Multinational companies are not ripping off New Zealand through excessive levels of interest-bearing debt.

That's the conclusion from EY's research on the debt-levels of multinationals operating here.

Most recent anti-business tax commentary has been overhyped. We agree with recent calls for the business community to break its silence and speak up in its own interest.

Using publicly available information, we've reviewed the debt levels of 108 foreign-owned companies and, for comparison, 45 widely-traded New Zealand-headquartered companies listed on the S&P/NZX-50.


For each company, we've taken data from the latest available accounts. We conclude that overall debt levels are relatively modest and multinationals are not significantly indebted when compared to New Zealand-based companies.

This country already has tough rules to combat excessive debt gearing. These limit the amount of tax-deductible interest where a foreign-owned NZ operation is financed with more than 60 per cent debt.

Our research shows:

- Most foreign multinationals stay well within the 60 per cent limit: the average debt finance for an inbound multinational here is only 20 per cent.

- There is no significant difference between multinationals and New Zealand-headquartered companies: the NZX-50 average is also 20 per cent.

We've excluded banks and insurers from our sample. This is a unique sector, operating on the basis of debt in and debt out, like ordinary inventory.

These figures reflect commercial reality. A 60 per cent debt/equity limit is a fair commercial level for a broad-brush tax rule. Corporate balance sheets now reflect the lessons learned from the Global Financial Crisis not to over-leverage.

We're coming forward now as we're worried that Revenue Minister Michael Woodhouse could see dollar signs.


He told Parliament's Finance and Expenditure Committee the New Zealand Government will "probably be net beneficiaries" when the tax rules applying to multinational companies are reformed.

In addition, a recent release of a raft of government papers on taxing inbound investments signals moves on "strengthening the interest limitation rules, which will further limit the ability of multinationals to strip profits out of New Zealand through excessive interest payments".

This indicates Woodhouse has debt levels and interest deductions claimed by multinationals in his sights.

Ammunition for his quest to further limit New Zealand debt levels of multinationals exists out of the OECD's long-running base erosion and profit shifting (BEPS) campaign against multinational tax avoidance.

This suggests a new approach to denying interest deductions, based on limiting the amount deducted to a fraction of the company earnings.

The OECD suggests this alternative test should restrict interest deductions to amounts somewhere between 10 to 30 per cent of a company's earnings.

Woodhouse must currently be running the numbers for an OECD-style test. The June 27 papers reveal we can expect interest and debt limitation proposals to emerge by September this year. These proposals will potentially have a real impact on business.

But perhaps not the one he expects.

We ran our version of an earnings based test across both the New Zealand and multinational company samples. We don't see big dollars in it for the Minister.

For our foreign multinationals 108 strong sample, the average proportion of interest to earnings is currently 17 per cent.

For New Zealand headquartered-companies, the average drops to 14 per

Of course, averages can be deceptive. And perils exist with any earnings-based limitation that can be highly uncertain in its application.

Business profits fluctuate from year-to-year, especially if you're a price taker in a gyrating commodities market, subject also to foreign exchange risk.

If the government were to set a tough 10 perc ent interest to earnings limit, there's no doubt many multinational subsidiaries here would be forced to overhaul their existing arrangements - possibly inject more equity, possibly change interest rates, but also seek to stretch earnings and generate sufficient income here to meet the new test.

Added to this is the potential adversity for the country as a whole if additional debt restriction rules have a curtailing effect on attracting foreign investment.

As an economy, New Zealand is a capital importer, unlike larger other OECD countries, and this is an important bias that demands careful consideration in flexing our regulatory environment.

Imposing stricter tax rules on how foreign investment capital is treated has attendant risks for how we compete for global capital looking for a home.

Pleasingly, it seems tax policy strategists at Treasury and Inland Revenue also regard this as an important consideration here.

They say "New Zealand relies heavily on inbound investment to fund its capital stock. Taxes can have important effects on the incentives for non-residents to invest in, or lend money to, New Zealand".

Anyone familiar with international tax knows simple- sounding rules become complex extremely quickly. We think if Woodhouse seeks to add an another OECD-style restriction on interest deductibility, the compliance costs risk being out of proportion to the gains for the government.

But these decisions aren't always made on efficiency alone. The government has supported the OECD's corporate tax crackdown thus far and, with this pressure, will need to be seen to act, justified or not.

IRD and Treasury's recent paper concludes New Zealand's response to BEPS may mean cooperating with other countries to achieve a more efficient worldwide outcome.

Our research challenges the Government to justify there's a real problem in New Zealand before moving to a complex, ineffective, rule which will just add bulk to the statute book for no real purpose.

*Andy Archer is an international tax partner at EY and David Snell is an EY executive director, specialising in tax policy issues.