Proposed new rules concerning international tax will increase information sharing between tax authorities and add to the growing compliance burden on multinationals. Although the proposed information sharing and documentation requirements could limit the opportunity for multinationals to shift profit from high tax countries such as New Zealand to low tax or no tax countries, this broad brush information exchange may result in less tax being paid in New Zealand.
In its march to combat profit shifting by multinational companies, the latest OECD discussion paper on the taxation of multinationals is set to boost the information gathering powers of tax authorities around the world.
New transfer pricing documentation requirements and country-by-country reporting will force multinationals to cough up much more information on the size of their operations, the profits earned, taxes paid, and where those taxes are paid.
Crucially, they will have to provide information on their worldwide group in every country in which they operate.
Under the proposals, Inland Revenue will have to share detailed information collected from NZ-based multinationals with foreign tax authorities. Aggressive foreign tax authorities may use the country-by-country information to claim more of the global tax revenue at the expense of countries such as New Zealand. We are already witnessing such a trend beginning to emerge in Australia which has vastly increased the amount of information multinationals are required to disclose with their tax return.
A major part of the New Zealand economy is represented by multinationals exporting goods and services through affiliate companies based in key foreign markets. If those foreign markets have an aggressive tax authority, there is a high risk that the affiliate company will be audited and asked to pay more tax. As such, these New Zealand-based multinationals may then seek to manage the risk of dealing with complex and drawn out audits in foreign countries by leaving more profit offshore to be taxed there instead of New Zealand. This will result in less tax being paid in New Zealand.
A likely response will be that moderate and principled tax authorities, such as Inland Revenue, will be forced to clamp down and potentially adopt extreme views when applying the current law. The New Zealand public may lose confidence in the tax system if no action is taken and multinationals are seen as not paying their fair share of tax here.
New Zealand-based multinationals need to heed these warnings and ensure Inland Revenue are aware of any concerns. Inland Revenue is representing New Zealand on the OECD committees finalising these proposals. It is essential it presents a view that reflects the interests of New Zealand business and taxpayers more generally. There is a lot at stake.
Diana Maitland is a tax partner and National Leader of Transfer Pricing at Deloitte.