Surviving in a world of multinationals

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Multinational tech companies like Google actively avoid paying tax. Photo / 123RF

By Juha Saarinen

Multinationals, especially the tech companies, can be menace to our society and economy, especially a small nation like New Zealand.

As the Herald has reported, they don't pay anywhere near enough tax on their earnings by using their global reach and shifting money around, out of reach of Inland Revenue.

When governments try to get tough with them, the giants respond by simply blocking access to local customers rather than paying tax, because even markets like Australia are tiny for them.

They don't hire many locals, nothing of consequence is made in New Zealand that they sell and their presence is a net loss to us.

It's true that tech giants and other multinationals have an unfair advantage compared to local businesses. Several advantages, in fact, like their enormous scale and access to multiple markets.

While we can needle multinationals into paying a bit more extra tax locally as it's good public relations for them, the playing field will forever be tilted in their favour, and against us.

All's not quite lost however. Local companies can still try to survive in a symbiotic relationship with multinationals, by doing business through them.

Apple for instance has become the largest foreign software seller in China says both Macquarie Capital and App Annie which monitors and produces app sale statistics.

Last year, the iOS App Store alone racked up US$5 to US$6 billion in revenue, Macquarie said. In a new report, App Annie forecasts that the Chinese mobile app market will hit US$56.5b revenue in four years' time.

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Already, the Chinese mobile app market is the biggest in the world, thanks to a combination of rising wealth and people there loving smartphones; it's larger than the much richer United States even.

The report can be found here (registration required).

With that sort of money sloshing around, and market sizes that make New Zealand look microscopic in comparison, there are plenty of incentives to ride on multinationals' coat tails rather than striking out on your own locally.

All the usual caveats apply: you're playing in someone else's walled garden where they set the rules of the game.

If you don't follow the rules, you're out in the cold, perhaps for good, which would be a catastrophe if you've established yourself on say Apple's App Store or Google Play, because there is no good exit strategy for surviving outside these.

There is no direct access to customers and, at any given time, a competing product could get a marketing leg up in the store, or the multinational could release something very similar to what you're selling.

Nevertheless, there's no e-commerce infrastructure to worry about, marketing is taken care of for you and bang, your wares will be in front of hundreds of millions of people. Which is the position everyone wants to be in right from the start, but it can take years of hard work to reach.

You'll be "taxed" twice: once by the multinational which takes a cut of your revenue, and then back at home by the IRD. Annoyingly enough, your company doesn't get to join in on the multinationals' profit shifting merry-go-round, even though you're selling stuff in the very same stores they do.

Perhaps that'd be one way to claw back some of the tax dollars lost, by getting more NZ companies onto the multinational stores so that they can sell in massive markets, create employment locally and bring profits back here?

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