OECD tax targeting a good start

MANY of the world’s largest and most profitable companies pay extremely low rates of tax, here in New Zealand and anywhere.

This is an egregious and upside-down fact, but no-one would bother to deny it.

By setting up headquarters in obscure locations, by shuffling profits back and forth between countries, by carefully using tax treaties and interest deductions and all the other arcana of tax regulation, companies like Google and Apple save billions of dollars.

This is why the OECD’s new work on ‘‘base erosion and profit shifting’’, as the jargon goes, is very welcome, even if it is only the start of what is needed.

The organisation wants its member countries to make changes in 15 areas of tax policy and confidently predicts that it will reap so much missing corporate tax that rates across the board will be able to fall.

The Government says it will take the ideas seriously, but hasn’t committed to any of them yet. Finance Minister Bill English does accept that ‘‘double nontaxation’’ – where companies don’t pay tax either at home or wherever they do business – is a problem.

In fact, it is the heart of the issue. Take Facebook, which turned over US$12.5 billion around the world last year, and apparently $1.2m in New Zealand. It reported a loss here and paid just $43,000 in tax, a mouse of a tax bill.

These figures seem very unlikely to reflect the tech giant’s real role here. Its $1.2m income did not come from its New Zealand sales, but in the form of a payment from Facebook Ireland. (Not coincidentally, Ireland is famous for its very low company tax rate and sweetheart deals for multinationals.)

$1.2m equates to about 50 cents per New Zealand user – much lower than Facebook’s average global user. So the company very likely moves much of the profit it makes in this country to somewhere less taxing.

In response to such practices, the OECD wants to make large companies provide country-by-country details of where they really make their money, so tax officials can see what is being shuffled around.

It also wants to tighten the rules around ‘‘transfer pricing’’, the regime meant to moderate how companies move profits between subsidiaries.

Both are useful, but even better would be to treat such companies as single entities, tax them as such, and then divide the receipts among different countries where they operate. A similar system holds within the United States.

Of course, the challenges are endless, from tax havens that don’t sign up, to the race to the bottom over company tax rates everywhere. There won’t be a total fix, but there must be improvement. The international tax system is plainly full of holes. The OECD plan looks like a start to patching some of them up.

Ordinary people – wage-earners and small businesspeople, people who never consider setting up a subsidiary in Bermuda – are rightly outraged that corporate icons can pay so little.

It’s ‘‘called capitalism’’, Google boss Eric Schmidt famously said of his company’s baroque tax arrangements. No, it’s not – nothing in a market economy requires free passes for the biggest fish. It’s called an outrage.