Credit: Original article can be found here
OPINION: The Government should and will fall in behind the G7’s “breakthrough” plan to reform the taxation of large multinationals.
As well as being a reasonable deal for New Zealand with no real downside, it is also the only one on the table.
To briefly recap, the G7 plan would impose a minimum level of tax on large multinationals.
It would also allow countries where very large multinationals don’t have any or much of a physical presence but still make sales, to grab a share of any super-normal profits they make.
The case against
There are three main criticisms of the G7’s plan, all of which to be fair have something in them.
The first is that the “minimum tax” is set too low at 15 per cent, but I believe that is fuelled in part by some misunderstanding regarding the details of the plan.
The second is that not enough tax on super-normal profits will be shared around between the countries, but I’ll explain why I think the formula is reasonably fair.
The third is that the G7 has no right to ‘strong arm’ the terms of an agreement on the rest of the world.
Well maybe, but before the G7’s compromise, talks within the OECD on further multinational tax reforms looked to be heading towards the rocks.
The ‘15pc’ minimum is not a floor
A minimum 15 per cent tax on profits sounds low given the company tax rate in most OECD countries is above 20 per cent.
In New Zealand the rate is 28 per cent.
But the G7 is suggesting that every dollar of profit large multinationals make in each jurisdiction where they might otherwise pay less tax can be topped up to 15 per cent.
The fact they would almost certainly be paying tax at a higher rate in some countries makes no difference.
Let’s take the case of fictional company “EatCo” based in the fictional country of Avalon, which has come to dominate the global market for online grocery reviews.
If EatCo paid 10 per cent tax on its profit in Ireland, the Avalonian government could top that up to 15 per cent and claim the extra 5 per cent tax on EatCo’s Irish profits for itself, under the G7 plan.
The fact EatCo’s New Zealand subsidiary would be paying 28 per cent tax on its profits here makes no difference as there would be no offset against the top-up tax for that.
So the average rate of tax paid by multinationals globally would be higher than 15 per cent.
The 15 per cent rate is also itself a minimum. It appears there be would nothing to stop Avalon setting the minimum rate at 21 per cent and topping-up the tax rate on EatCo’s overseas earnings to that.
Remember, EatCo is based in Avalon and all its “top-up” tax goes into Avalon’s coffers.
The share-out rule is not obviously unfair
The G7 has also proposed that if the world’s very largest multinationals make more than 10 per cent profit on their global revenues, countries where they sell products or services should be entitled to claim tax on 20 per cent of their global profits above that.
Play with some calculations, and it is easy to see why Oxfam and some others are disappointed.
In practice, only a few percent of the profits of very large multinational are likely to be shared out between countries such as New Zealand under this rule.
I’m taking some guesses here because the G7 has not completely spelt out its proposal.
But let’s say EatCo made a profit of $2 billion on sales of $10b, half of which were from sales in Avalon and half overseas, and that Avalon had a 15 per cent company tax rate.
Normally, the Avalonian government might be entitled to $300m in tax.
But the new rule would appear to mean other countries would be entitled to claim a share of tax on $100m of EatCo’s group profits (bearing in mind that half EatCo’s sales are in Avalon).
If that was also taxed at 15 per cent, EatCo would pay $285m tax in Avalon and $15m to other countries as a result of the G7 rule, assuming EatCo could offset the $15m against its domestic tax bill.
$15m from a $2b profit might sound like small beer, but then why should other countries get more?
The golden rule that has underpinned the tax system for about 100 years is that companies pay tax in the countries where they develop, create and support their products and services, not where they sell them.
It’s a pretty good rule that is now much better policed than it was thanks to the OECD’s work on tax rorts.
The reasons for reform
OK, there a few arguments why it might not be a perfect rule any more.
The first one that was really pushed in political circles was that the likes of Google and Facebook were in a special situation because much of their ‘value’ was created by their customers around the world uploading content and using and therefore refining their algorithms.
The idea seemed to be that their customers are a bit like employees, creating value and therefore a taxable liability.
That morphed into a tortuous, almost metaphysical argument that there is a broader swathe of multinationals that enjoy “market intangibles” through their powerful global brands.
Think of it, I guess, as some sort of ‘halo effect’ that transcends the companies’ operations, and that might be taxable worldwide.
This was where discussions within the OECD were stuck flailing before the G7 popped forward with its compromise.
There is another, perhaps better, rationale for a more caring, sharing global multinational tax system, that for some reason never really surfaced.
Let’s face it, if a very large multinational is earning more than 10 per cent profit on its revenues then it is probably enjoying some sort of natural monopoly advantage.
Neither New Zealand nor India can create a ‘Google’ or ‘Facebook’ because there is only room for perhaps one of each, and given the size of the US consumer market and the depth of its capital markets those companies were always going to spawn from there.
Accept that, and you could argue that most countries are having to ‘forgo’ the opportunity to tax tranches of the digital economy because they can’t home-grow digital giants, and through no fault of their own.
The G7’s tax proposal seems a pragmatic mechanism to provide limited redress for that.
There’s no real downside for NZ
There aren’t many ways New Zealand could lose out from the minimum tax rule.
It is conceivable it might have the effect of limiting the subsidies that the Government can pay to large film production companies including Amazon under the New Zealand Screen Production Grant.
But Deloitte tax partner Bruce Wallace believes that’s not clear-cut, and as other countries would be in the same boat with regard to any subsidies they offered that might seem a welcome development anyway.
It is also doubtful whether there are any New Zealand-based multinationals that are large and profitable enough to need to hand a share of their profits to foreign governments under the second part of the G7 proposal, as it will be intended to apply to only the world’s very largest firms.
Some tax collected from Fisher & Paykel Healthcare might need to be handed over to foreign governments, but that’s far from certain.
It’s this or nothing
Work on taxing the digital economy was supposed to be progressed by the OECD, so why should the G7 dictate terms when it only compromises Canada, France, Germany, Italy, Japan, the United Kingdom and the United States?
The reality is that US agreement is central to any deal as a high proportion of the large and very large multinationals that will be impact by the two rules are US based.
The US has long wanted a minimum tax to rein in tax havens, and handing out a small share of the profits of its very largest firms is the price it now seems prepared to pay both for that, and for countries such as India, Britain and France abandoning their own unilateral taxes on multinationals.
The New Zealand government consulted on plans for a Digital Services Tax that would have seen it take as tax a 3 per cent share of local revenues of internet advertising, social media and gig economy companies such as Facebook, Google, Uber and Airbnb.
But the consultations were completed in 2019 and that policy didn’t and never was going to go anywhere.
Officials advised the tax could break WTO rules or tax treaties and New Zealand’s biggest firms warned against it – even Spark whose chief executive at the time Simon Moutter was talking tough about unfair competition from under-taxed overseas giants.
With the G7 backing a multilateral deal to reform multinational taxation, New Zealand would be defenceless against retaliation if it went off and imposed its own different tax.
It would also be utterly irresponsible given the fragile state of so many global institutions post Trump and Covid, and in the current geopolitical situation, to risk breaking one thing that is still at least three-quarters working; the global tax system.
But that won’t happen. The Government will back the G7 proposal, and I imagine be relieved that it won’t need to see the bluff called on its Digital Services Tax.
It’s a good result.