NZ's biggest companies may face 'enormous compliance burden' from OECD tax dragnet

EY's Andy Archer said impacts will include how companies approach cross-border financing.

Fonterra Cooperative Group [NZX: FCG] is likely to be among some 20 New Zealand companies that will have to deal with increased red tape to comply with wide-ranging reforms to corporate tax rules proposed by the Organisation for Economic Cooperation and Development and expected to be endorsed by the world's 20 most powerful nations.

The OECD/G20 Base Erosion and Profit Shifting (BEPS) project is targeting global tax losses estimated at $US100 billion to $US240 billion a year, or between 4% percent and 10% percent of global corporate tax revenue. It released a package of measures designed to help governments plug gaps in international rules "that allow corporate profits to disappear or be artificially shifted to low/no tax environments, where little or no economic activity takes place," the OECD said in a statement.

The proposals will be presented to a meeting of Group20 finance ministers in Lima this week and then on to the full G20 leaders summit in Turkey on November 15-16, after which the focus will be on "designing and putting in place an inclusive framework for monitoring BEPS and supporting implementation of the measures, with all interested countries and jurisdictions invited to participate on an equal footing," the OECD said.

One of the earliest measures will be on country-to-country reporting, which the OECD recommends be put in place from January 1, 2016, for multinationals with global revenue of more than 750 million euros a year. That will capture New Zealand's biggest companies, adding reporting requirements and increasing foreign tax department scrutiny.

"As a consequence of this, New Zealand companies – the top dozen or 20 – will now confront an enormous compliance burden to access, capture and provide all that information," said Andy Archer, an EY partner for international tax. "Once captured, you would expect increased scrutiny, more questions, more audits and, ultimately, maybe more tax payable in those jurisdictions. Big companies are under the magnifying glass."

Small and medium-sized New Zealand companies shifting overseas also needed to be careful not to be caught by rule changes as they grew.

OECD secretary-general Angel Gurria said new minimum standards on country-to-country reporting "for the first time will give tax administrations a global picture of the operations of multinational enterprises."

The OECD's recommendations include limitations on interest deductions; new rules on "hybrid mismatches" where companies use hybrid financial instruments to make profits "disappear for tax purposes through the use of complex financial instruments"; a crackdown on transfer pricing rules to prevent companies using "cash box entities" to shelter profits in low or no-tax jurisdictions; and a new definition of "permanent establishment", the concept in double tax treaties where a firm's income is only taxed in a country where it has a permanent base or a fixed place of business.

"BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis and create more and better opportunities for all," Gurria said, describing the proposals as the biggest changes to international tax rules in almost a century.

EY's Archer said impacts will include how companies approach cross-border financing and could affect the value attributed to mergers and acquisitions. It may also prompt companies to change where they base workers and travel arrangements.

Global companies including Google, Amazon and Starbucks have been criticised for avoiding tax on sales in countries such as the UK through complicated tax structures. Google Payment New Zealand paid $123,000 tax on New Zealand revenue of $22.8 million last year. Apple Sales New Zealand generated $568 million of revenue last year, paying $6.8 million on earnings of about $22 million.

Archer said there had been examples of companies adopting "blatant and aggressive tax planning, and BEPS deals with that." But there were also many companies that followed the law and have been "opportunistic and got themselves into situations where they are able to shift profit from one jurisdiction to another."

"The multinational companies have been legally following the rules that exist but they are well out of date," he said.

The changes would also bring an end to so-called tax havens such as the Cayman and Channel Islands. "The cold winds of change have swept over them," he said. "Multinational companies have been retreating from them but will accelerate as these rules are promulgated and become law."

It would take a number of years to put the proposals in globally.

Revenue Minister Todd McClay said in a statement that "no decisions have been made by New Zealand on implementation or timing and that any changes would be subject to the usual public consultation process.

In the same statement, Finance Minister Bill English said "decisions have to be made as to what extent the OECD recommendations are applicable to New Zealand and the best way to implement them," with compliance costs on the high on the agenda.

Mr English stressed the approach was not punitive and that, in the kinds of cases targeted, companies were not paying tax either in their home jurisdiction or the country in which they do business.

(BusinessDesk)