A lower corporate tax rate is how you stop profit shifting

The Herald reports:

A major Herald investigation has found the 20 multinational companies most aggressive in shifting profits out of New Zealand overall paid virtually no income tax, despite recording nearly $10 billion in annual sales to Kiwi consumers.

The analysis of financial information of more than 100 multinational corporations and their New Zealand subsidiaries showed that, had the New Zealand branches of these 20 firms reported profits at the same healthy rate as their parents, their combined income tax bill would have been nearly $490 million.

This is not new. Basically firms sell products to their NZ subsidiaries at a rate which means little profit is made by the NZ subsidiary and lots by the global parent.

This is often justified. If it is the global parent who has paid for all the research and development on a product, and all the NZ subsidiary does is sell it, then you would expect this.

In other cases, it will be less justified.

As why multinational companies engage in profit-shifting, the twenty companies on the Herald list paid effective tax rates of 22 per cent on their non-New Zealand income, considerably lower than our 28 percent corporate rate.

You can not pass a law dictating at what cost a company can see products to a subsidiary. But you can reduce the company tax rate so there is no incentive for companies to have their parent companies pay almost all of the tax where they get a lower rate.

If the OECD can come up with a treaty or agreement to reduce the ability to unfairly profit-shift, that is a good thing. But short of that, there is little individual governments can do.

Every time James Shaw or Grant Robertson demands the Government do something, the response should be “What?”. Challenge Grant or James to tell us what is the law change they would propose that would stop this? Neither of them can. At best they mutter about an inquiry.