Private sector worries delays IRD tax crackdown on multinationals

New Zealand has delayed cracking down on multinational tax avoidance because of private sector concerns over timing and worries about "scaring away" foreign investment, the Inland Revenue Department says.

Wide-ranging reforms to corporate tax rules proposed by the Organisation for Economic Cooperation and Development (OECD), known as the base erosion and profit shifting (BEPS) project, target global tax losses estimated at $US100-240 billion a year, or between 4-10% of global corporate tax revenue.

At Parliament's finance and expenditure committee, Labour's finance spokesman Grant Robertson says papers from the IRD released under the Official Information Act indicate the department is working with the government on the introduction of an OECD recommendation of capping tax deductions on interest paid to a maximum of 30% of earnings before interest, taxation, depreciation and amortisation.

The papers indicated this would happen this year and public consultation would finish in September, Mr Robertson said, but public consultation has been delayed until early next year.

David Carrigan, acting deputy commissioner for policy and strategy, says the IRD needs to do more work on the proposal and it hadn't wanted to overwhelm the private sector.

"To make these new laws work, we need the full support of the private sector, both to provide technical support and also to make sure the laws practically will work," Mr Carrigan says. "It is just trying to manage the workflow for them.

"We've released a technical document on hybrid mismatch arrangements which they're already trying to absorb, and even for the private sector tax community that's a difficult proposal, so it is really trying to sequence things in a more manageable way."

Hybrid mismatches are one of the main strategies used by multinationals to avoid tax, where companies use hybrid financial instruments to take advantage of misaligned tax treatments in two or more countries to make profits disappear – essentially achieving double non-taxation. IRD released a discussion document on hybrid mismatch arrangements in September.

Mr Robertson says New Zealand seems to be "dragging its feet and asking the turkeys to organise Christmas", but Mr Carrigan assures him it is a priority.

"We think this is a great opportunity to think about ways we can buttress our rules around the ways multinationals stream profits out of New Zealand. I can provide you with that assurance, and we're looking at it early next year," Mr Carrigan says.

Green Party co-leader and finance spokesman James Shaw says Australia and France are moving ahead with implementing the OECD's recommendations and asked whether this was a bad idea.

IRD commissioner Naomi Ferguson says New Zealand's international and domestic tax rules "are pretty robust" and the department doesn't believe there is significant tax at risk.

"We have over many years shown our appetite to look at issues of international tax avoidance and tackle them operationally," Ms Ferguson says. "We believe operating with others is more appropriate for the nature of the New Zealand economy and our international trade and export business – obviously a number are multinationals that operate overseas, and we want to make sure we continue to support them as much as protect the tax base here."

Mr Carrigan says the UK has introduced diverted profit taxes, which the IRD is unconvinced by at this stage.

"We think the better way to go is to take the rules we've already got and strengthen those," he says. "The diverted profit taxes are separated penal taxes outside of the normal treaty system that the UK and Australia go with and are reasonably radical."

"In some ways, it's better to watch and see how that goes than be the first mover. We're a small open economy, we do require investment, there's a balance between getting the appropriate amount of tax and scaring away foreign investment."

(BusinessDesk)