Wednesday, 16 January 2013

The online GST rort; or why doesn't Google pay GST on advertising sales?

Recently there has been a fair bit of news about how multinational corporations manipulate income sources in order to book that income in the lowest tax jurisdiction they can. Most of that has focussed on corporate income tax, but there is a serious issue with GST/sales tax that concerns me for New Zealand businesses. Now while I am no great friend of the tax man, in order for NZ companies to operate on a level playing field internationally, there definitely needs to be some work done in the area of GST.

Most large international web platforms (Google, Facebook, LinkedIn etc.) generate a significant portion of their revenue from advertising. So do some our biggest NZ platforms (TradeMe, NZHerald, Stuff etc.). All no doubt attempt corporate income tax minimisation to the nth degree. But the one key difference is that while those onshore platforms (think TradeMe) pay GST on NZ derived AND NZ targeted advertising sales, those offshore platforms (think Google) don't pay GST on EITHER.

Hold on a minute. IRD states specifically on their latest GST guide:
“GST is a 15% tax on the supply (sale) of most goods and services in New Zealand...”

How can this be so?

I want to illustrate the unfairness of the current system by comparing Google and TradeMe. Both essentially make money from selling advertising; Google through Adwords PPC, TradeMe via listing and success fees. 

While TradeMe is specifically NZ, advertisers on Google can choose where in the world their ads are displayed, including NZ only. For the sake of this discussion I will talk about NZ and offshore businesses that specifically target NZ consumers via Google Adwords.

So for this discussion, the advertising service in both cases is provided in NZ, to target NZ consumers. 

So why is the offshore advertising platform, be that Google PPC or Facebook advertising, GST exempt,  while the onshore advertising platform (NZ Herald, radio station, NZ search engine etc.) is forced to charge GST? All of these companies are selling a product (advertising) within NZ, focussed on NZ consumers. Surely they should all be paying GST on those sales?

I think this is blatantly unfair on NZ businesses for the following reasons:
  • Any NZ online advertising platform (i.e. TradeMe) who wants to compete within NZ against an international online advertiser is automatically at a 15% pricing disadvantage, because they have to charge GST while Google etc. do not. 
  • Any NZ online advertising platform (i.e. TradeMe) who wants to compete outside NZ against an international online advertiser will also have to charge GST to their NZ advertising customers, while the offshore platform does not. 
  • Should a NZ business choose to use a NZ company to manage its PPC campaign, it will be charged GST on PPC fees. But should they use an offshore company, they won't be charged GST.
  • An overseas advertiser wins twice;  they don't pay GST on their advertising costs, and they don't pay GST on the sale of their product/service (but the poor consumer does if they get pinged by customs).
The fact is the advertising service is provided in NZ focussed on the NZ consumer; as such GST should be payable on the advertising cost.

So what of the cost? I think the costs fall as follows:
  • Disincentive for NZ companies to develop online advertising/trading platforms, or websites that derive income from advertising sold within NZ (much better to set up offshore with a
  • Financial incentive for NZ advertisers to go with the international platforms over local platforms
  • Disincentive for NZ companies to use local online advertising management services
  • B2C unfair competition in product and service sellers from overseas for the NZ consumer
  • Revenue loss for IRD from advertising supplies provided solely in NZ

So, to summarise, Google, being offshore, is not required to charge GST for revenue earned from ads that specifically target New Zealand, yet TradeMe is required to charge GST, irrespective of where the advertiser (or ad viewer) is from. How is this a fair system?

The benefits of enforcing a GST charge on all online advertising targeting NZ would be:

  1. Offshore advertisers would have to pay GST on their advertising costs to NZ consumers, evening things up a little with local NZ businesses
  2. NZ developers would be in a fairer position when it came to developing web properties that rely on advertising revenue
  3. IRD would increase the tax take. In 2009 Google NZ earned an estimated $150 million from NZ advertising; even if only 50% of that was ads targeted to within NZ, then there is revenue to be had, and a lot of it would be foreign exchange (offshore advertisers targeting NZ consumers). Add in Amazon, Facebook, YouTube etc. and target their advertising earnings from ads to NZ and this could be considerable.
By any stretch of the imagination, advertising targeted to be displayed within NZ is a service provided within NZ. It would be a very simple matter for e.g. Google to add GST to any PPC charges earned from within NZ. Why isn’t the government chasing this revenue?

Saturday, 5 January 2013

Whaling time again

The battle against Japan's so-called "scientific whaling" program has been going on for well over 20 years now, Japan using loopholes to venture into the Antarctic and the Southern Ocean Whale Sanctuary to harvest whales. Personally I am not anti-whaling per se; I eat meat and fish, and can see no reason why whales, along with any other wild stocks if managed sustainably and humanely, should not be part of the diet of those who chose to eat them. I lived for 15 years in Japan, working for many years as a scuba instructor, and spent many evenings sitting in small coastal village bars alongside crusty old fishermen, debating the finer points of whaling over a bottle of sake.

I do object however to Japan coming down to our neck of the woods, and despite the vociferous objections of virtually all of the locals (from NZ to Chile to South Africa to Australia), exert their economic and political clout and blatant arrogance to ignore, in basically an Imperial fashion, what are quite obviously resources over which we and our neighbours should hold kaitiaki, or primary responsibility.

I view it as a clear cut case of cultural imperialism by Japan against the smaller, weaker nations that border the Southern Ocean.

The problem is, to date, we have seen bugger all progress negotiating with Japan. Both Government and so-called "Green" groups have followed an absolutist policy for decades; no whaling whatsoever, wherever, anytime. This is doomed to fail in Japan's case, where their feeling of being the victims of cultural imperialism themselves (along the lines of "Kiwis eat cows, so why can't we eat whales?") and the massive loss of face by high ranking politicians any submission to this policy would entail, makes it a cultural and political impossibility.

But the general awareness in Japan about the facts of whaling is extremely poor, especially the economics. Rarely discussed, even less often eaten, anything to do with whales are generally a non-event in Japan, except when some nationalist politician tries to drum up support by banging the Japan-bashing drum. So I thought I would lay out a few facts about Japan's whaling industry, and then a strategy for perhaps overcoming their opposition.

Japanese whaling has in recent years become a virtually nationalised industry. While the company operating the whaling ships is a private business, fully 90% of the costs of whaling (including ship-owners profit!) are guaranteed by the national Government, with only 10% of the annual whaling cost actually covered by sales of harvested whale products. In 2011, the Japanese Government drew some USD$30 million OUT of the dedicated Fukushima Tsunami recovery budget to subsidise that season's whaling expedition. Almost 2 years on from the disaster, people are still awaiting emergency housing in some areas, while their own Government takes that money and uses it to refit the whaling fleet.

Whaling home base
The home port for the Antarctic whaling fleet in Japan is Shimonoseki. In a press release, the Japanese Ministry of Fisheries stated that the reason for using Tsunami relief funds to subsidise the whaling expedition was to help rebuild the industry of the devastated Fukushima region.

Shimonoseki is in the far south-western corner of Japan; approximately 1500km by road from Fukushima, which is in the north-east. On Japan's main island, you couldn't get any further from Fukushima than Shimonoseki. Perhaps those in the Japanese Ministry of Fisheries should have spent some tsunami relief money on a map.

Whale watching in Japan
Whale watching is a growth industry in Japan, growing at around 6.4% per year, in a country that has been mired in deflation for over 20 years. In 2008 it generated USD$22 million in revenue, small cheese admittedly, but this is almost all generated in some of the poorest regions (and yes, there is real poverty in many coastal towns in Japan) such as Wakayama and Okinawa.

Whale meat stockpiles
Japan cannot sell the whale meat it harvests. They are reduced to giving it away to staff, or storing it in warehouses. Almost 90% of respondents in a survey in Japan stated they had not bought whale meat in the last 12 months. In 2012, Japanese whalers failed to sell 908 of 1211 tons harvested. That's 75% of the catch could not find a buyer. No wonder they are bleeding cash and have to go to Government cap in hand.

Current warehouse stockpiles of whale meat sit at around 5,000 tons.

Cultural right
Japan has a long history of whaling and eating whale meat, just as most coastal cultures do. Yet Japan never ventured to the South Pacific until the mid-1930s, let alone Antarctica, and when it did it was harvesting whale oil to sell to its ally Nazi Germany. A very short history indeed of whaling in Antarctica.

Putting aside history, any claim by Japan to have a cultural right to harvest whales from outside its own territory in 2013 would be the same as the French claiming a cultural right to harvest sturgeon for caviar from the Caspian, the Vietnamese claiming rights to harvest Rhino horn from South Africa, or the English demanding their right to harvest beaver pelts from Canada. Quite blatantly ridiculous.

Why just Japan and not Norway or Iceland?
Japan is not the only nation conducting whaling. Norway and Iceland both have active whaling fleets. Japan frequently complains that is is being unfairly picked on, and that opposition to Japanese whaling is "cultural imperialism" or "Japan bashing".

The crucial difference is neither Iceland nor Norway conduct whaling at the opposite end of the planet from where they are. They don't come to Antarctica to whale in the International Whale sanctuary. They whale within their own waters, and Iceland at least is open that it kills whales for food. And as far as I am concerned that is totally legitimate, as long as it is done sustainably.

Whale meat is toxic
Research has shown again and again that whales and dolphins inevitably concentrate high levels of toxins. Researchers from Hokkaido University in Japan found concentrations of mercury 900 times the Japanese government limit from supermarket sold whale meat.

Independent local council members in Taiji, Japan, where dolphins and pilot whales are regularly harvested, had dolphin meat from a local supermarket independently tested. It showed concentrations of mercury 10 times higher than the recommended level.

This from the country that gave the world Minamata disease, one of the worst cases of mass mercury poisoning.

Yet whale and dolphin meat is served in school lunches all over Japan. It is sold to the schools at only 30% of the wholesale price, as a way of promoting Japanese culinary culture.

My point is
If someone wants to eat whale meat, more power to them. I have no objection to Japanese, Norwegians, or anyone else wanting to eat whale (providing they are aware of the toxins in it). Nor do I object to Koreans eating dog, Thais eating snake, Kiwis eating lamb or Arabs eating goat. I would just ask that any animal's life is taken with respect, and that nothing be wasted.

What I do object to is when a major world power comes down to our back garden, where we have spent years painstakingly trying to repair the damages of another age, and decides they can unilaterally extract whatever they feel like, with absolutely no regard to our opinion. And even more objectionable is when some species are still threatened with extinction; now the Japanese are not only stealing our heritage, but the entire worlds'.

It reeks of arrogance, Imperialism and outright bullying. It really just stinks.

What should we do to get them to stop?
Of course maintaining the diplomatic and political pressure is necessary. The Australians are bringing a case at the World Court. But I think the anti-whaling media, Government and the Green groups have got their approach all wrong. With Japan, the one way to effect change is to remove emotion from the argument entirely. Any reference to whales being "wonderful" "cute" or "sentient", or whale killing being "inhumane" or whatever is just not going to work and just dovetails in with the Japanese feeling of being persecuted. Most Japanese have bought into the "cultural imperialism"/"Japan bashing" propaganda forced down their throat by their politicians and media. If we can remove that from the debate, and stick to facts and logic, we might actually get somewhere.

So stop with the emotion, and just present the facts (which most Japanese won't know). I think many in Japan would be gob-smacked when they find out that, with a Government debt to GDP ratio the highest in the world, a massively expensive reconstruction effort in Fukushima, and a moribund economy, that their Government is wasting money in this fashion. Let's also explain the rational, logical, reasons for opposition, the physical danger of consuming whale meat, and by using analogies such as those above question their cultural "right" to steal something that doesn't belong to them under any pretext.

And then give the politicians and bureaucrats of Japan an option, so that they can save face. Just trying to boot them out of the South Pacific will never, ever work; the loss of face would be inconceivable for those powerful ones who have hoisted their pennant to this particular flagpole. This "face" is all important in Japan, and needs to be respected if we are to make progress. Just banging away with an absolutist approach is never going to solve anything.

I would ask that those concerned consider offering to enhance Japan's whaling quota in her own waters. Trade off the average take from the Southern Ocean of Minke whales (not endangered by any measures) over the last e.g. 3 years against their domestic allocation. Allow them to catch (non-endandgered species) of whales, and proceed to lose money hand over fist, domestically. Bring the industry reality into their backyard. And then let the Japanese whale watchers and Japanese whale killers battle it out domestically, while the debts mount up and the warehouses of unsold whale meat overflow.

Perhaps then we would actually see whaling become an issue for the Japanese public at large, debated by Japanese vs Japanese, rather than the current Japanese vs gaijin (foreigners), removing this most polarising of sentiments in Japan.

I am calling on the Green groups, the Governments and the Media, to exercise some understanding of realpolitik. And eventually, I feel confident, this kind of approach will lead to the collapse of the Japanese whaling industry altogether; because it is a 100% unsustainable business model; because the diehards will, you know, die out; because the whale watching industry will eventually gain the economic upper hand, and most importantly, because hardly any Japanese want to eat the stuff!