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.