Taxing multinationals – What exactly is New Zealand doing about it?
Tax Alert - July 2016
By Bruce Wallace
Well, a lot actually. Media coverage and debate in New Zealand and around the world in relation to the level of tax paid by multinationals continues, with a growing number calling on the New Zealand government “to do something”. There has been more political pressure of late from opposition politicians. The tax issues are complex and as a result there is much misinformation, especially in the New Zealand context.
Revenue Minister Woodhouse recently expressed his disappointment that “major multinationals had been "deafeningly silent" in the wake of allegations that some of them had been shirking their fair share of the tax burden.” It’s understandable that multinationals are perhaps reluctant to get into the debate publically – not because there is anything to hide, but because they are damned if they do and damned if they don’t.
What hasn’t been well reported by the media is the fact that Inland Revenue tax officials have done a lot of work in recent years to ensure New Zealand’s international tax regime is robust and they have been donkey deep in the OECD’s BEPS (base erosion and profit shifting) project since the project was set up over three years ago. New Zealand has already implemented rules that are consistent with a lot of the OECD’s BEPS recommendations.
New Zealand has to date resisted the temptation to implement its own additional ad hoc tax rules but officials are currently preparing a report for Ministers on whether New Zealand should adopt similar measures to those adopted recently by Australia and the UK.
Government has released a cabinet paper on the BEPS work programme that explains what New Zealand is doing in this regard. When all the projects are lined up on the one page, it’s pretty clear the tax landscape for multinationals is already changing and substantially so.
The report sets out some key principles and outlines a four-prong approach to managing these issues as follows:
- All taxable income earned in New Zealand should have tax paid in New Zealand; and
- In determining taxable income:
a. all gross revenue earned in New Zealand should be identified and reported; and
b. deductions from gross revenue should reflect the real economic costs of production, free of measures deliberately designed to reduce tax liability.
The New Zealand Approach:
1. Ensure New Zealand’s domestic tax rules are robust and consistent with international best practice
Under this heading, it is noted that:
- New Zealand has recently strengthened its controlled foreign company and thin capitalisation rules;
- It has introduced bank minimum equity rules, eliminated the conduit tax regime and removed the foreign dividend exemption for deductible foreign equity;
- New rules for applying GST to online services consumed in New Zealand have recently been enacted to apply from 1 October 2016;
- Legislation has been introduced that will strengthen the non-resident withholding tax and approved issuer levy rules;
- In late August/early September 2016, the government is to release a consultation paper on hybrid mismatch arrangements. New rules will prevent companies structuring their business entities or financing arrangements to take advantage of differences in how countries’ tax these arrangements;
- The government will also consult on whether to introduce interest limitation rules to prevent companies stripping excessive profits by way of deductible interest payments. This is despite the fact we already have strong thin capitalisation rules in comparison to some other countries;
- The government has just released the report on the inquiry into foreign trust disclosure rules (see New Zealand trust disclosure rules: Not fit for purpose but fixable). We expect most, if not all of the recommendations from this report to be adopted; and
- As noted above, the government may consider whether other BEPS measures are necessary (e.g. a diverted profit tax as adopted by the United Kingdom and Australia) and has asked Officials to report to cabinet thereon.
2. Work with OECD and treaty partners to ensure international agreements are fit for purpose
It is noted that New Zealand:
- Has signed the Convention on Mutual Administrative Assistance in Tax Matters in 2012. This became operative for New Zealand on 1 January 2015 and is also an essential element of New Zealand’s overall transparency framework;
- Will sign up to the OECD’s multilateral instrument which will be open for signatures by 31 December 2016. This instrument will amend countries’ network of tax treaties to insert a new anti-treaty abuse article, a new permanent establishment definition, anti-hybrid entity rules and dispute resolution articles; and
- Will apply revised OECD Transfer Pricing Guidelines to address misallocation of profits to low tax jurisdictions. Legislation could be introduced to facilitate this (if needed) in March 2017.
3. Improve the transparency of tax information so people cannot hide their wealth and avoid tax obligations
In this regard, New Zealand:
- Has introduced an International Questionnaire to monitor profit shifting activities of major foreign-owned groups of companies;
- Implemented measures to comply with the United States (US) foreign account tax compliance act which requires the collection and exchange of information from financial institutions about investments by US citizens (from 1 April 2015);
- Will introduce legislation in mid-2016 to enable automatic exchange of information with a wide range of countries’ tax administrations about the financial affairs of their residents (from September 2018);
- Is already starting to exchange Inland Revenue’s taxpayer binding ruling information with foreign tax administrators; and
- Is introducing legislation to require our multinational companies to prepare country-by-country reports (these reports basically provide a breakdown of business activities of the multinational group across the world and financial information for each country in which they operate) in line with the OECD proposal.
4. Ensuring that current compliance measures adequately address BEPS
In addition to the above, it is also noted that:
- Inland Revenue has an extensive international compliance programme addressing profit shifting, in particular transfer pricing of goods and services and international financing arrangements;
- The top 50 taxpayer groups receive comprehensive coverage, being account managed on a one-to-one basis; and
- Advance pricing agreements have proven extremely useful as a robust up-front means of dealing with profit shifting risk, especially the more complex issues that arise.
The OECD action plan to address BEPS includes 15 separate actions on the various tax issues. The final reports released in September 2015 amounted to more than 2,000 pages (see our previous article on this). The tax issues are incredibly complex and can’t happen as quickly as some would like because consensus among countries is required on a number of issues. But as the above list demonstrates, things have been and continue to be happening and New Zealand is very much in the thick of it.
The reality is that the government’s response to addressing the issues for multinationals is not likely to grab as much headline attention as the calls for action to do something. It’s also unfortunate that this BEPS update report was released on the same day as the report on the inquiry into foreign trusts, which hijacked the media’s attention.
Finally, let’s also not forget that New Zealand has its own home grown multinationals which will also likely face increased taxation costs in other countries due to operations carried out therein as a result of these measures and we need to ensure that there is a balanced global response.