Catch the Foreign Corporate Tax Cheats, Ignore their ‘Tax Structuring’ Advisers
Apparently the Government is set to move unilaterally in the New Year on tax dodging by foreign corporates operating in New Zealand. This would follow unilateral action by both the UK and Australia and would pre-empt the glacially moving efforts of the OECD to achieve a multilateral approach. With Donald Trump in the White House anything could happen to that exercise in global cooperation.
It’s good that New Zealand is going to move. The approaches mooted do not extend to a diverted profits tax, which is the mechanism Australia and the UK have adopted. That is also good because a diverted profits tax could well end up being a slap with a wet bus ticket as these corporates and their ‘tax structuring advisers’ (aka ‘dodging specialists’) work out ways to arbitrage the boundary.
The approach I prefer – as written up in a paper I did on this while at the Morgan Foundation and covered in this blog is putting the onus of proof on the corporate to prove their ‘deductibles’ are arms length, commercially validated transactions. Anyone who read our TOP Policy #1 would have noted that we were planning to launch this as TOP policy next week, but given this announcement we will wait to see the detail of the Government’ s plans.
How does this corporate accounting trick work? The classic of the local Cola outfit paying out all its profits in the form of a fee for its magic secret formula to Cola Ireland is a good example. That way Cola NZ has zero profits while Cola Ireland – where the tax rates are lower - books all the profits. Ka-ching!
Under what we propose (and hopefully the Government’s plans reflect), this type of arrangement would need to be validated as reasonable and not a mere device to shift profits between related companies. This approach of no expenses deductible unless validated, to me is the only way to plug the loophole of transfer pricing and thin capitalisation.
At TOP we will push this aggressively – I hope the National government is equally enthused, not just reluctantly stepping up because of public pressure. These are well recognised loopholes and there is no way I’d believe any utterance from tax advisers that they are not – that would be like believing the poacher has days when he’s gatekeeper. The conflict these professional dodging consultants have is total.
Another area TOP is keen to see taxation rules tightened is around charities – especially churches that collect more than they spend on pastoral care and relief work. That however will require a review of the Charities Act – well overdue.
It all comes back to this basic principle – the tax burden must be fair, there cannot be one rule for some and another for those who have the ear of government. Roger Douglas made big steps to address it but didn’t finish the job and subsequent governments have not been sufficiently active. With a fair New Zealand we can build prosperity for all and most importantly avoid prosperity for some – at the direct expense of others.
Some ask why does fairness matter so much? To them I just need to point to Trump, Brexit and the tide of Nationalism sweeping Europe to illustrate the political instability that unfairness leads to. But there’s far more to be gained from making fairness a policy priority. For instance we’d need far less taxpayers’ money for spending on social dysfunction like crime, poverty etc; capital would be deployed where the next best economic return is not where the biggest tax loophole is.
In other words fairness and prosperity go together, they are soulmates. Recognising this serves one’s pure self interest, as much as it might be any moral priority. Closing off tax loopholes is just part of achieving this ideal duo.
Ian Orchard commented 2016-12-16 06:14:58 +1300Tim: you’re right, something is better than nothing, but I’m concerned that TT distorts in favour of Megacorp, driving the market in the wrong direction. It’s unfortunate that economies of scale (for e.g.) make it harder for the little guys to compete, they are where the jobs are. We should ensure that taxation encourages what we want and discourages what we don’t want. Another example: should a robot have to pay income tax? The human(s) it replaces did!
Tim O’Donnell commented 2016-12-15 22:24:43 +1300Ian: A single tax taken from these Megacorps is better than the 0% they pay now. I’ll take something over nothing every time
Steve Cox commented 2016-12-15 19:37:21 +1300“… validated as reasonable and not a mere device to shift profits between related companies”.
I’m with you on this Gareth. The challenge is coming up with a method that works across the board without creating loopholes of it’s own. The circumstances for Cola may not line up with Apple or Facebook or …
I would probably start with putting the onus on the multinational to make a statutory declaration that the accounting methods they use in NZ are consistent with their overseas methods. Using your Cola as an example. Does Cola USA pay a fee to Cola Ireland for it’s magic secret formula? If not then what is so different about the Irish formula that NZ pays them instead of the USA formula. Where is that concentrated formula produced and shipped from? I bet its not Ireland. And is the fee NZ pays commensurate with the fee paid by other countries based on a per litre amount.
Who and how should they be held accountable? Could IRD seek the extradition of the CEO of Cola USA because our legislation allows for criminal prosecution and imprisonment?
Or at the other end of the scale will we go our usual wimpish way and have a maximum fine of $20,000.
Close on 100% of multinationals would not withdraw from NZ if the rules were toughened up on them. Receiving 72% of their NZ profit instead of 95% is still more than nothing.
Richard Renai commented 2016-12-15 18:00:05 +1300Just noting the comment from Paul Robinson about “Having wealthy people pay a greater share of tax is not fair, but it does work,-…..”. My question is, are you really asking the wealthy to pay a bigger percentage of their real income, or just to pay what the lower paid have to currently pay because they don’t have the means to avoid as the wealthy do?
Kate Tyson followed this page 2016-12-15 17:23:53 +1300
Ian Orchard commented 2016-12-15 12:42:45 +1300Tim: I’ve had sympathy for a Transaction/Turnover tax (simple, cheap to implement, can be too low a % to be worth evading) but it has one glaring loophole, it favours the big corporates. For e.g. a forester fells and sells a tree to a timber merchant, who sells it to a joiner who makes a bookcase, selling it to a wholesaler, then on the the retailer and the consumer. Each time a few % is skimmed off, adding up for the Gummint. BUT if MegaCorp owns the forest right through to the retail outlet, the taxman only gets one suck of the sav and all those individual competing companies are at a disadvantage.
Carolyn Eichler commented 2016-12-15 09:46:33 +1300Try and cut a companies profit and they will make adjustments elsewhere, most likely at the expense of Kiwis who work for them. Robots don’t get taxed PAYE remember. rip average Kiwi worker,
Paul Robinson commented 2016-12-15 09:13:03 +1300I agree with tightening up on interrnational related party transactions. But I wouldn’t push the “fairness” boat too far out. Having wealthy people pay a greater share of tax is not fair, but it does work, – it does help bind us together as a society. You can’t eat fairness – well, not for main course anyway!
Oliver Krollmann followed this page 2016-12-14 22:40:13 +1300
Tim O’Donnell commented 2016-12-14 22:02:53 +1300I’m all for closing loopholes
Tim O’Donnell commented 2016-12-14 22:01:39 +1300It would be good to hear your views on the below thread. Why wouldn’t it work? : http://www.top.org.nz/63114/a_simple_transactional_tax_that_can_t_be_avoided_or_claimed_back
Michael Robinson commented 2016-12-14 20:41:23 +1300I like what I’m reading . Is this an actual policy that will be put in place by TOP or just a theory that may or may not happen if the TOP party does become the Govt.