02/03/17

New Zealand: Multinationals face nervous wait on tax

Multinationals such as Google and Apple are about to find out whether they will face tougher tax rules in New Zealand, reports Stuff, Business Day.

Long-awaited measures to clamp down on multinational tax rorts are expected to be unveiled by Revenue Minister Judith Collins on Friday morning.

PwC tax expert Geof Nightingale said big business was waiting to find out whether New Zealand would follow Britain and Australia in implementing a "diverted profit tax" to penalise multinationals caught manipulating the tax system.

United States lobby group Citizens for Tax Justice estimated in October that the top 500 US corporations – including Apple, Nike and pharmaceutical giant Pfizer – had stockpiled US$2.5 trillion of profits in tax havens.

Profit-shifting has prompted G20 nations to back a crackdown by the Organisation for Economic Cooperation and Development, called Beps.

Company tax makes up 15 per cent of New Zealand's total tax take of $63 billion, but a Cabinet paper said there were concerns multinationals were not paying their fair share.

Nightingale said a diverted profits tax would be "more politics than policy".

Ministers had indicated the Government was thinking about a diverted profit tax but "probably wouldn't go the whole way", he said.

Instead, the meat of the measures that would be proposed by Collins at a meeting of the International Fiscal Association in Queenstown would likely be technical in nature and would represent New Zealand's attempt to implement Beps, he said.

"I expect they won't be easy to translate into simple soundbites."

An Inland Revenue briefing to Collins released last month confirmed officials were working on proposals to tighten transfer pricing and "permanent establishment" rules and hybrid instruments and on limiting the interest payments that foreign firms could deduct from the profits of their New Zealand subsidiaries.

Nightingale said a key question would be how orthodox those changes would be.

"What will be interesting will be ... how far they have gone towards the OECD recommended position, and whether they are in step with our major investment and trading partners.

"It is appropriate for the Government to focus on this stuff, like governments around the world are, [but] we don't want New Zealand to 'blaze the trail' because we are a small capital-importing country," he said.

Ernst & Young tax partner David Snell said the drivers behind Beps did not apply as strongly in New Zealand as they did elsewhere.

"We don't have a great revenue shortfall, nor do we have in my view strong evidence of corporates having markedly underpaid tax."

Nightingale said multinationals had been impacted by other changes such as the imposition of GST on imported digital services such as Netflix and Spotify and would be watching Collins' announcement closely.

There was a chance political developments such as Brexit and the election of President Donald Trump could delay the wider Beps project, but Nightingale believed the momentum was too strong for it to be derailed.

"Revenue officials are co-operating strongly and I expect that will continue despite the politics.

"But if you put the politics over the top of it, there is going to be a huge ongoing argument between Europe and the US – and there already is – over who gets to tax the revenues of those big European and US multinationals.

"The Trump Administration is going to put America's interests first in a whole range of policy areas, but also in tax," he said.

TAXING JARGON

Transfer pricing refers to the prices multinationals set when they charge their local subsidiaries for centrally-provided services such as accounting and marketing.

Multinationals can divert money to lower-tax jurisdictions by overcharging for such services.

The Government may remove the "burden of proof" on Inland Revenue to show transfer prices are unfair.

Permanent establishment rules determine whether a company has a taxable presence in a country.

Changes may make it harder for foreign firms to claim they don't have a permanent presence in New Zealand if they use intermediaries to enter into contracts here on their behalf.

Hybrid mismatches relate to rorts such as the "double Irish" that involve companies exploiting differences between countries' tax laws – often differences in semantics – to avoid a profit being taxed in either country.

Such "mismatches" can be tackled either through harmonising rules or through general "anti-avoidance" measures.

Interest deductions can be used to channel profits from New Zealand subsidiaries to multinational parents.

Unnecessarily large loans, or loans at artificially high interest rates, can mean cash is unfairly transferred through untaxed interest payments, rather than through dividends on locally-taxed profits.    

Already a focus for Inland Revenue, the Government may seek to tighten up practices in this area.