IRD delayed multinational tax crackdown due to private sector, investment concerns

Wednesday 9th November 2016

New Zealand has delayed cracking down on multinational tax avoidance due to private sector concerns over timing and concerns 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 US$100 billion to US$240 billion a year, or between 4 percent and 10 percent of global corporate tax revenue.

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

The papers indicated that would happen this year and public consultation would finish in September, Robertson said, but public consultation is now due to happen early next year.

David Carrigan, the acting deputy commissioner for policy and strategy, said the IRD needed to do more work on the proposal and they hadn't wanted to overwhelm private sector stakeholders.

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

"We've released a very 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 was 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 advantages 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.

Robertson said New Zealand seems to be "dragging our feet and asking the turkeys to organise Christmas", but Carrigan assured him it was 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," Carrigan said.

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

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

"We have over many years shown our appetite to look at issues of international tax avoidance and tackle them operationally," Ferguson said. "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."

Carrigan said the UK had introduced diverted profit taxes, which the IRD was 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 said. "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.co.nz

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