Update: After I wrote this blog post, I thought that it would be good to see if I could get wider coverage for the ideas in it. There has been a mass of articles about multinationals and taxation in the papers, especially in the NZ Herald, but none touching on the idea of the price of civilization, and none taking on the claim that PAYE and GST “paid” by multinationals is a sufficient contribution to the tax take here in NZ. So I redrafted the post, taking out the more informal language, and it has been published in the NZ Herald: Govt has the means to make multinationals pay.
Not multinationals, as it turns out.
Multinationals are taking advantage of their ability to charge internal fees, and set royalties, and increase the “cost” of products sold from one part of a company to another (transfer pricing), to shift profits around the world, preferably into jurisdictions with very low corporate tax rates. It’s a comparatively simple thing to do, even when there are robust anti-avoidance laws and intense scrutiny of transfer pricing practices.
I very much hold to the view that taxation is the price of civilization – health, education, welfare, parliamentary democracy, robust rule of law, smoothly functioning institutions, and all those other accoutrements of first world living that the multinationals rely on.
At the same time, I think that as citizens, one of our better avenues for checking the power of government is to give it less money. That means minimising the tax we pay. Of course I am not advising tax evasion, or even aggressive tax avoidance, but if the law permits us to reduce our taxes, then we should go ahead and do say. Pay absolutely all the tax you owe to government, but not a penny more. If government wants to collect more in taxes, then it can do so through changing the law, and thus ensuring that its tax collecting activities are exposed to the full scrutiny of our democratic processes.
So perhaps the way to deal with the problem of multinationals earning large amounts of revenue in New Zealand, but paying very little tax here, is to change the law. My preference would be to look at some form of transaction tax. We already have a tax that is based on adding a certain amount to each transaction in New Zealand, in the form of GST. Perhaps we could add a new transaction tax for companies whose head office is not located in New Zealand. We could even allow them to offset any company tax paid in New Zealand against the total transaction taxes they pay here. That would make the point very clear: either pay a reasonable amount of company tax here, or pay the full quantum of a transaction tax.
Multinationals are of course bleating, and saying that they already make a magnificent contribution to the price of civilization in New Zealand by paying GST and PAYE on their employees wages.
Other companies, notably from the alcohol industry, stress that their total tax payments — including PAYE for local employees, GST and excise taxes on the sale of alcohol — are a better measure of their contribution to New Zealand than income taxes alone.
That’s a canard. While companies bear some of the cost of GST, ultimately the full cost of GST is borne by end users. And in the alcohol industry, that’s you and me, the consumers. By and large, companies act as tax collectors for GST, but they don’t by any means bear the full cost themselves.
As for PAYE on their employees wages, again, that’s not the company paying tax. It’s the employee paying tax. All the company is doing is collecting the tax on behalf of government.
So not only are these companies engaging in fairly interesting tax avoidance activities, but they’re also trying claim some kind of social good credit for their employees’ taxes too. “We’re good citizens because our employees pay tax.”
Ahh… no. That would be like you giving some money to an accountant for your taxes, and the accountant paying it over to IRD and claiming it towards her or his own tax.
Not paying company tax, and engaging in cutesy pie non-justifications of their behaviour. Somehow, for me, that makes it all even worse.
Time to get the multinationals to pony up and pay the price of civilization.