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IRD auditing 16 multinational firms over $100 mln of tax avoidance

Monday 11th December 2017

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The Inland Revenue Department is auditing 16 multinational firms over their use of transfer pricing to trim their annual collective tax bill by about $100 million. 

Revenue Minister Stuart Nash last week introduced legislation targeting the shifting of profits from one jurisdiction to another, and the bill should get its first reading in Parliament tomorrow. The legislation was carried over from the previous administration as part of a global effort to clamp down on tax structures known as base erosion and profit shifting (BEPS) strategies. 

In a July regulatory impact statement specifically targeting BEPS strategies, IRD policy manager, policy and strategy Carmel Peters wrote that the tax department was "aware of about 16 cases of transfer pricing and PE (permanent establishment) avoidance currently under audit that collectively involve about $100 million per year of disputed tax."

The papers don't name any of the firms and IRD is gagged from discussing individual firm's practices by tax secrecy provisions, however the latest accounts from Microsoft New Zealand and Oracle New Zealand acknowledge audits over their respective use of transfer pricing. In Microsoft's case, its 2017 financial statements show the audit was extended from an initial review of June 2013 to June 2015 to include the June 2016 year, whereas Oracle didn't provide a timeline. 

Microsoft's accounts say its directors and legal advisers "believe the company has adequately assessed and provided for its tax position" although the final outcome "cannot be reliably estimated at this time", while Oracle's statements say the firm was "in discussions with the IRD in respect of historic treatment of transfer pricing" and that its directors believe "the current treatment of this matter is appropriate and in compliance with taxation laws". 

The IRD documents say proposed transfer pricing measures will only apply to multinational firms generating annual revenue of 750 million euro. The European Union estimates there are up to 6,000 of those firms worldwide, although it's unclear how many operate in New Zealand. 

The tax department estimates the transfer pricing changes will generate an extra $50 million of tax revenue per year, although it said that's a conservative projection. 

Other streams in the tax bill would restrict the allowable interest rate for tax purposes on related party loans and change the way deductible debt is calculated under thin capitalisation rules, which IRD projects could generate extra tax revenue of between $80 million and $90 million a year. The regulatory impact statement said while most multinational enterprises operating in New Zealand have relatively low levels of debt and don't typically have excessive interest rates on related party loans, a small number used those arrangements and caused a "significant" fiscal impact. 

The legislation will also address the use of hybrid instruments using debt and equity characteristics to create a mismatch across borders to reduce firm's global tax bill. IRD said it's aware of some mismatch arrangements, but "the full extent of the problem is unknown" because the benefit comes from taking advantage of different rules in different jurisdictions. Those changes are expected to generate an additional $50 million a year of tax revenue. 

The bill will also close a loophole using hybrid instruments and non-resident withholding tax (NRWT), which in certain circumstances would let a taxpayer claim interest deductions in New Zealand, without paying NRWT due to double tax agreements (DTAs) deeming the payments to be dividends. 

IRD had previously withheld NRWT on those payments until it was disputed, and the papers say Crown Law advice indicated "it may well decide the law does not permit NRWT to be withheld". The tax department estimates if the law stands it would put $60 million of previously paid tax at risk and an ongoing $15 million of annual tax revenue. 

The tax department and the Treasury didn't consult with the private sector on this part of the bill because it posed "a base maintenance risk" and publicising it could have encouraged the abuse of the loophole. The proposed rule would also apply retrospectively from April 1, 2008. 

"There may be some private sector concern about the amendment, given that it applies retrospectively and will be the third explicit override of our DTAs in recent years," the papers said. "However, we do not expect disagreement over the policy outcome." 


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