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Christmas miracle! New tax rules could finally force multinational companies to pay their fair share

The government has announced a new set of tax proposals aimed at getting multinationals like Apple and Facebook to pay more on their NZ earnings. But do they go far enough? And what about a diverted profits tax? Taxation expert Andrea Black breaks it down.

Waking up on Wednesday morning I found I had emails from my lefty friends asking me what I thought of government’s recent announcement on multinationals as set out in the Herald.

Also in my inbox was a request from The Spinoff’s editor Duncan Greive to write an op-ed on the same thing. Sure I said. I can do that. And ran off to the trusty IRD policy site to find the details.

Not a thing.

Then I read the article in the Herald. Mmm. The thing is that geeks like me know is that the Honourable Michael Woodhouse – Hon Mike, to me  – announced this stuff at the accountants’ annual tax conference almost a month ago. So how was this news? And “unilateral action”? What was that about?

By 1pm it became more clear. The Herald had got an advance of a cabinet paper that was then released to the rest of us. It was a bit more information on one part of what Hon Mike announced in November.

Now essentially there are two ways anyone can try to get out of paying tax on income. Much like the little black dress and pearls – they will take you anywhere. Multinational or local business person, all tax stuff comes back to one or both of these things. There are enhancements involving credits and treaties and things, but basically it boils down to these two methods.

The first is saying “Income? What income?” Essentially: I never earned any income. Domestically this is done through earning untaxed capital returns (hello, housing). Cross-border it is done through not having a taxable presence – or permanent establishment – within a country that you’re actually selling into.

The second is saying “Ah yeah I did earn that income but look at all the costs – often interest, sometimes royalties – incurred earning that income. So let’s call us even.”

In November Hon Mike said he would look at both for multinationals in a discussion document early next year. Now the government has simply released the cabinet paper looking at the first one plus some bits of the second.

(Not interest deductions mind. Shame. I’m looking forward to that, as while our current rules do have some form of limitation for multinationals there is no link to the actual income earned.)

He’s looking to tighten the taxable presence rules; do some boring admin disclosure stuff which gives more information to the IRD as well as putting the burden of proof on the taxpayer to prove all transactions with foreign parents are legit. This is in line with the rest of the tax system. Currently, as far as the transactions with foreign parent thing goes, poor old Mrs Commissioner has to prove her case to the taxpayer – not the other way around.

Now the Herald article says it is ‘unilateral action’. No idea what that’s about since:

  • Tax is inherently unilateral. It is raised by parliaments – or whatever – of sovereign countries. There is an exception to this with tax treaties which are agreed between two countries. There are also ‘international norms’ which are set by the OECD and which it has been looking to change with its BEPS (Base Erosion and Profit Shifting) project.
  • The BEPS project has reported. One of the suggested action streams relates to tightening up whether or not multinationals should have a taxable presence in a country. From the looks of the cabinet paper Hon Mike is looking to use this technology.

None of this is a diverted profits tax. And in many ways I am quite pleased. Anytime I have tried to go through what a diverted profits tax would mean for New Zealand, it has totally done me in. I am very grateful for the discussions in the cabinet paper as they will now be my cheat sheets.

But a diverted profits tax really is a nuclear option. It says “You know those treaties we signed with you, other countries ?– jk, we’re going to do our own thing.” Now Australia and the UK may be able to get away with it, but we are very small. It really wouldn’t be my advice as an official.

And honestly – we will need to see the detail – but what Hon Mike has released should go a long way to fixing the “Income? What income?” problem with multinationals. As well as the “look at all my deductions” – other than interest – issue. I say let’s give it a fair hearing before we take it out and shoot it.

So Hon Mike, thanks for playing. Now, interest deductions: Hon Judith – when will we see a cabinet paper on that?

The Spinoff made a donation to Yoga Education in Prisons Trust http://www.yogainprisonstrust.org/ for this article.