Will a critical mass be reached?
While there appears to be sustained consensus amongst OECD countries and support from the current US administration for the Pillar Two proposals, the publicly announced implementation timeframes are ambitious and it currently seems unlikely that countries will be able to adopt the rules to be effective from 2023 as originally proposed.
It is unclear whether EU will reach political agreement on the draft text for an EU Minimum Tax Directive intended to incorporate the Pillar Two rules into EU law.
It is also uncertain whether domestic implementation will pass through the US Congress. On the other hand, the prospect of a proliferation of unilateral digital service taxes being implemented by individual countries may provide sufficient impetus to reach an international consensus, particularly for the US which has a number of tech companies that would be impacted.
Impact for New Zealand
Inland Revenue estimates that out of approximately 1,500 multinational groups that will be within scope of the proposed rules, only 20 to 25 are headquartered in New Zealand.
Practically, we expect that implementing Pillar Two is unlikely to raise significant extra tax revenue for the Government; but it will impose significant compliance costs and added complexity to the international tax rules. However, a key reason for New Zealand to implement the rules is to ensure no New Zealand tax is left on the table i.e. to prevent other countries from taxing New Zealand headquartered multinationals under their own GloBE rules. Further, the Government may see that adopting the rules will signal New Zealand is serious about its role as a “good global citizen” and is addressing concerns that multinationals are not paying a “fair share” of tax.
The New Zealand Government has clearly signalled its preference is to work with the OECD to reach a global solution to concerns about the taxation of multinationals. However, officials have noted that a digital services tax may be back on the agenda if consensus cannot ultimately be reached on the implementation of Pillars One and Two.
For multinationals operating in New Zealand, while the proposed 15% minimum rate may seem low relative to New Zealand’s 28% corporate tax rate, the income on which the tax is calculated differs from the taxable income determined for domestic purposes. This may lead to some unexpected results. Further, if other countries decide to adopt a domestic minimum top-up tax, this may mean New Zealand headquartered multinationals doing business in those countries may end up paying more tax in those countries.
Given the ambitious timeframes and the complexity of the proposed rules, we recommend that in-scope multinational groups operating in New Zealand consider how these rules could impact them. If you would like to discuss this further, please reach out to your usual tax advisor.