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BUDGET 2014: Time to tackle tax on multinationals

The government is part of the OECD discussion on international taxation proposals but will have little say in whether they are adopted globally.  

Could we actually be worse off with what’s finally proposed? Should the government take actions sooner, by implementing new domestic tax measures in the budget?

The key focus of the OECD’s discussion is BEPS (base erosion and profit shifting). The most public examples are multinational companies, such as Google, Starbucks and Amazon, which transfer profits globally, based on recognised international tax principles. 

In effect, profits are drawn away from the country of the customer and often placed somewhere with low or no tax, effectively enhancing the return to the shareholder. And, while this doesn’t offend the letter of the law, it has been called into question morally. 

Make no mistake; if there was an easy answer, it would already have been put in place. Some countries have implemented their own remedies, India and China being two notable examples of jurisdictions that modify their domestic laws and interpretations to the benefit of their respective governments.

But therein lies the problem. International business embraces multiple jurisdictions, none of which have the same rules of taxation. While there are some broad principles, local implementation is unique. Likewise, while there are broadly accepted principles for the pricing of related party transactions, each country has its own interpretation of these.  

Reliance is often placed on mutual agreement procedures contained in tax treaties to solve the impasse. However, the process of resolution is often arduous and long. And, of course, not all countries have tax treaties, particularly not tax havens!

Critically, only 34 countries comprise the OECD. The notable omission of all BRIC countries (Brazil Russia, India and China) shows the potential lack of global reach.

Revenue Minister Todd McClay has acknowledged the success of whatever solutions are proposed relies on the majority of countries adjusting their domestic tax laws to embrace the new international tax best practice.  

Even the most optimistic will agree this will take a considerable amount of time to implement, if at all. For years countries such as Ireland have sought to attract business through tax breaks and incentives.

It is hard to see a simultaneous and multilateral adjustment relating to BEPS recommendations being adopted by most countries, retrenching inducements they have in place and implementing uniformity of approach.  

One of the proposals – to require taxation in the country of the customer – would certainly leave New Zealand business worse off.  Mr McClay has recognised the devastating effect this would have on an export-based economy. However, he remains confident this proposal will not be finally suggested.  

A greater focus on ensuring multinationals pay tax somewhere in the world is certain. The logical outcome would be to tighten the rules in the shareholders’ home countries, thus attracting more tax revenue to those countries.  

This would not benefit New Zealand either, given the preponderance of foreign-owned multinationals.

Somewhere in the mix of solutions, New Zealand needs to put its own stake in the ground. Several countries have already cried “enough is enough” and have addressed this issue through their own domestic tax rules. 

The government needs to consider whether it should be doing the same – and using the budget as a starting point. While generally unpopular (India’s 50-year backdated legislation last year was an example), implementing new domestic tax rules would be more better than allowing the New Zealand economy to shore up other countries’ tax revenues. 

Greg Thompson is a partner and national director of tax at Grant Thornton New Zealand 

Read more Budget 2014 coverage here.

Comments and questions
6

Time to eliminate the stupidity of having 3 different top tax rates between entities.
How about we start with 28% across the board.

it is an indictment on our government that we do not already insist on mult- national corporations paying tax in this country.

But then the relationship between government and crony capitalism is only now beginning to be taken seriously. But this very relationship certainly explains a lot.

Incidentally, Is multi- millionaire Sam Morgan paying any tax yet? I seem to recall his complaining that he didn't have to (!)

Of course, he could have volunteered the amount he hadn't been charged

By all means find out if he actually did - it would certainly help the rest of us.

This is not hard to fix. All the IRD needs to do is look at the companies turnover and profit declared and apply a reasonableness test. If the profit or tax paid is insignificant compared to the size of the operation commence an audit. There are multinationals operating in NZ for years that have paid minimal or no tax. No legitimate company would remain in business if wasn't making a profit.

Oh yes they would; but in another country. This is a problem for all governments and there is no simple answer. Suffice to say a reasonableness test would not achieve a thing.

Totally agree. On the old world of being able to dictate the tax structure, governments are now finding out what its like to be a commercial entity and compete for revenue in a digital world where assets, IP, royalties cost structures and revenues are seamlessly movable. The only way to stop profit shifting is to create a single worldwide corporate tax rate to eliminate the attractiveness of some countries over others; the chances of counties agreeing to that are zero. A better strategy is for governments to drive for cost efficiency like companies that want to survive are forced too as times get tough. Too much intervention from government will see companies concentrating more on emerging markets than those that are mature and flat lined.

Do Google and Apple really need to be in NZ? Do we really make a significant contribution to their worldwide revenue? I think not.. as a small market its not a big concession for either of these companies to remove their presence in NZ, Australia or any other small market should governments introduce an more oppressive tax regime. A recent parallel is the international film industry reactions to NZ being a more expensive location to film due to smaller concessions than other countries; the turn around as soon as NZ's concessions were equaled with other countries was immediate.

I think we should start a free zone in NZ a bit like they do in Dubai. Companies can set up in NZ and they will pay no tax. They can bring into the country any number of staff (earning say over some figure - say $70K) who will pay tax.

They also need to provide accommodation for their businesses and staff with new build. Which they can then on sell if they leave (perhaps onsell to incoming companies).

I think we need to look at new ways of getting money out of this new high tech world - it is a very different paradigm and not as easy to apply the old ways of taxation.