Let’s talk about tax.
Or more particularly let’s talk about Facebook and their tax payments.
The methadone programme that is this blog is working pretty well and I now have an awful lot of non blog commitments these days. So until after the Budget I will just post when I can rather than every Monday. So those of you who haven’t already – you might like to sign up to email notifications on the right of the screen. Coz dear readers I would hate for you all to miss anything I had to say.
As a further aside I am also open to topic suggestions email@example.com altho I give no guarantee as to when they may turn up.
Now after dealing with Apple, family stuff and Sydney last week; dear readers I was and am a little tired. So as a bit of lite relief after all the nasty multinationals stuff I thought I’d finish off a post on GST I have had in the can for far too long. A reader asked for it last year but it keeps getting crowded out. Soz J.
But then this morning on my feed was a news item on Facebook and how they have very little income or tax paid in New Zealand. And how everyone who gets advertising in NZ contracts with Ireland. And they have very few staff here but earn all this money. But it’s not in their accounts.
Ok right. GST post down you go and Facebook here we come.
Now I have said a number of times there are many and varied ways of not paying tax. Apple uses a wheeze where they give the appearance of being a NZ company but because they are really an Australian company with no physical presence here they don’t pay tax here.
Looking at the 2014 accounts of Facebook New Zealand Limited and the news item Facebook’s wheeze seems to be separating out the income earning process so only some of it sticks in the New Zealand tax base.
Again once upon a time businesses advertised in newspapers or magazines that were physically based here. They would also have had a sales force that would have been a department of the newspaper or magazine probs also based in the same building as the publication.
The New Zealand company
Now the newspaper or website is in the cloud which just means a server somewhere. But there is still a sales force – or at least a sales support force – based in New Zealand. These guys are employed by Facebook New Zealand Limited a NZ incorporated company that earns fees from for its sales supporting.
Now a NZ incorporated company as you know dear readers this is prima facie taxable on all its income as it is tax resident in NZ. Ah you say but ‘what about the directors? Where is the control?’ Well done dear readers yes there are three foreign directors . Sigh. An Australian, an Irishman and a Singaporean. Beginnings of a bad joke. But good news is probs hard to show control in any one country.
So probably still resident under a treaty in New Zealand. And even if it isn’t as the sales support income is being earned from a physical presence here – note 7 shows office equipment – so probably fully taxable here. But expressions involving small mercies are coming to mind – it is only sales support income. But should be at armslength rates – usually done as a markup on cost. So there should always be taxable income here even if it is small.
The Irish company
And in the old days not only would the sales force be in NZ, the advertising contracts would be made with a NZ company. Not now. The Stuff article shows advertising agreements being made with a sister company in Ireland – Facebook Ireland Limited. This is also referenced in note 13 of the 2014 accounts so it must be true.
Now it is conceptually possible that Facebook Ireland Ltd is a NZ resident company if it had NZ directors – please stop laughing – but I am going to assume it isn’t. So let’s do the source rule thing.
Trading in v trading with
By now dear readers you will be quite expert on the whole trading in versus trading with thing. If there were no people here I would have said that this was trading with again. However the people on the ground – albeit employed by the NZ company – complicate the issue and what with the possibility that the contracts are partially completed in New Zealand. Hey I am going to give it a New Zealand source!
Limits of the permanent establishment rules
But then we go to the Irish treaty. Now the normal fixed place of business stuff can’t apply as it is Facebook NZ not Facebook Ireland that has the fixed place of business. However Article 5(5) provides that if another company – Facebook NZ – habitually enters into contracts for Facebook Ireland then game on – PE.
However your correspondent being the somewhat cynical – I have always preferred realist – individual she is is guessing the line is: ‘Dude they don’t conclude contracts for us – they are just like sales support – you know like preparatory and auxiliary. All the like real commercial work is done in Ireland not New Zealand – so bog off Mrs Commissioner.’
Yeah that is a bit clever and yeah that is what the tax avoidance provisons are for. And we can’t assume that the Department isn’t trying to use them.
Diverted Profits Tax – NZ style
Now PE avoidance is exactly how this all appears to your correspondent and that is what the government’s proposals are trying to counter. So lets see how that goes. Tests are:
Second point check – Facebook NZ does sales support;
Third point check – seems unlikely that only $1million was sales revenue in 2014
Fourth point – Ah.
The Irish treaty was concluded in 1988 long before BEPS; the international tax rules were only just coming in; and the Commissioner engaged in trench warfare that became the basis of the Winebox. Number 4 might be a bit of a struggle.
This struggle is alluded to in the discussion document’s technical appendix. Apple is example 1 and Facebook example 3. Example 3 discusses the application of the DPT NZ style and says it really is only any good if new treaties get new PE articles. And then says that maybe some countries won’t want them. Let’s all take an educated guess what Ireland will think.
But don’t panic. The OECD is doing some work on this which should come out in 2020. Awesome but wasn’t this exacly what Action point 1 was all about?
Changing the subject slightly last week Gareth Morgan put out his international tax policy. Most proposals were either the existing law – payments must be armslength or won’t get deduction – or government proposals – burden of proof should be on taxpayer. But his key point of difference is he wants all treaties ‘wound back’. I am not there yet but good on him for putting it on the table.
And given the public anger on all of this and OECD not reporting until 2020 when it was one of the original primary issues with the BEPS project – I would watch this space!
All this discussion on Facebook is only possible because until 2014 they had to file accounts with Companies Office. This changed in 2015 to large companies only. Because compliance costs. They still have to file accounts with IRD but rest of us don’t get to see them and their related party transactions anymore.
Let’s talk about tax.
Or more particularly let’s talk about Apple and their taxes.
Your correspondent is currently in Sydney – family stuff nothing glamorous or exciting – and had started to put together a post on Donald Trump and his 2005 tax return. Coz the Sydney Morning Herald had actually explained some stuff behind it and there were some issues that I thought – dear readers – you would find interesting.
But Saturday morning I opened my Herald app to find the latest on multinationals and tax. Apple this time. And yeah that is me. Apparently they have paid no tax in New Zealand. Whether that is 100% true only the Department would know but from looking at the accounts and how it has organised itself – looks pretty damn likely.
So let’s go!
Apple appears to sell products to New Zealand through a New Zealand incorporated company called Apple Sales New Zealand. Note no Ltd at the end. It is owned by an Australian company Apple Pty Ltd.
Now normally a New Zealand incorporated company means New Zealand has full taxing rights on all its income. No need to consider whether income has a NZ source or not . If it has earned income it is taxable. Well that is unless a tax treaty would take away some of those rights. And how could that happen dear readers? Yes that’s right – if it is managed or has directors control in another country.
And is Apple Sales New Zealand (not limited) controlled offshore? Yup the directors are Australian. Ok so then not a New Zealand company for tax purposes.
Now all the income comes from New Zealand so it should be taxed here – right? Well yeah if it has a New Zealand source. And remember that trading in v trading with thing again. Now once upon a time if you wanted to sell almost a billion dollars worth of consumer products you would kinda need to be here. But now http://www.apple.com/nz/ does the business. So thanks to the internet trading in can morph into trading with meaning bye bye income tax base.
Limits of diverted profits tax
Oh but the new things announced by Hon Judith should fix it? You know the diverted profits tax – NZ style? Well not really. The NZ diverted profits tax has some use if there really is stuff happening in New Zealand but clever things have happened to make it look like there isn’t. But here there isn’t stuff happening in NZ. Just people buying stuff from a website.
And remember how all the things a diverted profits tax would help with? Remember how trading with v trading in wasn’t one of them? Yeah this won’t save us.
But the pretending to be a New Zealand company when it is an Australian company. That is a bit cute isn’t it and doesn’t tax avoidance stop cute stuff. Yes it does so what are the facts?
- New Zealand incorporated company
- Australian directors with Australian control
- US website
- Shipping from Australia
- GST registered
- No presence or activity in New Zealand
So taking away any clever stuff. What is actually happening?
An Australian company is selling products to New Zealand via the internet shipping from a warehouse in Australia. What is the tax consequence of this? No tax – as Apple is only trading with New Zealanders not trading in New Zealand.
Compare to current outcome – no tax. Soz nothing for tax avoidance to bite on.
Could it be fixed?
Of course it is possible Apple will get shamed into paying tax here. Putting in New Zealand directors would do the trick. Not holding my breath though. There are also plans by the Government to strengthen our source rules – but nothing proposed tho that will bite on this issue.
What would need to happen is an extension of the ‘contracts made in New Zealand’ rule to say it is deemed to be made in the country of the purchaser for online sales.
So technically not hard.
But here’s the thing. If we do that for Apple – other countries might then do it to Fonterra; Zespri; Fisher and Paykel; Fletcher Building; and Rank when they trade without a footprint. And in this case Apple NZ seems to be paying some tax in Australia. So that will be an interesting discussion with the Australian Treasury.
And it won’t just be the nasty multinationals that get caught. Your correspondent has an extensive vintage reproduction wardrobe. All purchased online from the US and UK from relatively small companies. Risk is such suppliers would see NZ as not worth the effort and stop selling to us. But then now I live in active wear not such an issue for me.
Oh and the not limited thing? It will be a US check the box company as will the Australian Pty company meaning it is an entity hybrid and Apple Inc can choose how to treat it for tax. Cool – but don’t think it impacts on us. Phew.
Thanks to a comment below – I missed a point I really shouldn’t have.
Even if we do change our source rules every treaty we have requires there to be a permanent establishment or fixed place of business before business income can be taxed. So if our source rules were expanded to make income prima facie taxable in NZ the treaty would then allocate taxing rights to Australia.
So short of resinding our treaties – or shaming Apple into paying tax here – we have to suck it up.
There is also the issue of whether it is right to expect tax given Apple isn’t using anything that taxes have paid for. But currently that seems like an argument from another time given the public outrage.
So while taxes are inherently unilateral – this is something that has to be sorted multilaterally. Except I am not aware of any real work on it. And on that I would love to be proved wrong!
Let’s talk about tax.
Or more particularly let’s talk about tax residence for companies and trusts.
Following Mr Thiel’s post a reader asked about the non- resident purchaser stats that LINZ produces. And so I wrote a post on that. I really did. But as I was going through it it became clear to me that the LINZ stuff was actually super hard. Even for you dear readers. And – given I hadn’t taken yet taken you through the joys of tax residence for companies – super hard was actually super impossible.
So dear readers today you get company residence. And hang in there coz next week you get a discussion of the LINZ data where I try to clear the smoke and mirrors that is those stats. But that is next week. So back to tax residence and companies.
Ok now companies have separate legal personalities and so they can contract and do stuff independent of its shareholders. And the total wheeze is that if the company fails shareholders are not liable for its debts if their capital is fully paid. They do lose the dosh they put in as capital and of course if that was spent on deductible expenses and it is a closely held company those losses can be offset against other taxable income. But you know that already so you won’t get any more on that from me today.
So back to residence. As a company is its ‘own person’ the concepts of prescence or connections with New Zealand used for actual people make no sense with them. They need their own bespoke tests. And in New Zealand they are:
- Head Office
- Directors control
- High level management
If anyone of those is in New Zealand then game on – New Zealand resident – taxable on worldwide income. Or at least before a treaty comes in.
But looking at that list and thinking about how often in tax policy the statement ‘a company is a vehicle for its shareholders’ is used. What is not on that list?
Well done – shareholding. A company could have 100% foreign shareholders – hit one or all of those tests and still be prima facie taxable on its worldwide income in New Zealand. The opposite also applies. A company could have 100% New Zealand shareholders and meet none of those tests. It then would be non-resident and so not taxable on its worldwide income. Now because that is just too cute there are other – controlled foreign company – rules that then come in. But they are for another day.
So key message – residence does not equal shareholding or beneficial ownership. Now in practice there will be significant overlap coz NZ companies are really for NZ resident shareholders. But won’t be a complete set.
And joy of joys other countries have similar tests:
Australia – incorporation or directors control
Canada – Incorporation or directors control
US – incorporation
And yes dear readers – you’ve got it – two countries could claim a company. A NZ incorporated company with effective management offshore in UK or China or Australia or Canada could be claimed by those countries too. Similarly an Australian incorporated company with NZ high level management will get claimed by both Australia and New Zealand.
And then – as with Mr Thiel – the treaty will decide who gets the rose. With companies the test in the treaty is usually the place where the high level decisions aka place of effective management is. So as with Mr Thiel there is domestic law tax residence and residence for the purpose of a treaty. And the music finally stops with the treaty.
Ok well done. Now that wasn’t too hard. Now let’s try trusts. In a trust is a settlor that puts in stuff; a trustee that legally owns the stuff and manages it on behalf of the beneficiaries.
For those of you who followed the foreign trusts thing you may have heard something like ‘ NZ has a settlor based system for taxing trusts’. Now that is almost right. New Zealand has a settlor based system for the taxation of distributions. The residence of the trustee, however, is the starting point for the taxation of trusts.
And the tax residence of the trustee is the tax residence of the company or individual that is the trustee. So again the residence of the trustee could be completely different from the residence of the settlor or the residence of the beneficiaries.
Now why I am labouring this potential disconnect will make more sense next week. Feel free to pre read the LINZ reports in the first link.