The multinational tax avoidance debate

By Patrick McCalman

Tax has featured in media headlines as of late. One of the topics being discussed is base erosion and profit shifting by large multinational corporations (otherwise known as BEPS).

There is no doubt that some commentators and politicians will use the spotlight afforded by the Budget to argue that New Zealand should be doing more to crack-down on multinational corporations seen to be dodging their tax obligations, as was actioned in the Australian budget when a “diverted profits” tax was introduced.

But we believe such calls need to be carefully considered.

New Zealand is taking incremental steps to address BEPs, having recently signed up to an international agreement to make it harder for multinationals to artificially lower their tax liabilities and being poised to introduce tax legislation to increase tax information sharing with our tax treaty partners. Work also continues on the foreign trust review.

Steps have already been taken to address some issues, with the Budget noting recently enacted changes to introduce GST on cross-border services and intangibles and reforms to Non-Resident Withholding Tax and Approved Issuer Levy rules(currently in Bill form) as bringing in an additional $150 million and $116 million of tax revenue over the next four years. These are both BEPS related initiatives.

At a time where New Zealand’s economy has fared better than others (compare New Zealand’s budget surplus to Australia’s deficit), business has made a significant contribution. The estimated corporate tax take for 2016/17 is $11.6 billion and taxes on corporate income as a percentage of total taxation in New Zealand sits at around 14%. In contrast, the average for OECD countries is 8.5% . According to Inland Revenue, despite comprising 0.1% of registered entities, large enterprises (defined as having an annual turnover of more than $100 million) account for half of the tax collected from companies in New Zealand. By this evidence, large corporates clearly pay their fair share of tax in New Zealand.

The reasons for this include:

• Our relatively high corporate tax rate - New Zealand’s corporate tax rate is the 27th highest out of 34 OECD nations (the median rate for the OECD is 22%)
• Our relatively robust tax rules – current tax settings already close many loopholes and contain relatively few exceptions or incentives compared with other nations. For example, our thin capitalisation rules help prevent foreign corporations from taking excessive interest deductions (a common method of profit shifting).

The government’s Business Growth Agenda has set a target of increasing our exports to 40% of GDP. To achieve this, it is estimated that our exporting businesses would need $160 to $200 billion of new productive capital.

To achieve this aim, it is important that our tax settings do not act as a barrier to encouraging foreign investment and foreign companies to do business here. The risk is that action outside of the OECD recommended actions may do more harm than good by making New Zealand a less competitive destination for foreign investment. Ultimately this has flow-on effects on the level of economic activity here – all of which contribute to the amount of new jobs, corporate profit levels, and ultimately the tax revenue collected by the government on those profits.

The OECD’s approach is to seek to ensure a global response to a global problem. Since New Zealand cannot control the actions of other nations, supporting the OECD approach provides the best opportunity to support our exporters. Introducing tax measures targeting foreign companies runs the risk that our exporting companies receive similar treatment when they operate overseas. In the global economy, we can’t have our cake and eat it – if we expect foreign companies selling goods and services in New Zealand to pay more tax here, it is inevitable that New Zealand businesses will end up paying more tax on products sold overseas.

Budget 2016 provides an opportunity for us to reflect on this debate. Looking ahead, the government should proceed carefully and consider the impact tax changes would have on New Zealand’s economic welfare. Large companies and foreign investment are a key contributor to New Zealand’s success story – they help provide the fuel to our economic engine. Ensuring that our tax rules are balanced and proportionate will help our economy stay on the runway and leave us poised to take off in the future.

[1] OECD Revenue Statistics 2015