Taxation of Multinational Companies: Report Issued by Inland Revenue
There has been considerable media coverage and debate in New Zealand and around the world recently in relation to the level of taxation paid by multinational companies. A lot of this coverage has been hyped and has oversimplified the discussion in what is a very complex area of taxation. It is very easy for the media to spotlight the low levels of taxation paid by multinational companies, such as Starbucks, Facebook and Google, quite often without acknowledging the complete facts or circumstances of these corporations, or addressing the legality of their structures. In reality, there is unlikely to be enough public information available about these companies and their corporate structures and policies to make an informed comment on the appropriateness of the level of taxation that they pay.
What is widely known is that existing domestic international tax rules and double tax treaties were created in the world of bricks-and-mortar businesses and not in the new world of ecommerce and technology companies. The way in which multinational companies do business has changed, and the stark reality is that international tax rules have not been able to keep pace with such changes.
On 19 December 2012, the Policy Advice Division of Inland Revenue released a report titled “Taxation of Multinational Companies”, to explain these concerns and how New Zealand and other countries are responding. The report also provides a brief summary of New Zealand’s existing rules for ensuring multinationals are taxed on activities that they perform in New Zealand.
The report is useful reading for people interested in understanding the issues associated with how multinationals are taxed. What is important to understand upfront is that this is not a problem that New Zealand or any one country can address on its own and this is highlighted in the report which notes that it is a “global problem which requires a global response, which New Zealand will be actively involved in.” In this respect, the report explains that the OECD is currently developing a tax base erosion and profit shifting (“BEPS”) initiative to address the issue. A progress report will be issued by the OECD in early 2013 on actions to tackle the issue of BEPS, including strategies to detect and respond to aggressive tax planning and ensure better tax compliance. It will include discussion on whether taxation rules developed in the past are still appropriate in today’s business environment, as well as present options to implement reform in a streamlined manner.
The report also highlights initiatives undertaken by a number of other countries around the world, including in Australia where the Australian Government has directed Treasury to develop a scoping paper that will set out the risks to the sustainability of Australia’s corporate tax base from multinational tax minimisation strategies and to identify potential responses. Australia is also currently updating its transfer pricing and general anti-avoidance rules to address some problematic court decisions. Annex 1 and Annex 2 to the report sets out the background to the OECD work on BEPS and Australia’s domestic law reforms, respectively.
Officials make three recommendations in the report in relation to how New Zealand should respond to the issue. They are:
- Identifying and addressing gaps in New Zealand’s own base protection rules that apply to non-resident investment into New Zealand.
- Promoting best practice for residence taxation by all countries under their domestic law.
- Participating in work to update and improve the international tax framework that is reflected in the OECD Model Tax Convention and other areas.
Annex 3 of the report provides a summary of the existing measures used by New Zealand to ensure that multinationals are taxed on activities that they perform in New Zealand, including transfer pricing rules, thin capitalisation rules, broader permanent establishment rules in tax treaties, withholding tax, exchanging information with other tax authorities, and the general anti-avoidance rule. The Annex also highlights a number of gaps in New Zealand’s international tax rules which will look to be addressed in the future. For example, the report highlights some current gaps in New Zealand’s thin capitalisation rules. An issues paper on reforms to the New Zealand thin capitalisation regime was subsequently released on 14 January 2013.
The report notes that officials will report back on developments in March 2013, which will include further information on the OECD BEPS project, after the OECD’s initial analysis is published in February 2013.
It will be very interesting to see where the OECD BEPS project will lead. One thing which is clear, is that these issues fall into a very complex area of international taxation and will require an international solution, which unfortunately is unlikely to be simple or fast.
Tax Alert February 2013 contents
- Tax Alert - February 2013
- Fundamental changes proposed to thin capitalisation rules
- GST remedial issues paper released for comment
- Inland Revenue update New Zealand tax residency rules
- Purchases denominated in foreign currency – proposed tax reforms announced
- Japan and New Zealand sign new double tax agreement
- Taxation of Multinational Companies: Report Issued by Inland Revenue