Taking tax off internet businesses no easy task

The taxation of foreign entities was an "incredibly complex" area and an uninformed debate was not the right answer to furthering New Zealand's tax system, Polson Higgs tax partner Michael Turner says.

Labour Revenue spokesman David Clark late last week revealed that Facebook New Zealand paid just $14,500 in tax last year, which he said made a mockery of Revenue Minister Peter Dunne's refusal to consider closing tax loopholes for multinationals.

In 2010, Facebook's tax bill was only $5238.

"For a company that has 2.2 million users in New Zealand and makes billions worldwide, that's barely believable," Dr Clark, the Dunedin North MP, said.

Dr Clark also took aim at Google, saying the search engine giant had paid only $109,038 tax on $4.45 million of revenue, meaning it paid less than 2.5% tax, when New Zealand's corporate tax rate stands at 28%.

However, Mr Turner said, the difficulty with internet-based businesses like Facebook and Google, was there was often no physical presence in a country to establish the right to tax.

"It is a cheap shot to simply pick a couple of high-profile names and suggest that because their tax bill in New Zealand is not significant that somehow the rules are being avoided."

New Zealand's tax system, as many systems in the world were, was founded on taxing New Zealand residents on their worldwide income and taxing non-residents based on their New Zealand-sourced income, Mr Turner said.

The source of income for internet-based businesses had concerned several countries and the OECD had done a body of work looking to establish the appropriate rules for taxing internet-based profits.

"The simple reality is that taxing labour is easy as you tax it in the country where it is carried out."

Taxing business profits was generally done based on where the entity was resident or where a permanent establishment existed, he said.

The term "permanent establishment" had historically referred to physical presences such as an office, a factory, a workshop or a construction site.

The difficulty with internet-based businesses was that often no physical presence existed in a country to establish the right to tax, Mr Turner said.

Where a physical presence existed, it was then necessary to establish how much of the profit derived was related to that presence.

While Dr Clark's claim might raise some eyebrows that internet-based companies were not paying significant tax in New Zealand, that was attributable to the way most countries had decided to tax businesses based on a permanent establishment, Mr Turner said.