Friday 03 March 2017 10:35 AM
NZ looks to crack down on multinationals flouting local tax system
By Rebecca Howard
March 3 (BusinessDesk) - The government is taking steps to crack down on multinationals that manipulate New Zealand's tax system to their benefit.
"Multinationals provide many benefits for the New Zealand economy, and the government is committed to making New Zealand an attractive place for them to do business. However, this does not mean rewarding firms that are aggressive in attempting to flout the current rules," said Finance Minister Steven Joyce and Revenue Minister Judith Collins in the first of consultation papers proposing new measures to strengthen New Zealand’s rules for taxing large multinationals.
Earlier Friday Collins told Radio New Zealand that Inland Revenue had advised her that up to $300 million a year in tax was being lost, possibly more.
Companies including Google, Facebook and Apple have been criticised for booking profits in low-tax jurisdictions and the huge reduction in tax owed prompted the Organisation for Economic Cooperation and Development to call for a worldwide crackdown on that kind of behaviour.
The three papers focus on concerns about multinationals booking profits from their New Zealand sales offshore, even though these sales are driven by New Zealand- based staff, preventing multinationals using interest payments to shift profits offshore, and implementing New Zealand’s entrance into an international convention for aligning double tax agreements with OECD recommendations.
"Base erosion and profit shifting, or BEPS, the tactics used by some large multinationals to minimise their exposure to tax and spirit profits out of a country is not new. As a small, open economy we’ve been aware of our potential vulnerabilities to this issue for several years and have been progressively strengthening our rules," Collins said in a speech to the International Fiscal Association today.
The first of the three papers consults on proposals to counter permanent establishment avoidance, strengthen transfer pricing rules, and help Inland Revenue deal with uncooperative multinationals. "These proposals are aimed at large multinationals that are able to report low taxable profits in New Zealand despite significant economic activity here," said Collins.
Among other things, the government is proposing a new anti-avoidance rule will be introduced that will apply to large multinationals that structure to avoid having a permanent establishment (taxable presence) in New Zealand. A large multinational is considered a company with a global turnover of more than 750 million euros. Under this rule, a non-resident entity would be considered to have a permanent establishment in New Zealand if a related entity carries out sales related activities for it here.
Regarding transfer pricing - where a related company charges a New Zealand subsidiary an artificially high price for inputs such as raw materials, head-office services, or the rights to use intellectual property - it proposes updating existing legislation to strengthen New Zealand’s transfer pricing legislation so it aligns with the OECD's new guidelines and Australia’s transfer pricing rules.
The aim is to introduce rules requiring transfer pricing to align with the economic substance of a transaction. It also proposes rules allowing a transaction to be disregarded or reconstructed if it would not have been entered into between independent parties. Finally, the discussion document proposes some rules to make it easier for Inland Revenue to investigate a multinational’s transfer pricing practices.
In terms of investigating "large uncooperative multinationals" it is proposing a series of administrative measures to help Inland Revenue assess and collect the right amount of tax. These measures will generally only apply to large multinationals that refuse to cooperate with Inland Revenue. They will make it possible for Inland Revenue to assess uncooperative multinationals based on the information Inland Revenue has at the time. The measures will also require tax to be paid earlier in the disputes process, and allow Inland Revenue to collect relevant information that is held offshore. "The proposed measures will also contain remedies for Inland Revenue where the non-resident does not cooperate, such as increased penalties and a power to allocate income to New Zealand in the absence of information to the contrary," said Collins.
She noted it is standard business practice to borrow in order to help finance investments. However, since interest payments are deductible, the use of debt is also a simple mechanism for shifting profits offshore. She noted that the OECD recommended a rule that limits a multinational's interest deductions based on its ebitda. In New Zealand, however, the current rules limit a multinational's interest deductions by placing a limit on the amount of interest-bearing debt.
The government does not propose changing that rule but is proposing to buttress the existing thin-cap rules with a new mechanism that will cap interest rates on cross-border related-party debt.
Finally, given that many BEPS strategies rely on the abuse of tax treaties, the BEPS Action Plan has recommended a number of changes to strengthen them. However, as it would be very time consuming for individual countries to implement the recommended amendments on a treaty-by-treaty basis, the OECD has developed a multilateral tax treaty that will modify a worldwide network of several thousand bilateral tax treaties in one fell swoop. The final consultation paper address this as it is an "unprecedented approach to modifying tax treaties," said Collins.
According to Collins, New Zealand expects to sign Multilateral Instrument, along with many other countries, in June this year.
Submissions on the consultation document on implementing the international convention are open until 7 April. Submissions on the other two are open until 18 April. Ministers will consider final proposals arising from the documents later in the year, said Collins.