Envy Clouding the Mind

Basic Errors

We have roundly ridiculed the proposal by Labour to ban from the internet furrin companies who allegedly do not pay enough tax in New Zealand.  To its credit, the Labour leadership swallowed the dead rat within  twenty-four hours and said that barmy idea was off the table.  Good on it.  But questions remain how the idea got on the table in the first place.  Incompetence?  Stupidity?  Naivety? Ignorance?  All of the above? 

Probably the last option lies closest to the bone. The general ignorance in matters financial and monetary never ceases to surprise and frustrate.  In this case, Facebook was cited as an evil corporate because it was not paying enough tax in New Zealand.  But, people who should know better--non-politicians--give evidence of the same stupid mistakes and silly ignorance. 

Pat Pilcher writes a column in the NZ Herald on IT and the internet.  Today's offering was a round, sound drubbing of Labour for ever coming up with the daft plan of censoring the internet in a vain effort to enforce corporate tax law.  So far, so good.
  What is not good at all, however, is the continuing confusion and ignorance over the most basic accounting realities and concepts.  Amidst the Pilcher piece, we read the following:

There's no shortage of companies that are not paying their way - the most widely cited example is Facebook whose New Zealand operations are said to have reported revenues of just over $790,000 in 2012, and only paid a mere $28,000 in tax.  [Emphasis, ours.]

This was the example cited by the Labour party luminaries, and so Pilcher probably thought it could be taken at face value.  But the point has been made many times, by many people that reported revenues do not a profit make.  And taxation is levied against profit, not revenues. Anyone that takes politicians figures and assertions at face value is a fool; doubly so if the source is the inept Labour caucus. 

The corporate tax rate in New Zealand is 28 percent.  What taxation of $28,000 implies is a gross (pre-tax) profit of around $100,000.  If Facebook's NZ gross revenues in 2012 were $790,000, from which $100,000 pre-tax profit was generated, Facebook's operations in NZ are not only highly profitable, it is probably overpaying NZ tax.  To employ a facile comparison, The Warehouse (well known to New Zealanders) produces a pre-tax profit of about 5 percent of its reported revenues.  Facebook's tax paid in New Zealand implies that it is producing profit at about 13 percent of its reported revenues. 

Of course the businesses of Facebook and The Warehouse are very different, but it is not at all apparent that Facebook is avoiding appropriate and "fair" tax in New Zealand from its operations here.  The mistake--and it is a fundamentally stupid mistake--occurs when one assumes that revenues equate to gross profit which is what the Labour revenue spokesman did and which Pilcher also has done. 

This is a mistake that if made by someone in a lower fourth accounting class, would result in ridicule and red ears.  It is basic stuff.  To have adults--let alone people aspiring to govern the country--make the same mistake is atrocious.