Death and taxes: are the giants of the digital economy paying their fair share? UPDATED!!!

Death and taxes: are the giants of the digital economy paying their fair share? UPDATED!!!
We’ve had it pretty good for a while now. Hours of House of Cards on Netflix? Tax free. Months of Spotify premium? Tax free. That Chromecast thing you bought from Amazon? Tax free. But it looks like those good times may be coming to an end.

Yesterday, Spark CEO Simon Moutter doubled-down on his calls for tech giants Facebook and Google to pay their "fair share" of corporate tax: "Is it right 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?" he wrote in the Herald.

What better time then to revisit a story from last year when Moutter made a similar statement, then in regards to the proposed "Netflix tax", a GST levy on digital goods and services? 

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Last week, Revenue Minister Todd McClay released ‘GST: Cross-border services, intangibles and goods’, a discussion document outlining the IRD’s intention to require overseas suppliers of digital goods and services to register with the IRD and collect GST on purchases made by New Zealand consumers.

Many have dubbed this the ‘Netflix tax’ due to Spark chief executive Simon Moutter’s call for GST to be charged on digital goods and services, which, in his view, would help even the playing field between Spark’s television streaming service, Lightbox, and Netflix, the US-based global leader in the market.

But since the announcement of the new GST policy (covered by our sister-publication the Register here), some have begun to ask: if we’re reevaluating the tax New Zealand consumers pay on online purchases, shouldn't we also reevaluate the corporate tax providers of digital goods and services pay in New Zealand?

Image: Simon Moutter

In a statement to the National Business Review, Moutter said that corporate tax avoidance by multinational companies operating digital services across borders is a bigger issue than consumers paying GST on digital goods and services and low-value goods.

He says that by minimising their tax burden through various profit-sharing mechanisms (where profit made in one territory is moved to another by, for instance, charging licensing fees for intellectual property), overseas digital companies are placing an unfair burden on New Zealand taxpayers.

He tells the NBR: “every tax dollar that a multinational avoids paying in New Zealand has to be made up by local individuals or companies in the tax that they pay. [...] 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.”

It makes sense on a gut level. We know that most New Zealanders use Google and Facebook products on a daily basis, and we know that these companies are generating revenues that dwarf small countries, so why are they paying so little tax here? Are Google, Facebook, Apple, Amazon, Netflix, etc., ripping us off?

Dr Eric Crampton, head of research at the New Zealand Institute, says no.

Image: Eric Crampton

“It seems a little odd to me to complain about the extent of taxes paid in New Zealand for shows distributed by Netflix to New Zealand consumers,” he says, comparing Netflix to LG, a company which sells televisions in New Zealand which are designed and produced overseas.

“LG doesn’t really exist here. They ship TVs in and Kiwis buy them from retailers. Netflix doesn’t really exist here, except in the extent that they’ve got a website that people sign up to and people will end up paying GST on under the new proposal, but it’s just a licence to service content coming from elsewhere. I don’t know how different that is to a TV that’s shipped into the country direct to consumers. You pay GST on it at the border if it’s high value, but it’s not like LG’s paying corporate tax on it here.”

Crampton disputes Moutter’s characterisation of profit sharing as corporate tax avoidance: “For things like Google, how can you tell the difference between [shifting profits] and just a licensing fee that a parent company is paid for a massive amount of intellectual property by a New Zealand subsidiary? Would anyone be signing up for anything with Google New Zealand if they didn’t have all of the Palo Alto bunch there behind it? People are only prepared to use Google for search because they’ve got this massive search engine run out of the States.

“Google pays corporate taxes elsewhere on that stuff. I know that countries are negotiating to make sure there’s not dodgy ways for companies operating across multiple countries to try and hide revenues or to avoid tax burdens, but we shouldn’t immediately assume that payments for use of IP generated abroad are some tax dodge.”

He agrees that if companies are avoiding paying tax through genuinely illegitimate tactics, the loopholes that enable that avoidance should be closed, but says it’s impossible for New Zealand to that so alone. “If the IRD here, in coordination with other countries, find that there are ways that companies are avoiding paying tax across the entirety of the worldwide operations, then there could be cause to try and coordinate across countries to make sure there aren’t loopholes that way. But some New Zealand-going-it-alone deal just doesn’t seem practicable.”

Crampton says that it’s absurd to think that by diverting profits to other territories, innovative companies are taking value out of the New Zealand economy.

“I look at what I get out of Google,” he says. “I’ve got my phone, I push a button and, for free, it will tell me how to walk anyplace in Wellington that I didn’t know who to get to before. And it will give me voice directions to get there. I've got a parallel imported car that’s got a screen display and I can’t understand a word of it. I put my phone up to it, I push a button and it translates it to English for me, and I haven’t had to pay a dime for that. And I can figure out how to make my car work and I haven’t had to pay Google anything for that. It’s a little app, Google Translate, and it’s magic. It’s like Star Trek stuff in your hand and people are whining. You don’t have to pay for any software on that!”

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