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Multi-national tax avoidance clamp down bill introduced

Legislation has been introduced to try and clamp down on multi-nationals avoiding paying tax.

The Taxation (Neutralising Base Erosion and Profit Shifting) Bill builds on work done internationally with documents showing it was drafted under former ministers Steven Joyce and Judith Collins. It was introduced by Inland Revenue Minister Stuart Nash.

Documents released when the Bill was introduced today says officials estimate the changes will mean the Government will receive an additional $50 million of revenue per year.

“There is a risk that foreign companies investing in New Zealand will view the proposals as complex and onerous, incentivising them to remove their existing personnel from New Zealand or to cease operating in New Zealand altogether. However, most of the affected foreign companies are dependent on having personnel in New Zealand to arrange their sales. Without personnel on the ground, they would not be able to service their New Zealand market. It is also unlikely that they would cease to operate in New Zealand altogether.”

Inland Revenue is aware of about 16 cases involved in these types of Base Erosion and Profit Shifting (BEPS) arrangements which are currently under audit that collectively involve about $100 million per year of disputed tax. While there are only 20 New Zealand-owned multinationals earning over the threshold for some of the main proposals (over EUR €750 million of consolidated global revenue), the European Union (EU) has estimated that there may be up to 6,000 multinationals globally

It is not known how many of these global multinationals operate in New Zealand.

The 16 cases “show our existing rules are vulnerable and Inland Revenue considers that the use of avoidance arrangements will increase if the weaknesses in the current rules are not addressed. Furthermore, as New Zealand endorses the Organisation for Economic Co-operation and Development’s Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan), there is an expectation that we will take action against BEPS and implement a number of the OECD’s recommendations,” officials said.

The proposed measures in this Bill will prevent multinationals from using:
• artificially high interest rates on loans from related parties to shift profits out of New Zealand (interest limitation rules);
• artificial arrangements to avoid having a taxable presence (a permanent establishment) in New Zealand;
• transfer pricing payments to shift profits into their offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore; and
• hybrid and branch mismatches that exploit differences between countries’ tax rules to achieve an advantageous tax position.

The Bill says multi-nationals maybe using non-commercial terms for related party loans, as an interest payment from a New Zealand subsidiary to a multinational parent is not a true expense from the perspective of the multinational’s shareholders. Indeed, it can be profitable to try to increase the interest rate on related-party debt—for example, to shift profits out of New Zealand into a low tax country. This is because the interest paid to the parent is deductible to the subsidiary, thereby reducing its taxable income in New Zealand.

There are 2 main ways to push up the interest rate charged on related party debt:
• First, the foreign parent can excessively debt fund the New Zealand subsidiary, to depress the subsidiary’s credit rating and make it look riskier as an investment, and therefore justify a higher interest rate.
• Second, a foreign parent can add terms and conditions into the debt instrument itself to justify a higher interest rate. For example, it can subordinate the debt or make the debt have a long duration—both of which would increase the interest rate compared to if they were dealing with each other at arms’ length.
To address profit-shifting, the Bill proposes new rules which will limit the interest rate on related party debt. It does this by setting specific rules and parameters to:
• establish the credit rating of the New Zealand borrower; and
• determine (in combination with the credit rating rule) the amount of interest on the debt.

Another problem is some multinationals can structure their operations so their New Zealand sales and associated profits are booked in an offshore entity which under current rules is not considered to have a permanent establishment in New Zealand, even though, in substance, the sales are generated by New Zealand-based salespeople. As a consequence, New Zealand is unable to apply income tax to the multinational’s New Zealand sales.

The Bill proposes new anti-avoidance rules that will deem a multinational to have a permanent establishment in New Zealand if:
• the non-resident supplies goods or services to a person in New Zealand;
• the non-resident is part of a multinational group that is required to file Country-by-Country reports (i.e. the multinational group has more than EUR €750m of consolidated global turnover);
• the arrangement has a more than merely incidental purpose of tax avoidance.
Australia and the UK have already implemented similar permanent establishment avoidance rules in their domestic law


The Bill also proposes strengthening Inland Revenue’s powers to investigate large multinationals (with at least EUR €750m of global revenues) that do not cooperate with a tax investigation. This will allow Inland Revenue to:
• collect any tax owed by a member of a large multinational group from any wholly-owned group member, provided the non-resident fails to pay the tax itself;
• request information held offshore by another group member of the large multinational group;
• impose a new civil penalty of up to $100,000 for large multinational groups which fail to provide requested information (which replaces the current $12,000 maximum criminal penalty).


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