OECD says you can’t do special tax rules for digital companies

February 3rd, 2014 at 10:00 am by David Farrar

The FT report:

Proposals for a crackdown on digital companies such as Google and Amazon are to be dropped, as governments push ahead with measures affecting the global economy.

Designing special tax rules for internet companies would not be viable, given the growing digital presence in large parts of the economy, an international task force has concluded.

So I’m really looking forward to details of the magic wand that Labour claim they have, that will mean those companies will pay tax in New Zealand based on their turnover instead of their profit.

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61 Responses to “OECD says you can’t do special tax rules for digital companies”

  1. flipper (4,198 comments) says:

    Peter Sellars would have loved this situation.

    He would have re-made his classic movie, “The Mouse that Roared”, into something like “When labour squeaks….”

    Silly, stupid Clark, Parker and Cunners et al.

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  2. queenstfarmer (782 comments) says:

    Well, what would tax and international trade experts know. Bloody amateurs. They simply need to ask martinh who came up with a brilliant plan on this very site just the other day (http://www.kiwiblog.co.nz/2014/01/labour_says_apple_et_al_plundering_nz_economy.html). His plan is to force Facebook and Google to pay more tax by:

    1. Punishing all NZ businesses who advertise with foreign companies Google and Facebook
    2. Rewriting NZ’s accounting rules to disallow foreign advertising as a business expense
    3. Sacrifing NZ’s multi-billion dollar technology / digital sector
    4. Inviting punitive / reciprical tarriffs and tax treatment on NZ primary exports, including dairy
    5. Breaching numerous free trade agreements and other international agreements
    6. Sending IRD agents to the US to knock on Google’s door and demand to carry out a tax audit
    7. Consider expanding this scheme into taxing foreign airlines, too.

    A potential minor side-effect is this will cost billions and cripple our economy, but at least it may browbeat Facebook and Google into voluntarily paying a few million dollars to the NZ Government. Brilliant. Perhaps Labour will invite martinh to be their special policy adviser :-)

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  3. ross69 (3,652 comments) says:

    So you really do support multinationals paying 2% tax! Thanks for clarifying.

    [DPF: Lying gets you 10 demerits. Incidentally Google pays an average 20% tax on its profits worldwide]

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  4. tvb (4,501 comments) says:

    A turnover tax of a fairly low rate if in line with international practice may be a solution to large transnational companies manipulating their profits to get around tax.

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  5. ross69 (3,652 comments) says:

    Even a Tory like David Cameron gets it. Strange that the Tories here struggle with the idea that it’s not OK to rort the system.

    http://www.reuters.com/article/2013/05/21/us-britain-google-tax-idUSBRE94J0O420130521

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  6. dishy (248 comments) says:

    ross69, you mean that even David Cameron thinks companies will make voluntary payments of tax because somebody “expects them to”? Good luck with that.

    There’s no rorting here. There’s just the law as it stands. Don’t you understand the difference between avoiding the impostion of tax, and evading payment of taxes lawfully imposed?

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  7. burt (8,309 comments) says:

    ross69

    Just out of interest – what percentage of revenue do the labour party pay in tax ?

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  8. Joanne (177 comments) says:

    ross69

    Look at The Warehouse Financial Statements. Their tax liability is less than 2% of total revenue.

    If you and Cunliffe and the Labour Party don’t understand the tax rules just ask. This tax compared to total revenue is a deceiving and ignorant argument.

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  9. Joanne (177 comments) says:

    ross69

    Let the Labour Party shut The Warehouse down and then they can bitch about the loss of job.

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  10. Joanne (177 comments) says:

    I’ve just had a quick look at the Fonterra financials. Rough calculations they pay under 3% of total revenue in tax. Labour should ban them and then they will have lots to bitch about because we won’t have an economy to pay for their promises.

    But then they will never be in power so why worry.

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  11. burt (8,309 comments) says:

    Joanne

    Don’t expect ross69 to use his own brain. He’s a Labour supporter and believes in socialism so pretty much anything they say he will repeat without thinking. The Labour party rely on people like him to get elected….

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  12. Mike Wilkinson (71 comments) says:

    Preumably, the growing digital sector of the world’s economy will often just move to wherever the tax rate is lowest. This would appear to imply a decline in the corporate tax rate (as countries compete to have digital businesses locate to them). That might be sensible, however: rather than taxing the companies themselves, why shouldn’t governments worry more about taxing the individuals that own them? I reckon individuals will be slower to respond to tax rate differences as digital companies do.

    Cheers,
    Mike

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  13. freethinker (694 comments) says:

    If governments are really serious it may not be too difficult to stop the tax avoidance that seems to be the stock in trade of large multinationals by explaining to governments of those countries with tax rules that allow very low levels of corporate taxation that they need to review the rules before the international community reviews if such countries will remain part of international banking arrangements. The US effectively forced Switzerland to divulge details of previously secret Bank accounts so there is a precedent for the use of Bully Boy tactics which in any event of universally used against the small guy.

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  14. jp_1983 (225 comments) says:

    Well I guess when all the countries in the world give all their taxes and monies to the un’United Nations’ this will solve the issues of the multinationals not paying their ‘fair’ share.

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  15. Jim (398 comments) says:

    Can anyone in Labour spell DTA let alone read and understand it?

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  16. chris (647 comments) says:

    If governments are really serious it may not be too difficult to stop the tax avoidance

    It would only work if every single country in the world agreed on how much to tax companies. All it takes is one single country to be a tax haven and the system breaks.

    But look, on the other hand, say every single country in the world did have e.g. a 25% tax on profit, it still doesn’t mean Facebook etc would pay that 25% here. Most likely the money would still be off-shored to the USA as expenses and they’d pay their tax in the USA.

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  17. davidp (3,587 comments) says:

    >So I’m really looking forward to details of the magic wand that Labour claim they have, that will mean those companies will pay tax in New Zealand based on their turnover instead of their profit.

    I thought we already knew the answer to that?

    1. Clark and Cunliffe will arbitrarily decide how much “tax” an online provider has to give them.
    2. They’ll set out their demands: “Give us $10million or we’re going to block your site in NZ.”
    3. If the companies don’t cave in to the threat, then add them to the Great Firewall of NZ.
    4. Then move on to restaurants: “Give us $100k in used notes and we’ll protect your restaurant from arsonists, and your children from thugs.”

    It’s mafia policy for a mafia party.

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  18. gump (1,661 comments) says:

    @DPF

    “[DPF: Lying gets you 10 demerits. Incidentally Google pays an average 20% tax on its profits worldwide]”

    —————————

    If you are going to accuse a poster of lying, you should first be certain that you are correct.

    Google uses transfer pricing to export its earnings into jurisdictions with lower tax rates. In 2010 their overseas tax rate was only 2.4%.

    Here is a link so you can verify this.

    http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html

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  19. ross69 (3,652 comments) says:

    http://www.stuff.co.nz/national/politics/opinion/9678808/Labours-Facebook-ban-threat-loony-but-its-on-the-right-track

    “Though Mr English and his colleagues have spent millions of taxpayer dollars cracking down on welfare cheats and trying to hock off our deeply unattractive state assets, the finance minister’s shoulder-shrugging response when asked how we actually get multinationals to pay their share of tax seems to be ‘it’s complicated’. What a pity he’s only been finance minister for half a decade so hasn’t had time to do anything much about it. ”

    LOL

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  20. ross69 (3,652 comments) says:

    http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/9653961/Apple-pays-less-than-2pc-tax-on-overseas-profits.html

    “The Sunday Times reports that new documents have revealed that the world’s biggest company [Apple] paid $713m (£445m) in corporation tax abroad in the year to September 30, as profits grew to a $36.8bn outside America, according to regulatory filings lodged last week.

    The technology giant’s overseas tax rate fell to 1.9pc from 2.5pc the year before, significantly below the corporate tax rate of 35pc in the US and 24pc in Britain.”

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  21. chris (647 comments) says:

    What I think is amazing is it’s always about percentages. I mean, holy shit, Apple paid $713m in tax. That’s a shit load of money. But apparently it’s not a “fair share” because it’s only x% of profit.

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  22. queenstfarmer (782 comments) says:

    @gump. Your article clearly says that Google’s “overseas tax rate” was 2.4 percent. DPF was calling out ross69’s (habitual) dishonesty by observing that “Google pays an average 20% tax on its profits worldwide”.

    DPF is correct: http://www.techhive.com/article/2034137/how-much-tax-do-big-tech-companies-pay-.html

    It is hardly surprising that a US company pays a very low rate of overseas tax. Guess what – I sell to clients overseas, and I pay no tax to the US, Australia, Singapore, and Hong Kong. Perhaps the Labour Party would like me to write out a cheque to these other countries to pay my “fair share” to them?

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  23. gump (1,661 comments) says:

    @chris

    According to that link, Apple generated $36,800 million in profits, and paid $713 million in taxes.

    Is this fair for the domestic companies that are competing against Apple in those markets?

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  24. Joanne (177 comments) says:

    ross69

    It is complicated. There corporations not only pay tax, they also pay salary/wages, FBT, GST, expenses to NZ based businesses. The Warehouse also donate to organisations, they also sponsor organisations, even as small as the sausage sizzle outside the building – it goes on.

    Again, the Labour Party argument is ignorant and deceiving.

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  25. gump (1,661 comments) says:

    @queenstfarmer

    Google pays US taxes on its US income, but almost no taxes (US or otherwise) on its global income.

    It is good to hear that you export products from NZ to clients overseas. If you behaved like Google, you wouldn’t have to pay NZ taxes on the profits you are earning from your export business.

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  26. chris (647 comments) says:

    @gump That’s an interesting way of looking at it – I hadn’t thought of that.

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  27. rangitoto (248 comments) says:

    Gump. “Google pays US taxes on its US income”

    What are you babbling about. Company tax isn’t calculated on income.

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  28. queenstfarmer (782 comments) says:

    @gump: it doesn’t affect competition, because tax is only payable on profit (although the Labour Party’s revenue spokesman and ross69 are utterly confused by this simple, elementary principle. Sad really). That is, Apple can’t sell its products for a lower price, or spend tax due on marketing etc.

    The issue highlighted in that article is that US companies are deliberately not repatriating revenues because if they did, they would be taxed for doing that. That is perfectly legal, but it highlights the flawed tax regime in the US.

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  29. Jim (398 comments) says:

    queenstfarmer – dead right: “Guess what – I sell to clients overseas, and I pay no tax to the US, Australia, Singapore, and Hong Kong. Perhaps the Labour Party would like me to write out a cheque to these other countries to pay my “fair share” to them?”

    And because we have DTAs with each of those countries then that would result in less tax revenue for NZ for those transactions.

    What goes around comes around… except for the Labour Party and supporters who believe that the bludger model can work internationally. Reciprocity is not in their vocabulary.

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  30. queenstfarmer (782 comments) says:

    @gump: “If you behaved like Google, you wouldn’t have to pay NZ taxes on the profits you are earning from your export business.”

    What rubbish. Taxes are payable on taxable income. Simply really. I pay all tax legally due, and I trust that Google and Facebook do as well.

    Now, some people (including you, I presume) want to redefine what is taxable. That’s a legitimate discussion. But it is stupid and wrong to attack companies for not currently paying more tax, when they are not legally required to. Otherwise, you can have a go at yourself for not paying 66% tax on your income.

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  31. gump (1,661 comments) says:

    @rangitoto

    “What are you babbling about. Company tax isn’t calculated on income.’

    ———————

    Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident.

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  32. Pete George (23,681 comments) says:

    Clark thought it was unlikely an Internet ban would be necessary apart from as a threat.

    “It’s important to have a credible threat, but generally sitting down with them will lead them to review their affairs.”

    He wasn’t clear whether it should be the Government or IRD who should do the sitting down to prompt company reviews on tax compliance. That doesn’t matter, either way it’s mindbogglingly naive.

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  33. dime (10,100 comments) says:

    Gump – im pretty ross got demerits for telling DPF what DPF supports… DPF said youre lying (obviously DPF knows how DPF feels).

    I guess though, you did post a link to some website, so maybe DPF doesnt know how DPF feels?

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  34. gump (1,661 comments) says:

    @queenstfarmer

    “Now, some people (including you, I presume) want to redefine what is taxable. That’s a legitimate discussion. But it is stupid and wrong to attack companies for not currently paying more tax, when they are not legally required to. ”

    ——————–

    Nobody is attacking the companies.

    They’re attacking the financial system for allowing large global companies to transfer the profits that are earned in one market into other jurisdictions with low (or no) corporate taxes.

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  35. gump (1,661 comments) says:

    @queenstfarmer

    “@gump: it doesn’t affect competition, because tax is only payable on profit (although the Labour Party’s revenue spokesman and ross69 are utterly confused by this simple, elementary principle. Sad really). That is, Apple can’t sell its products for a lower price, or spend tax due on marketing etc.”

    —————————-

    It does effect competition. The additional profits that are retained through not paying taxes can be reinvested into marketing or any other business purpose.

    For an easy example – Sanitarium doesn’t have to pay any company taxes (since they’re a registered charity). They have invested a lot of this money into building a significant media presence, and the additional marketing gives them a significant advantage over their competitors.

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  36. Paulus (2,659 comments) says:

    Tax has bugger all to do with Turnover, as Labour seems to think.
    It is Tax on Profits.

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  37. PaulL (6,043 comments) says:

    @gump: I think a lot of people, including the Labour party, are attacking those companies, and suggesting they should pay more tax even though the law doesn’t oblige them to. That may not be what you’re doing, but it’s wrong to say that nobody is doing that. Most of DPF and other’s arguments against this are against that bit.

    There’s nobody saying that it wouldn’t be legitimate to change the law to make more tax payable, there are a few people saying that it’s quite a hard thing, so they’d like to see what those changes are other than them being a random threat to cut off the internet if people don’t pay more.

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  38. Nigel Kearney (1,047 comments) says:

    This is not as simple as either side is making it out to be. In general I think companies should pay tax in the places their revenue comes from, in a roughly proportional manner.

    The internet has changed the way business is done, and there may well be a need to therefore change the way business is taxed. That doesn’t excuse people making really silly and unworkable proposals, but it’s also wrong to just dismiss any suggestion of tax changes.

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  39. Kimble (4,443 comments) says:

    In general I think companies should pay tax in the places their revenue comes from, in a roughly proportional manner.

    Should individuals also pay tax in the places their revenue comes from?

    Might that mean that someone hired by an overseas company, and so is getting revenue from overseas, so shouldn’t have to pay domestic tax? But rather should pay the tax required in the other domicile?

    What right would the foreign country have to demand that tax of someone who doesnt live within their borders and has not otherwise agreed to be taxed by them?

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  40. chris (647 comments) says:

    This is not as simple as either side is making it out to be. In general I think companies should pay tax in the places their revenue comes from, in a roughly proportional manner.

    The problem with this ideal, is it hurts small businesses.

    For example, I have websites that have content and target audiences in New Zealand, Australia, Canada and the UK. I sell advertising directly to advertisers in those countries.

    With your idea, I have to comply with tax laws and complete tax returns in all 4 countries, working out which income and which expenses can be divvied up amongst each country. This would seriously erode the revenue I make as I would need to employ accountants with knowledge and expertise for all countries I earn money from.

    And guess what? The NZ Govt would lose out because I’d be paying less tax to it. That’s what people seem to forget. Sure, we might be “losing” out on tax money from Facebook etc, but if Fonterra (for example) had to pay tax money relative to earnings in each country then we wouldn’t get much tax money from them. Swings and roundabouts.

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  41. ross69 (3,652 comments) says:

    Gump,

    I think you need to explain the situation in simpler terms:

    With the likes of Google, Facebook et al rorting the tax system, taxpayers could soon be enjoying tax increases, increased government borrowing, or printing money. Which (if any) do the commenters here support? :)

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  42. muggins (3,800 comments) says:

    One problem with companies like Facebook and Google is that it appears that they aren’t paying their fair share of tax.

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  43. chris (647 comments) says:

    @ross69 Aren’t we about to go into surplus? Therefore there should be no need to increase taxes, borrowing or print money. Unless NZ is stupid enough to vote in a Labour/Green government.

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  44. PaulL (6,043 comments) says:

    @ross69 and @muggins:
    1. Evidence that they’re rorting the system? Does rorting mean “paying the tax that the law requires” or does it mean “avoiding tax”
    2. Evidence that they’re not paying their “fair share”? I’ve heard a lot about them paying about 2% of their revenue in tax, but as some have noted that’s about the proportion that Fonterra pay. The point is that it’s profit, not revenue, that you pay tax on, and that many internet businesses run on very very low margins – I’d expect an internet business to have much lower profit as a % of revenue than an organisation like Fonterra.

    In short, after all this noise I still don’t understand what the metric is that people would like to have met, nor what definition people are using for fair. Remember that a company like Facebook or Google has most of it’s costs in servers and infrastructure, and that none of that is in NZ. So logically the NZ entity is paying quite a bit to the offshore entities to pay them for that hosting. If we want to argue that they should pay more tax we need something a bit more sophisticated than saying that NZ is a small share of their global tax – we’re also a small share of their global business, and almost none of their cost base. Logic (to me at least) says that the place where you do business is mostly where you have your costs (servers in this case) and therefore where you’d pay most of your tax.

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  45. muggins (3,800 comments) says:

    Is anyone able to tell me how much profit Facebook and Google made in the last financial year and how much tax they paid on that profit?

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  46. muggins (3,800 comments) says:

    Fonterra made a one billion profit last year and their net profit was $736 million.
    The difference was made up of interest and tax but I don’t know how much of that $264 million was interest .
    Is anyone able to advise the interest amount?

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  47. muggins (3,800 comments) says:

    PaulL
    I am not interested in what % of revenue Google, Facebook and Fonterra pay in tax.
    What I would like to know is how much tax they pay on their gross profit.

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  48. gump (1,661 comments) says:

    @PaulL

    “2. Evidence that they’re not paying their “fair share”? I’ve heard a lot about them paying about 2% of their revenue in tax, but as some have noted that’s about the proportion that Fonterra pay. The point is that it’s profit, not revenue, that you pay tax on, and that many internet businesses run on very very low margins – I’d expect an internet business to have much lower profit as a % of revenue than an organisation like Fonterra.”

    ———————–

    No – the problem we’re discussing is that the companies are paying 2% tax on their overseas profits.

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  49. gump (1,661 comments) says:

    @muggins

    “What I would like to know is how much tax they pay on their gross profit.”

    ————————-

    You can get the information from the SEC filings (which have to provide as they’re publicly listed companies).

    Using Google as an example – Google pays an effective global rate of around 20% tax across their entire global earnings. The majority of this tax is paid on their US earnings (which are nominally taxed at the Federal tax rate of 35% before deductions are made), and an average of 2.4% tax is paid on their overseas earnings (which are not repatriated to the US).

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  50. burt (8,309 comments) says:

    Do Labour MPs pay tax on the travel expenses etc ? These are like income in that it’s money allocated to them and the expense portion – that’s not relevant for tax apparently…..

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  51. chris (647 comments) says:

    What I would like to know is how much tax they pay on their gross profit.

    You don’t pay tax on gross profit, you pay it on net profit.

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  52. queenstfarmer (782 comments) says:

    @gump, you missed that I specifically said corporation’s can’t “spend tax due” to gain an advantage. You cite Sanitarium, which is a charity, and hence doesn’t have “tax due”.

    The point is that companies are taxed on profit, i.e. what they make after cost of goods/services and other deductible expenses, etc.

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  53. burt (8,309 comments) says:

    Companies should be banned – the bastards employ people then they don’t vote for more benefits !

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  54. muggins (3,800 comments) says:

    gump ,
    Thanks for that.
    I take it by earnings you mean gross profit before tax. So Google are paying 35% tax on their US gross profit but only an average of 2.4% tax on their overseas gross profit.
    So obviously they would not want to declare their total world wide gross profit in the US because if they did they would have to pay 35% tax on all of it. Would this not give us the opportunity of getting them to pay a higher % of the gross profit they make in New Zealand than what they are paying at the moment?
    Maybe we could ask the US authorities to tax all Google’ s gross profits and then pay us our share less, say, a small collection fee.

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  55. muggins (3,800 comments) says:

    gump,
    My previous message should have said net profit before tax, not gross profit before tax.

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  56. chris (647 comments) says:

    @muggins In the simplest terms, Google and others move money around the place to ensure they pay as little tax as possible. Places like the USA and NZ have reasonably high tax rates and don’t see much in the way of tax on profit at all.

    The article Gump already linked to is here http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html and it has some of the explanation there.

    They don’t want to pay it in NZ, because it’s still 28%, whereas they can pay next to nothing doing what they do.

    They pay very little in the USA, and even if they did pay 35% of their profit to the USA, the USA isn’t going to then go and give us some.

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  57. muggins (3,800 comments) says:

    chris,
    Yes, I meant net profit, not gross profit.
    I am a little confused about the word earnings and also that 35% tax rate before deductions.
    From that it would appear the US taxes Google on ther gross profit.

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  58. muggins (3,800 comments) says:

    chris,
    Thanks for that. So it looks like gump gave me the wrong info.
    Well, all I can say that those tax loopholes should be closed so that google pays the correct tax on the net profit before tax they made in the country they made it in.
    But PaulL mentions Fonterra who pay their tax on their net profit before tax in New Zealand when they make much of that net profit in China. Should they be paying China tax on the net profit they made in that country?

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  59. muggins (3,800 comments) says:

    I see Reuven Avi- Yonah says the system is broken and he thinks it should be scrapped . He says companies are getting away with murder. Darn right they are, companies like Google and Facebook, anyway.

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  60. PaulL (6,043 comments) says:

    IIRC the US has some bizarre loopholes that directly create the problem that gump is talking about (and again, I think it’s entirely different than the problem that Labour started talking about or that most people are talking about).

    I think the rule is that you pay tax immediately on US profits, but foreign profits you only pay tax on when you repatriate. So the trick is to manipulate your profits into a tax jurisdiction that has low tax (at least initially), then not repatriate them. The problem is that they’re no good to you there – they end up on a little island, you can’t spend them and you can’t pay dividends. Sooner or later you have to repatriate them and pay tax.

    Remember also that company tax is basically a withholding tax – it’s paid and then offered as a deduction to the end owner (shareholder). So if Google make $1B and pay only 2% tax, then their shareholders get $980 million plus a tax credit for $20M. Some of this profit is returned as dividends (and you pay tax for any that you don’t have a deduction already for), some is returned as capital gains (and many countries levy tax on capital gains, the US included). In short, a low corporate tax rate doesn’t mean the tax isn’t paid, it just changes who writes out the cheque.

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  61. gump (1,661 comments) says:

    @PaulL

    “The problem is that they’re no good to you there – they end up on a little island, you can’t spend them and you can’t pay dividends. Sooner or later you have to repatriate them and pay tax.”

    ————————–

    You can still pay dividends from offshore earnings. Apple is a good example of this – they recently borrowed money using their offshore holdings as collateral and paid out the borrowings as dividends to their shareholders.

    http://money.msn.com/top-stocks/post.aspx?post=1ee4f83b-52a3-4eaf-85b0-152ec0de6428

    It’s also important to understand that the US Government periodically grants repatriation holidays on offshore earnings. The last holiday was in 2004 when Congress created a one-year repatriation tax holiday that lowered the rate rate on returning income from controlled foreign subsidiaries from 35% down to 5.25%. So large corporations typically just sit on their offshore cash holdings, lobby their elected representatives, and wait.

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