Matt Nippert is a business investigations reporter.

Government planning action to target multinationals over tax

The moves stop short of a full-scale diverted profits tax. Photo / Greg Bowker
The moves stop short of a full-scale diverted profits tax. Photo / Greg Bowker

The Government is planning unilateral action to crack down on tax dodging by multinational companies, including changing the law, amid growing concern about fairness.

Revenue Minister Michael Woodhouse said proposals outlined in a cabinet discussion document tabled last month would see Inland Revenue properly armed to tackle the problem and could be accompanied by increased enforcement funding for the taxation authority.

"They are policy and legal bullets - and there may also be resource bullets. We're constantly having that conversation," Woodhouse said.

Click through to explore how multinational companies pay no tax in NZ

The proposals include granting broader information-gathering powers to Inland Revenue investigators, shifting the burden of proof to multinational companies in disputes over transfer pricing, and tightening loopholes that allow companies to claim they have no taxable presence in New Zealand.

The moves stop short of a full-scale diverted profits tax, as introduced by Australia and the United Kingdom, but Woodhouse refused to rule out such a measure if this new package failed to achieve results.

"If we continue to get aggressive tax planning and tax arbitrage I won't rule out - I wouldn't call it the nuclear option, but the stronger option - a diverted profits tax," Woodhouse said.

The paper lays out challenges faced by IRD dealing with multinationals over tax issues, especially "a minority that engage in aggressive tax practices" complicated by "difficulties Inland Revenue faces in obtaining the relevant information".

The measures are intended to both tackle sharp tax practice - and have a positive, but as-yet unquantified effect on the government's tax take - as well as answer public concerns about tax fairness.

Deborah Russell, a senior lecturer in tax at Massey University, said the breadth of changes proposed by the discussion document represented a change in government thinking.

"I'm quite surprised by it. To me it's being driven by public opinion and it's now a rising question around the world," she said.

PwC tax leader Geof Nightingale agreed the measures was an about-face by government.

"It's a shift in policy, and I don't think it's subtle. It's a reasonable shift," Nightingale said.

To date the government had expressed a preference to tackling the issue of cross-border corporate tax avoidance multilaterally, but the cabinet document signals the intent for unilateral action.

Revenue Minister Michael Woodhouse. Photo / Mark Mitchell
Revenue Minister Michael Woodhouse. Photo / Mark Mitchell

New Zealand is a participant in the long-running Base Erosion and Profit Shifting project run by the Organisation for Economic Co-operation and Development, and its suite of reforms will be rolled out in parallel with these new unilateral initiatives.

The first time the possibility of such unilateral action was raised was by former Prime Minister John Key in March in the aftermath of the launch of the Herald's tax gap series.

Nightingale, who advises multinational companies on tax structuring, said the proposals may be an over-reaction.

"While I agree there are some specific issues - they talk about a minority - where there's a leakage, I don't think it's an across-the-board issue," he said.

The discussion document notes its package of policies would be unlikely to affect companies without a material local presence who have attracted recent headlines, an oblique reference to high-profile internet-based firms.

Woodhouse said controversy over the tax arrangement of multinational companies was likely to continue, as he was concerned that moving imprudently could cause unintended consequences.

"If we start playing silly games with this stuff and over-reach in our attempts to claw back from multinational companies, Fonterra may be subject to the same thing," he said.

Woodhouse said the package was unlikely to be the final word on the subject of corporate tax avoidance.

"I don't think we're going to stop playing whack-a-mole anytime soon," he said.
A formal paper on the policy changes is expected to be published for consultation in February, with cabinet making a formal decision on the proposals later in the year.

- NZ Herald

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