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Study suggests US$1 billion in profits shifted from New Zealand to tax havens over 12 months


Added on 25/06/2018

(stuff.co.nz) -- A US study estimates multinationals shifted US$600 billion in profits to tax havens in 2015 alone.

Multinationals may have been shifting about US$1 billion ($1.4 billion) of profits from New Zealand to tax havens each year, according to the United States' National Bureau of Economic Research.

In a just-released study, the bureau estimated that, globally, multinationals "artificially" shifted US$600 billion of profits to tax havens in 2015, representing about 40 per cent of those firms' total profits.

Profit-shifting was highest among US multinationals and the losses of tax revenues were the most severe in the European Union and developing countries, the research said.

But it also estimated US$13b in profits was shifted from Australia in 2015 and US$1b from New Zealand.

The study singled out Google for comment, noting that it booked US$19 billion in revenue in Bermuda in 2016 "where it barely employs any workers nor owns any tangible assets and where the corporate tax rate is zero per cent".

The National Bureau of Economic Research (NBER) describes itself as the US' leading non-profit economic research organisation, with affiliations to 27 Nobel prize winners in economics.

This particular research project – which Britain's Guardian newspaper described as a landmark study – was led by Berkeley University assistant professor of economics Gabriel Zucman and Copenhagen University academics Thomas Torslov and Ludvig Wier.

They said they believed their research was the first to use statistics on the amount of wages paid by affiliates of foreign multinational companies and the profits those affiliates made, to estimate the extent of profit-shifting.

"An advantage of this approach is that it enables us to compute the amount of profits shifted offshore in a direct and transparent way," they said.

"Until recently, the data published by tax havens was too limited to conduct this exercise meaningfully."

However, they accepted the technique was not perfect and involved making assumptions.

One of those assumptions was that if it wasn't for profit-shifting, foreign corporations in each country would be as profitable as local firms.

Revenue Minister Stuart Nash said the study was a reminder that there was always work to do to protect the New Zealand tax base through its domestic law.

"The Base Erosion Profit Shifting Bill is one response and it will go through its final reading this week. This will improve the integrity of the tax system considerably," he said.

"It is a first step, and further legislative measures may be required. Most multinationals operating in New Zealand pay the tax they should and are compliant, but there are some that adopt ... strategies to minimise their New Zealand tax obligations."

Organisation for Economic Cooperation and Development (OECD) tax policy director Pascal Saint-Amans said in February that major progress had been made stamping out international multinational tax rorts through its Beps initiative.

He cited a committed by Facebook in December to book its sales revenues in each of the countries where it has offices – including New Zealand – as a sign of changed times.

Google subsequently made a similar commitment with respect to its New Zealand subsidiary.

"We won't have the data and the evidence for a year or two" but the rorts really were coming to an end as countries enacted new rules designed by the OECD in their own legislation, Saint-Amans said.

PwC tax expert Geof Nightingale said tax laws had been tightened up twice since 2015 and he doubted there would be much "revenue leakage" once the additional measures now going through Parliament took affect next year.

The study suggested New Zealand should think carefully before it reduced the corporate tax rate, he said. "It tends to suggest that is not necessarily the right answer in terms of taxing the rents that multinationals might be earning."