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Multi-national tax avoidance clamp down bill introduced
Legislation has been introduced to try and clamp down on multi-nationals avoiding paying tax.
The Taxation (Neutralising Base Erosion and Profit Shifting) Bill builds on work done internationally with documents showing it was drafted under former ministers Steven Joyce and Judith Collins. It was introduced by Inland Revenue Minister Stuart Nash.
Documents released when the Bill was introduced today says officials estimate the changes will mean the Government will receive an additional $50 million of revenue per year.
“There is a risk that foreign companies investing in New Zealand will view the proposals as complex and onerous, incentivising them to remove their existing personnel from New Zealand or to cease operating in New Zealand altogether. However, most of the affected foreign companies are dependent on having personnel in New Zealand to arrange their sales. Without personnel on the ground, they would not be able to service their New Zealand market. It is also unlikely that they would cease to operate in New Zealand altogether.”
Inland Revenue is aware of about 16 cases involved in these types of Base Erosion and Profit Shifting (BEPS) arrangements which are currently under audit that collectively involve about $100 million per year of disputed tax. While there are only 20 New Zealand-owned multinationals earning over the threshold for some of the main proposals (over EUR €750 million of consolidated global revenue), the European Union (EU) has estimated that there may be up to 6,000 multinationals globally
It is not known how many of these global multinationals operate in New Zealand.
The 16 cases “show our existing rules are vulnerable and Inland Revenue considers that the use of avoidance arrangements will increase if the weaknesses in the current rules are not addressed. Furthermore, as New Zealand endorses the Organisation for Economic Co-operation and Development’s Action Plan on Base Erosion and Profit Shifting (BEPS Action Plan), there is an expectation that we will take action against BEPS and implement a number of the OECD’s recommendations,” officials said.
The proposed
measures in this Bill will prevent multinationals from
using:
• artificially high interest rates on loans from
related parties to shift profits out of New Zealand
(interest limitation rules);
• artificial arrangements
to avoid having a taxable presence (a permanent
establishment) in New Zealand;
• transfer pricing
payments to shift profits into their offshore group members
in a manner that does not reflect the actual economic
activities undertaken in New Zealand and offshore;
and
• hybrid and branch mismatches that exploit
differences between countries’ tax rules to achieve an
advantageous tax position.
The Bill says multi-nationals maybe using non-commercial terms for related party loans, as an interest payment from a New Zealand subsidiary to a multinational parent is not a true expense from the perspective of the multinational’s shareholders. Indeed, it can be profitable to try to increase the interest rate on related-party debt—for example, to shift profits out of New Zealand into a low tax country. This is because the interest paid to the parent is deductible to the subsidiary, thereby reducing its taxable income in New Zealand.
There
are 2 main ways to push up the interest rate charged on
related party debt:
• First, the foreign parent can
excessively debt fund the New Zealand subsidiary, to depress
the subsidiary’s credit rating and make it look riskier as
an investment, and therefore justify a higher interest
rate.
• Second, a foreign parent can add terms and
conditions into the debt instrument itself to justify a
higher interest rate. For example, it can subordinate the
debt or make the debt have a long duration—both of which
would increase the interest rate compared to if they were
dealing with each other at arms’ length.
To address
profit-shifting, the Bill proposes new rules which will
limit the interest rate on related party debt. It does this
by setting specific rules and parameters
to:
• establish the credit rating of the New Zealand
borrower; and
• determine (in combination with the
credit rating rule) the amount of interest on the
debt.
Another problem is some multinationals can structure their operations so their New Zealand sales and associated profits are booked in an offshore entity which under current rules is not considered to have a permanent establishment in New Zealand, even though, in substance, the sales are generated by New Zealand-based salespeople. As a consequence, New Zealand is unable to apply income tax to the multinational’s New Zealand sales.
The Bill proposes
new anti-avoidance rules that will deem a multinational to
have a permanent establishment in New Zealand if:
• the
non-resident supplies goods or services to a person in New
Zealand;
• the non-resident is part of a multinational
group that is required to file Country-by-Country reports
(i.e. the multinational group has more than EUR €750m of
consolidated global turnover);
• the arrangement has a
more than merely incidental purpose of tax
avoidance.
Australia and the UK have already implemented
similar permanent establishment avoidance rules in their
domestic law
The Bill also proposes strengthening
Inland Revenue’s powers to investigate large
multinationals (with at least EUR €750m of global
revenues) that do not cooperate with a tax investigation.
This will allow Inland Revenue to:
• collect any tax
owed by a member of a large multinational group from any
wholly-owned group member, provided the non-resident fails
to pay the tax itself;
• request information held
offshore by another group member of the large multinational
group;
• impose a new civil penalty of up to $100,000
for large multinational groups which fail to provide
requested information (which replaces the current $12,000
maximum criminal
penalty).
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