NZ may be in for a fight against multinational tax dodgers as new global tax treaty begins to bite.

A leading tax expert believes it will not be easy for New Zealand to take on giant multinational companies to haul in hundreds of millions of dollars of unpaid corporate tax - even with the backing of a new global treaty.

Iain Craig, head of tax for BDO, the business advisory and accountancy firm, says the gross revenue of many multinationals - like Apple or Google - is probably greater than the gross domestic product (GDP) of the entire New Zealand economy.

"New Zealand is too small to make a difference to companies like these; they don't make a lot of money out of our market," he says, "so will Inland Revenue (IRD) take them on?"

Craig says the international treaty, designed to fight tax evasion by multinational corporations (MNCs) and which has been signed by New Zealand, has given IRD an incentive to pursue corporate giants more aggressively.


He says the intention of the treaty is not to attack New Zealand subsidiaries of MNCs (who because of the size of our market simply don't make enough money), but to counter aggressive tax practices.

"Traditionally IRD has taken an educational rather than confrontational approach to encourage compliance with international tax and transfer pricing ; will they now be more adversarial?" he says. "These cases can be difficult to prove and will be hard for the IRD to fight if an MNC wants to defend its position."

He says an argument before the courts in Europe in which Apple is appealing a decision by the European Commission it must pay the Irish government 13b Euros ($NZ21.5b) in unpaid tax is an example. The appeal - which the Irish government is understood to be supporting - will be heard by the European Court of Justice and is expected to take up to four years to be resolved.

New Zealand is among countries who have signed the Organisation for Economic Cooperation and Development (OECD) tax treaty on tax evasion - or base erosion and profit sharing (BEPS).

It follows calls for a worldwide crackdown on the problem after companies like Google, Facebook and Apple were criticised for booking profits in low-tax jurisdictions.

Revenue Minister Judith Collins expects up to $200 million of additional tax revenue to be raised as a result, although she believes loopholes in the system means New Zealand is missing out on up to $300 million a year.

But Craig says while some MNCs don't pay their fair share of tax, his gut feeling is the problem has been overstated: "Our legislation is good, we have a relatively low tax rate and I believe we have better compliance (MNCs meeting their tax obligations) than is generally perceived.

"The treaty has created a lot of noise around the issue and I have seen figures for unpaid corporate tax ranging from $200m to $900m," he says. "I struggle to know where these figures come from and is IRD going to just go and pick a number to try and meet the target expectations? Of course they can't do that and nor would we expect them to."

"They are relatively small amounts in the overall scheme of things (last year the government received $12.5b in company tax), and BEPS is about a tweaking of our existing and well designed tax rules; hopefully we have got the balance right without reducing the attractiveness of New Zealand as a place to invest and do business."

Craig is also concerned the treaty will hit New Zealand companies, particularly technology-based digitals trying to set up overseas, with increased costs for filling out paperwork - effectively "money down the drain."

"The impact this has on New Zealand companies with global ambitions will be the real drama around BEPS," he says. "Countries party to BEPS will become more compliance oriented which I think will impact all companies, even those who play by the rules."

Although the measures are designed to enable participating countries to strengthen their laws and work together to combat tax evasion, Craig believes they will suck money out of smaller companies, like start-up digitals, disproportionate to the level of their projected income.

"For a company trying to set up in the United States or Australia with, for example, turnover of between $5m - $15m, the risks are higher because costs in those countries cannot be offset against profit in New Zealand," he says. "It isn't cheap to do business overseas."

Craig says he would like to see the IRD help New Zealand companies in dealing with overseas revenue authorities: "This would make it easier for those technology companies which are too small to be able to invest significantly in transfer pricing studies but are still caught by overseas compliance requirements being driven by the BEPS mania."

The issue has been in focus in recent years. A New Zealand Herald investigation last year found 20 large multinational companies with combined revenues of $10b had paid just $1.8m in corporate tax while a 2013 OECD report highlighted aggressive tax practices used by MNCs to exploit gaps in domestic tax rules to avoid paying tax.

The treaty - known as the Multilateral Instrument - allows a worldwide network of several thousand tax treaties to be quickly updated to meet the recommendations of the BEPS action plan. New Zealand signed the treaty in June and its measures are expected to be passed into law here next year.

Read BDO's white paper: BEPS - What you Need to Know