COMMENT: From next week, multinationals will find it harder to avoid paying their fair share of tax while doing business in New Zealand.
There could be further measures coming up — and it's not one day too soon.
The new measures were flagged late last year, and this week the Taxation (Neutralising Base Erosion and Profit Shifting) Bill passed its third reading in Parliament.
Revenue minister Stuart Nash said "the legislation will ensure that multinationals pay tax based on the actual economic activity they carry out in New Zealand" from July 1 this year.
That massive multinationals such as Google and Facebook pay little tax in New Zealand, despite their high revenues, has been a thorn in the side of officials for the past few years.
The tactics are known by the acronym BEPS and large companies with offices in many countries funnel money earned from sales to places with low corporate taxes such as Ireland and Singapore.
Such profit shifting is not available to individual taxpayers or smaller companies, and Nash said BEPS strategies "distort investment and threaten the integrity of tax systems all over the world."
It also means the Government loses out on significant tax revenue.
The new anti-BEPS measures are estimated to bring in up to $200 million in tax revenue every year, Nash said.
A Herald investigation in 2016 revealed a list of 20 companies engaged in aggressive but legal shifting of profits out of the country and found that they paid only $1.8m in income tax on revenues of nearly $10b.
Google and Facebook reported revenues of $1.2m and $14m respectively, and paid just $43,261 and $361,542 in income taxes.
This was despite industry sources estimating the internet giants' actual revenues at somewhere around $400m and $100m respectively from New Zealand clients, in an advertising market worth over $800m.
Sensing the direction the wind was blowing, Google decided in February this year to stop sending revenue earned in New Zealand to low tax jurisdictions such as Singapore.
Facebook intends to do the same, hoping to be ready to book local revenue locally for all its worldwide offices by the first half of 2019.
The new anti-BEPS law implements five new measures, including banning artificially high interest rates on loans and other transactions from parties related to the companies doing business in New Zealand, so as to shift money out of the country.
Multinationals will no longer be allowed to hide information in their offshore companies to hinder IRD investigations, and if they're doing business here, well, they need to have a presence in New Zealand for tax purposes.
The new legislation is a welcome first step, but it is one that should've been taken some years ago.
To be fair to the Government, it couldn't have done this on its own. It had to work together with other countries in the Organisation for Economic Co-Operation and Development (OECD) and the G20 nations to hammer out a coherent anti-BEPS strategy.
Depending on how successful the new anti-BEPS law is, the IRD could claw back more in income tax from the big internet multinationals in the future.
A mere $200m on $10b in revenues seems a low target, so watch this space.