A fifth of New Zealand's companies could be liable for a total of $86.7 million in extra annual tax charges. Photo / File
A proposal to close international tax loopholes has mobilised opposition from large taxpayers, who bristle at potentially being stung with tens of millions of dollars in extra tax bills.
A Herald analysis of a Organisation for Economic Co-operation and Development recommendation to limit tax deductions from interest charges has found that a fifth of New Zealand's 100 largest companies could be caught out and liable for a total of $86.7 million in extra annual tax charges.
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The long-running Base Erosion and Profit-Shifting (BEPS) working group of the OECD last year proposed that members should clamp down on the use of debt loading to artificially suppress reported profits and taxes, by imposing a limit on interest deductions.
Interest costs are treated as an accounting expense. These are deducted from profits, on which taxes are then levied. Under the proposal, those deductions would be limited to 30 per cent of a company's ebitda - its earnings before interest, tax, depreciation and amortisation.
The Herald analysis looked at New Zealand's 100 largest companies - those with annual revenue above $323m - matching ebitda data calculated by advisory firm Deloitte for its 2015 top 200 listing, with data on net interest costs culled from reading dozens of annual reports and financial statements.
Eighteen companies were found to have an interest:ebitda ratio above 30 per cent.
These firms - ranging from oil companies, to co-operatives, to multinational food and electronics-makers - had average potential excess tax deductions of $4.8m.
A March briefing about multinational tax avoidance to Revenue Minister Michael Woodhouse, obtained under the Official Information Act, had Inland Revenue officials stating the "level of debt finance represents the biggest risk to NZ corporate tax base", and raising the OECD interest-deduction cap as a "likely" solution.
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Officials initially suggested legislation enabling the policy could be introduced to Parliament by the end of this year, but last month those moves were put on hold, with a paper now due to be circulated among taxpayers for consultation by the end of March.
The delay is being met with claims of foot-dragging by Opposition MPs, but has been welcomed by the industry it would potentially apply to.
Geoff Nightingale, a tax partner at PwC, said current policy in the area set deduction limits based on a company's equity, not its earnings, and while the proposal had been adopted in Europe and the United States, it wasn't necessarily the best option for New Zealand.
"It's right for us to be thinking about it, but I don't think New Zealand should act alone," he said, arguing we should wait and see whether Australia adopted the new regime.
If multinationals are paying more tax, that looks good for government ... but the question is: who bears the cost of this tax?
Nightingale cautioned the Government against acting imprudently, and said such moves risked discouraging foreign investment and raising the cost of capital and goods and services in New Zealand.
"If multinationals are paying more tax, that looks good for government ... but the question is: who bears the cost of this tax?" Nightingale said.
The proposed rules are intended to target interest payments and profits moving offshore, and typically do not apply to domestically-owned companies which borrow locally. But, according to a recent EY report on the issue, Britain's recent adoption of the OECD recommendation caused surprise by making no distinction between locally and foreign-owned firms.
Minister Woodhouse told the Herald the initial timeframe suggested by officials was overly ambitious and, given the general election next year, any finalised policy was now unlikely to see Parliament in 2017.
He said unscheduled work on regulating foreign trusts, triggered by the Panama Papers revelations, was one explanation why the issue had moved down the agenda. "It's an issue of the best laid plans, really. But it's definitely not dropping off the radar. It's more fitting in amongst the scrub."
Opposition MPs, by contrast, urged swift action by the Government to meet the international standard and restore tax fairness.
Green Party co-leader James Shaw said the delays made it seem that Inland Revenue had double standards in tax enforcement.
"What it looks like is the Government is sending in metaphorical SWAT teams to catch beneficiaries and student loan borrowers, while they're letting [large taxpayers] not pay millions of dollars in taxes, year after year," he said.
Labour finance spokesman Grant Robertson said Woodhouse "needs to decide whose side he's on. Is he on the side of working New Zealanders who pay their PAYE every week and do the right thing, or is he on the side of companies who seek to limit their tax paid in New Zealand?"
Woodhouse rejected this criticism and said the interest deduction cap was only one of several large projects being tackled by his Ministry. A wide range of other tools to tackle multinational tax avoidance - including a diverted profits tax - were also being mulled.
We want to ensure that multinationals are prevented from having excess debt levels and taking excessive interest deductions in New Zealand, while ensuring that New Zealand remains a good place to invest and do business.
He said the Herald analysis of the potential scope of the policy was a useful starting point, but it also illustrated shortfalls in using a crude measure.
"It highlights overcharging [of interest] on the face of it, but it also highlights how difficult it might be to set an ebitda rule that works fairly for all," Woodhouse said.
Woodhouse, cautious not to prejudice the upcoming discussion document, said the Herald's analysis of firms potentially over the limit was heavy with co-operatives and infrastructure companies (which respectively have lower earnings, or higher interest costs) and exemptions may be required for such sectors.
"I'm not ruling an ebitda measure out, but I am cautious about ruling it in as a straight limitation," he said.
Woodhouse's cautious approach was welcomed by John Payne, chairman of the Corporate Taxpayers Group, which represent large taxpayers.
Payne said the slate of taxation reform already being digested by the sector was significant, and while his members agreed with the BEPS process - "it's making sure that corporations are paying what they should in each country" - New Zealand needed no change from the status quo.
In a statement to the Herald, an Inland Revenue spokesperson said it was still committed to the BEPS process.
"We want to ensure that multinationals are prevented from having excess debt levels and taking excessive interest deductions in New Zealand, while ensuring that New Zealand remains a good place to invest and do business," the spokesperson said.
In response to Official Information Act (OIA) requests seeking reports and briefings on the proposal, Inland Revenue released only two pages of a single report, after identifying 10 such documents that fell within the scope of the request.
The remaining documents were withheld, with officials citing secrecy provisions in the Tax Administration Act. "A key consideration in this case is whether disclosure would have an adverse effect on the integrity of the tax system," the response to the OIA request said.
The Herald's findings broadly mirror the results of a July study by EY, although the Herald analysis allows identification of individual taxpayers exposed to such a policy, and an estimate of the potential costs. EY concluded that since the majority of taxpaying companies operated under the limit, no law changes were necessary.
The OECD proposal has received a mixed response from the academic community.
The OECD recommendations have been made for a reason and it does seem our thin capitalisation rules aren't stopping enormous interest deductions
Auckland University professor of tax law Craig Elliffe said he had reached the conclusion that our current regime was fit for purpose and the calculation of ebitda was open to manipulation for tax advantage.
Elliffe, who has previously spoken out about the extent of multinational tax avoidance and its challenge to New Zealand's tax base, said: "I don't think we should holus bolus adopt change which is very complicated, just to meet an OECD global imperative."
Massey University senior lecturer in taxation Deborah Russell took a contrary view and said it was important to hew to an international standard and the Herald analysis appeared to show abuse of current policy.
"The OECD recommendations have been made for a reason and it does seem our thin capitalisation rules aren't stopping enormous interest deductions," she said.
The debate over tax and interest deductions is just one front in a wider battle being waged by governments, against the growing threat to their tax bases from companies which shuffle money around the world in search of low - or no - taxes.
Action is being taken multilaterally through the OECD, but some governments are also taking unilateral action. Australia and Britain are imposing a diverted profits tax - popularly known as a "Google Tax" - to penalise companies which unfairly shift profits out of their country.
New Zealand is a participant in the OECD process, with the Government expressing strong support for this approach, but officials and ministers are also mulling unilateral action - including a Google Tax of our own - and are expected to announce their intentions in a policy paper early next year.
The subject is clearly at the forefront of Government minds, with both Prime Minister John Key and Commissioner of Inland Revenue Naomi Ferguson raising the issue publicly over the past fortnight.
Key cornered Facebook founder Mark Zuckerberg at the recent Apec summit in Lima, Peru, where he told reporters he raised the issue of tax.
"Everywhere you go, when there's a discussion about multinationals not paying their tax, people say 'Facebook'," Key told reporters as he described his discussions with the social-media billionaire.
"There could ultimately be consequences and they should deal with it," Key said of his advice to Zuckerberg.
And at an accounting conference in late November, commissioner Ferguson demanded the business community be more open about their tax arrangements.
"By being more transparent, we can help change the conversation on international tax affairs and rebuild the trust of the New Zealand public in our biggest corporates, especially the multinationals," she said.
Prospect of rivers of fresh tax revenues shrank, on reflection, to mere trickles.