By Bernard Hickey
It's the topic every tax official and finance minister in the developed world is talking about and acting on, yet we hear very little about it in New Zealand.
Cracking down on tax avoidance by the world's biggest technology companies - among them Google, Facebook, Apple and Microsoft - is at the top of the agenda of the OECD and the G20.
This week British Chancellor of the Exchequer, George Osborne, flagged new tax avoidance rules and the European Commission announced Apple faced having to pay billions of euros in back taxes because of the way it used Ireland's tax rules to lower its tax bills.
"Some technology companies go to extraordinary lengths to pay little or no tax here,” Mr Osborne said. “If you abuse our tax system, you abuse the trust of the British people. And my message to those companies is clear. We will put a stop to it. Low taxes, but low taxes that are paid," he said.
The use of tax havens and Ireland's extremely low corporate tax rate is a common theme for companies such as Google and Apple.
One common tactic is the "Double Irish with a Dutch Sandwich," whereby an American based company has a subsidiary in Ireland that owns the company's intellectual property. Revenues for the product or service are then paid to the Irish subsidiary, which is then able to route the profits to a tax haven, often via the Netherlands, because of some quirks in Irish and European tax law.
It's like magic.
Hey Presto, and the revenues for a product or service designed in America, manufactured in China or hosted in Finland, but bought and consumed in New Zealand, are routed through Ireland and end up as profits untaxed in a tax haven.
It is, of course, perfectly legal.
But it is deeply unsettling for Governments, particularly as more and more products and services are being bought from such multi-nationals, often through a an apparently stateless and ever shifting 'cloud' of servers and companies.
Where previously, a product or service might have been produced in New Zealand, the company that made it paid corporate taxes, the employees paid wages and GST was paid when it was sold.
Now, the revenue goes straight to Ireland and no GST is paid, while little or no corporate tax is paid.
For example, Google New Zealand Ltd reported revenue in calendar 2013 of NZ$10.1 million and paid NZ$227,074 in tax.
New Zealand companies, meanwhile, are estimated to have spent more than NZ$200 million on advertising with Google last year, aiming to reach other New Zealanders using Google in New Zealand. That revenue was routed through Ireland.
Meanwhile, Apple Sales New Zealand reported revenues in the year to September 28, 2013 of NZ$564.6 million and paid NZ$3.9 million in tax.
New Zealand is not alone, and it cannot act alone, but it will have to soon think about how to act. Yet there is very little political discussion or Government focus on the topic.
It has snuck up on everyone focused on the election campaign, but the topic of tax avoidance by multi-nationals will be the main topic of discussion at the G20 leaders meeting on November 15 and 16 in Brisbane, where Prime Minister John Key will attend as a special guest of the host, Australia's Tony Abbott.
The G20's finance ministers met in Cairns on the same weekend as New Zealand's election and agreed to work on a sweeping range of cross-border tax avoidance plans. However, the success of these plans will depend on Governments, which means politicians, cooperating with each other and avoiding the temptation to poach international business off each other or turn a blind eye to please their corporate backers.
Only political pressure will keep them honest and this problem is not going away.
If anything, it is getting worse.
A recent rash of corporate 'inversions', where US companies buy smaller rivals in lower tax countries to cut their tax bills, has forced an immediate reaction by Barack Obama.
In New Zealand, GST revenues have been weaker than Treasury expected for much of this year, part because of the growing amount of online buying from offshore sites. BNZ's Online Retail survey shows online buying from overseas sites has risen 140% in the last four years, while domestic online sales have grown at less than half that rate.
Online sales now make up almost 10% of retail sales, excluding grocery and liquor sales.
Also, significant sectors of the New Zealand economy are about to be 'internationalised' in the same way as manufacturers, many of whom saw their supply chains migrate to China and elsewhere.
Education, health, banking and insurance will face competition from rivals in the 'cloud' who will be able to offer cheaper and better services because they don't pay much tax.
The likely continued erosion of GST and corporate taxes is a big deal for the way we fund public services, given the NZ$29 billion collected each year from these taxes make up more than 43% of New Zealand's total tax take.
This would increase the burden on PAYE tax, or put even more pressure on spending on services.
Our broad base and low rate tax system works well when taxpayers are grounded here, but is less effective when those taxes migrate into the cloud.
A lack of urgency
The lack of urgency or public concern about the issue is surprising. The Government delayed its review of charging GST on overseas purchases before the election and comments about cracking down on multinational tax evasions from senior ministers are lukewarm.
If they're looking for an indication how concerned they should be, they need look only across the Tasman, where a confidante of Prime Minister Tony Abbott, Liberal Senator Bill Heffernan, this week warned of the dangers of ignoring the evasion.
"If you're willing to turn a blind eye to billions of dollars going out the door and offshore, you're doomed in terms of providing what people expect from government: roads, schools and hospitals," Heffernan said. "This is the greatest financial challenge facing the Western world and if not addressed it could redefine sovereignty in the Western world."
A version of this article first appeared in the Herald on Sunday. It is here with permission.