.

A basic principle should be that all companies making money from doing business in New Zealand, regardless of where they are located, should make an equal contribution to our society by collecting and paying their fair share of taxes.

Allowing these sorts of tax avoidance arrangements to become more commonplace can only have a substantive negative impact on New Zealand businesses, erode public service funding, increase the tax burden on New Zealand tax-payers and reduce the incentive for New Zealand companies to invest in digital services or local content.

This is an issue that has been gathering steam around the world.

Speaking at the Finance Ministers meeting prior to last year’s G20 meeting, Bill English stated, "Both governments and voters want to see particularly the new generation of tech-oriented companies paying their fair share of tax". I hope he follows through.

We are seeing other countries beginning to act. Just last week, the United Kingdom announced it will introduce from April 1 a “diverted profits tax” aimed at big tech multinationals that move earnings around the globe to minimise tax liabilities. Australia is currently also mulling a tax on multinationals that shift profits around the world, but is yet to enact any measures similar to the UK.

Many people in the local business community here want our Government to lead the way on ending the rorts and creating a level-playing field for all New Zealanders.

Digital technology may have opened many of these tax loopholes, but digital technology will help close them.

Take GST for instance: the websites of many large US based companies already have the ability to accommodate different US state taxes at the click of a button with drop down menus and suchlike. 

It would be easy to extend this concept to consumption taxes from other countries.

It shouldn’t be put in the too-hard basket.

The number of companies who operate in this way will grow fast.

Otherwise we risk the hollowing out, not only of a tax base, but of a nation.

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* Simon Moutter is the managing director of Spark New Zealand (formerly Telecom). This opinion piece was first publsihed in the NZ Herald. It is here with permission.