Newsroom Pro's 8 things at 8 am: No tax from Apple, water charging questions remain, good news and bad news for Kiwibank

Is Apple's tax department as vital to the company as its product designers? Photo: Getty Images

In today's email, we detail the Government's failure to collect any tax from global giant Apple, we look at how the water charging story isn't going to dry up, and examine the good news and the bad news out of Kiwibank's woeful week.

1. Not a single bite of the Apple

The Government's apparent impotence in collecting taxes from Apple is front and centre this morning after Matt Nippert reported on Saturday that Apple actually paid no tax in New Zealand over the last decade despite earning NZ$4.2 billion in revenues here.

To add insult to injury, Nippert reported that the NZ$37 million that Apple did pay to the IRD over that period was actually sent to the Australian Tax Office because Apple NZ is a subsidiary of Apple's Australian office and because of a tax treaty on dual claims.

The key number in the story is NZ$356 million. That's how much tax Apple would have paid in New Zealand if Apple had reported the same profit margins here as it has done globally.

This is all about Apple's use of its Irish subsidiary to shuffle global revenues through a low tax jurisdiction. Google and Facebook use similar techniques. Nippert's summary of his 'Tax Gap' series is a useful roundup of where we are now.

The next question is whether the Government's package of measures announced in March to crack down on international companies paying very little tax here would actually change things. Judith Collins, who chose not to comment in the article, hasn't 'gone nuclear' yet by adopting the unilateral diverted profits tax adopted by Australia and Britain.

2. A diverted profit tax?

The Opposition jumped on the issue. Green Co Leader James Shaw came up with the quote of the piece: "It looks like their tax department is even more innovative than their product designers."

Labour's Revenue Spokesman Michael Wood appeared to suggest Labour might adopt a diverted profit tax in his response.

"The Government has been forced into belated action by the media and the opposition, and even then are refusing to consult on the option of a diverted profit tax, which has been employed to deal with this issue in Australia and the UK," Wood said.

He also ripped into Collins over her inability to talk to Nippert for the piece.

"She was willing to be tough with 17 year olds in souped-up Mazda’s, but not with major multi-nationals that are ripping off Kiwi taxpayers."

3. Apple's zero tax a 'force for good'. Really?

Apple did itself no favours in its response to Nippert.

"Apple aims to be a force for good and we're proud of the contributions we've made in New Zealand over the past decade," it told him in a statement.

"Because our products and services are created, designed and engineered in the US, that's where the vast majority of our tax is paid."

The trouble is Apple only pays the US corporate tax rate when it brings its cash back home. It has held over US$200 billion in a cash pile overseas and has issued bonds in America to allow it to keep doing that.

Apple's approach and that of many other multi-nationals is only fueling the backlash against globalisation.

Apple CEO Tim Cook appeared tone deaf in a speech he gave in China over the weekend, in which he said globalisation was generally "great" for the world and that pulling back was not a good idea.

"I think the worst thing would be to--because it didn't help everyone--is to say it's bad and do less of that," Cook told a conference on development sponsored by the Chinese Government.

"I think the reality is you can see that countries in the world...that isolate themselves, it's not good for their people."

The backlash against multi-nationals gaming competing tax arrangements for their own benefit has been slow to develop in New Zealand, compared to other countries such as Britain and Australia. The momentum is building now and the Government has appeared behind the curve on it.

4. Charging for water?

Another story that is not going away for the Government is that of water quality and the bottling of free water for export.

It has raised one of the thorniest issues for the Government: can water can valued and 'sold' when the conventional view is that 'no one owns the water'. A yes answer opens up the potential for massive fights between Iwi and farmers with the Treaty of Waitangi as the main battleground.

Last week's rash of protests and revelations about acquifers and springs being tapped by overseas companies to bottle water for export at virtually no cost is having an impact.

In comments to reporters over the last three days, Prime Minister Bill English appeared to nudge the Government's stance towards looking at whether water could be charged for.

He said the Government had "the opportunity over the next few years to change those rules if we want to."

However, English was much more cautious in his appearance this morning on AM.

"Right now, it is too hard. You want to be careful about rushing in and starting to charge people that historically no one's owned and no one's paid for," English said, pointing straight at the risk of Iwi claims under the Treaty.

"I think they would almost certainly come in with a claim. It would be pretty hard to resolve it," he said.

As if to reinforce the growing public angst over the issue, RNZ's Kate Gudsell reported a company was promoting its free access to 236 million litres a year from an acquifer next to the Dart River at the head of Lake Wakatipu.

5. Good news and bad news...

Kiwibank had a tough week last week with the failure of a A$175 million bond issue because the Reserve Bank expressed doubts about the quality of the equity capital raised in two earlier hybrid bond issues.

Fitch explained the fallout on Friday in this release that highlighted the damage to Kiwibank's ability to go back to Australia's bond markets any time soon and its need to pump up its term deposit rates at the cost of lower profit margins.

"Fitch notes that Kiwibank's access to term funding markets may be negatively affected until the regulatory dispute is resolved," the ratings agency said, noting that bond funding made up 15 percent of Kiwibank's non-equity funding and that it would need to refinance some bonds late in 2017.

It said it expected Kiwibank to instead focus on raising term deposits in the local market in the meantime and that it did not expect the stand-off with the Reserve Bank to draw out to the point that Kiwibank could not refinance its bonds.

"Fitch believes that these developments come at a time of greater deposit competition which may affect Kiwibank's net interest margin and operating profitability in the short- to medium-term," it said.

That's good news for term depositors, but not such good news for the ACC, the NZ Super Fund and the Government, who face having to tip in more capital (possibly up to $250 million) to offset the flawed hybrid issues, and receiving lower profits into the bargain.

But there was some good news for Kiwibank late on Friday. It settled its "Fair Play on Fees" class action with Andrew Hooker's group. The settlement details were confidential and Kiwibank did not admit any liability.

6. A cover band economy

Here's my end-of-the-week wrap-up on Thursday's GDP figures and what they say about the economy.

Just as James Carville convinced Bill Clinton to focus on "It's the economy, stupid" as his election-winning catchphrase, I write "It's the productivity, stupid."

The figures showed more people worked many more hours to increase output. That's not a rock star economy. That's a cover band economy.

The lack of focus on productivity in the debate over our economy means the elephant in the room of not taxing property properly continues not to be addressed with any directness. Our housing market now dwarfs investment in stocks and productive business investments.

New Zealand's housing market is worth 4.2 times GDP and ten times the value of the stock market. America's housing market is worth just 1.6 times GDP and is only slightly larger than the value of the US stock market.

7. Food for thought

The Government faces growing pressure on the issue of education performance, particularly given recent poor PISA results.

National Affairs Editor Shane Cowlishaw pointed me to this excellent roundup of New Zealand's education performance by Simon Collins over the weekend.

The key quote: Professor Warwick Elley worries that New Zealand's education system is failing an entire generation. "I worry that it's a dumbing down of a whole population of students."

RNZ's Insight team also focused on Education over the weekend, pointing to the flight of middle class families from low-decide schools.

One of the Government's strategies for improving performance was Teach First, which was designed to quickly send graduate trainees out to schools. Shane Cowlishaw got the scoop on Friday about Teach First's new partner to replace Auckland University. It's Frances Valintine's Mind Lab. Find out more here in Shane's piece on Newsroom.

8. Coming up...

Bill English is scheduled to hold his weekly post-cabinet news conference at 4 pm today.

The OECD releases its report on New Zealand's environment on Tuesday.

The Productivity Commission releases its report on Tertiary Education on Tuesday.

The Reserve Bank is expected to hold the Official Cash Rate at 1.75 percent in its decision on Thursday.

Have a great week ahead.

cheers

Bernard