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Taxation Neutralising Base Erosion and Profit Shifting Bill

Miscellaneous issues

Issue: The cumulative effect of and interaction of changes needs to be considered more

Submission

(PwC)

The cumulative effect of and practical impact that the proposed changes will have on taxpayers and existing law has not been properly thought through. More work is required from the Government to do this.

Comment

Officials consider that the cumulative effect of the proposed changes is to address the problem of BEPS. Officials at Inland Revenue and the Treasury have devoted significant time to developing the proposals and considering the likely technical and practical outcomes. More work will be done to ensure that guidance is provided so that taxpayers may understand and comply with the proposals.

Recommendation

That the submission be noted.

Issue: Proposals do not strike the right balance between compliance costs for businesses and Inland Revenue

Submission

(Corporate Taxpayers Group)

In the Group’s view, many of the changes proposed are being driven from a place of reducing compliance costs for Inland Revenue and increasing compliance costs for businesses operating here, and not from a “what is best policy” point of view. Fundamental changes to New Zealand’s tax system, such as those proposed in this Bill, should have a clear policy intent behind them and must be for the benefit of New Zealand as a whole.

Comment

The changes proposed in this Bill have been developed from the OECD BEPS recommendations through several rounds of consultation and tailored for the New Zealand environment. While these rules will necessarily increase compliance costs in certain circumstances the rules have been designed to minimise these to the extent possible, especially on taxpayers with less complex structures and those without arrangements entered into to achieve a tax advantage. The policy intent behind all of the proposals is to prevent multinationals benefiting from unintended competitive advantages over more compliant or domestic companies. To the extent the rules in this Bill encourage multinationals to adopt simpler structures, for example ordinary related-party debt instead of debt with equity-like features that makes it more difficult to price and be treated differently in different jurisdictions, many of the rules in this Bill will have little impact and will result in lower compliance costs.

Recommendation

That the submission be declined.

Issue: Engagement with the public before a Bill is introduced to Parliament

Submissions

(OliverShaw, Public Health Association of New Zealand)

Communication with the public on tax issues such as those at the heart of this Bill should be improved. Such communications should go beyond technical details (although of course these are vital and must be included) but also include broad contexts and policy options, neither of which are apparent in this Bill’s Regulatory Impact Statements. (Public Health Association of New Zealand)

The Bill is complex and the process under which it has been developed is not fully consistent with the Generic Tax Policy Process. Best practice for the development of tax policy requires complex tax legislation to be developed with input from the private sector so that at FEC technical issues are largely resolved. This enables policy issues to be considered at FEC and some fine tuning of drafting. This best practice has not been followed for all of the proposals in the Bill. There has not been enough time for all of the proposals to be understood. (OliverShaw)

Comment

Officials consider that context and broad policy options have previously been canvassed with the public in the form of the June 2016 Treasury/Inland Revenue document New Zealand’s framework for taxing inbound investment, as well as three Government discussion documents on the topics of the Bill (released in 2016 and 2017). Officials also consider that context and policy options for each part of the Bill were provided in the Bill’s Regulatory Impact Assessments as per the Treasury’s requirements.

Recommendation

That the submission be noted.

Issue: Start-ups should have a chance

Submission

(Bryce Jensen)

The tax system should allow new businesses to have a chance to grow.

Recommendation

That the submission be noted.

Issue: Paying a fair share of tax

Submission

(Bryce Jensen)

The submitter considers that the use of tax havens and other methods to avoid servicing tax obligations is not appropriate as it means others will disproportionately bear the burden of the tax.

Comment

Officials agree with the submitter and notes that the Bill is intended to ensure that tax obligations are shared more evenly between those who are able to use BEPS strategies to reduce their tax liabilities and those who are not.

Recommendation

That the submission be noted.

Issue: Human Rights should be considered

Submission

(Human Rights Commission)

The Committee should take account of human rights principles when considering the Bill. The measures in this Bill that address the substantial loss of corporate revenue through BEPS strategies will have a positive impact on human rights.

Comment

Officials consider that human rights principles are taken into account in all legislation passed by Parliament. Officials agree with the submitter that the measures in the Bill that will generate more revenue from multinationals carrying on BEPS activities will have a positive impact on human rights in New Zealand.

Recommendation

That the submission be noted.

Issue: The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) should be ratified

Submission

(Human Rights Commission)

The Commission recommends that the Government ratifies the MLI.

Comment

Adopting the MLI is a core part of New Zealand’s policy response to BEPS and the OECD’s recommendations.

As such, officials are currently progressing through the domestic entry into force procedures required before the MLI can be ratified. It is expected that this process will be completed later this year, with the MLI having effect for New Zealand from 2019.

Recommendation

That the submission be noted.

Issue: General determination making power

Submission

(Corporate Taxpayers Group)

A regulatory/determination making power should be introduced to ensure that legislation is applied consistently with the policy intent of the rules.

Comment

The Government has recently consulted on allowing such a power to exist with respect to the provisions of the tax law more generally (see Chapter 6 of the Government Discussion Document Making Tax Simpler: Proposals for Modernising the Tax Administration Act. That separate consultation and decision making process, which is currently on track to produce a policy decision in the near term, is the best forum to consider this kind of issue.

Recommendation

That the submission be declined in respect of this Bill.

Issue: Tax avoidance should be fraud and criminal

Submission

(Public Health Association of New Zealand)

Tax avoidance should be recognised as fraudulent and criminal, and strategies and penalties to combat tax avoidance should be adopted from New Zealand law relating to serious fraud.

Comment

Tax avoidance (as distinct from tax evasion) is undesirable, but cannot be criminally penalised. This is because it is difficult to know exactly where legitimate tax planning behaviour ends and where inappropriate tax avoidance behaviour starts. Judging the difference is usually a matter of interpretation of the relevant law by a taxpayer and Inland Revenue.

Tax evasion however, is a crime and a fraudulent act because it has involved some deceit by the taxpayer as to their circumstances.

An objective of this Bill is to introduce new international tax rules to make it more difficult for a taxpayer to successfully avoid tax through the use of particular BEPS strategies.

Recommendation

That the submission be declined.

Issue: Need a comprehensive statutory framework for combating tax avoidance

Submission

(Public Health Association of New Zealand)

New Zealand needs a comprehensive statutory framework for combating tax avoidance.

Comment

Inland Revenue treats inappropriate tax avoidance very seriously and devotes significant time and resources towards discovery of tax avoidance and disputes. New Zealand’s current statutory framework for combating income tax avoidance consists of a general anti-avoidance rule (GAAR), which has been used successfully in recent years to challenge complex tax avoidance arrangements, as well as a number of specific anti-avoidance rules interspersed throughout the Income Tax Act 2007. These rules are supplemented by Inland Revenue’s existing administrative powers which assist in information gathering and disputes.

The Bill upgrades New Zealand’s statutory framework for combating tax avoidance by proposing to introduce new international tax rules to make it more difficult for a taxpayer to successfully avoid tax through the use of particular BEPS strategies. In addition, the Bill proposes that some of Inland Revenue’s administrative powers are upgraded so that they may better assist Inland Revenue in its dealings with taxpayers that use BEPS strategies (including foreign-owned multinational groups).

Recommendation

That the submission be declined

Issue: The provision of advertising services and platforms should be tax neutral

Submission

(New Zealand Council of Trade Unions)

CTU is concerned that tax-avoidance by internet-based corporations puts local carriers of advertising (e.g. newspapers, broadcast television and radio) at a competitive disadvantage. The advertising revenue on which the conventional media depend is already undermined by new technologies and new forms of business. It makes it even more difficult if their competition can lower their costs by avoiding paying tax.

Protecting conventional media is in the public interest. Conventional media are still the principal originators of the content on which New Zealand depends for reliable news.

CTU is disappointed that the proposals do not address the tax avoidance of multinational firms which have significant activity in New Zealand but no taxable presence. It submits that New Zealand should ensure that the provision of advertising services and platforms is tax neutral.

Comment

The Bill is not intended to target any particular firms or industries. Instead, it is designed to target specific base erosion and profit shifting activities that can give some multinationals a competitive tax advantage when compared with New Zealand businesses. Officials consider that the measures in the Bill will be sufficient to neutralise this competitive advantage.

Officials also note that the OECD is currently developing some potential measures that would address the taxation of digital services that are provided cross-border. Officials consider that any measures endorsed by the OECD in relation to this issue should be investigated.

Recommendation

That the submission be noted.

Issue: Transparency

Submission

(Oxfam, New Zealand Council of Trade Unions, Public Health Association of New Zealand)

Oxfam urges New Zealand to join the growing momentum for greater tax transparency. Tax transparency is an essential step in fighting global tax avoidance. A lack of transparency over what profits are made and what taxes are paid by MNCs in every country in which they operate makes it hard to identify abusive tax practices. (Oxfam)

Most countries require publicly listed companies (i.e. those listed on a stock exchange) to publish audited annual reports and accounts, although these are often on a consolidated basis for the entire group, rather than separating out individual subsidiaries. However, for private companies, there are often no public reporting requirements at all. The structure of MNCs, with a parent company and multiple subsidiaries, makes collecting and assessing all relevant information hard, especially when subsidiaries are based in tax havens that do not require the publication of financial information. (Oxfam)

IRD should publish regular summary info on the taxation of multinationals. (New Zealand Council of Trade Unions)

The public should have access to information resulting from comprehensive disclosure to tax authorities of information relating to business activities. This would involve details of names (of the entity, and principal owners and officers) and financial statements and tax rates. (Public Health Association of New Zealand)

Information obtained through the Automatic Exchange of Financial Account Information in Tax Matters (the Automatic Exchange of Information or “AEOI”) in accordance with common reporting standards should be made available to the public. (Public Health Association of New Zealand)

Public access to information on foreign trusts registered in New Zealand should be available on request. (Public Health Association of New Zealand)

The Committee should review the Australian Tax Transparency Code to identify proposals that could be usefully incorporated into this Bill. (Public Health Association of New Zealand)

Comment

Officials consider these submissions to be outside the scope of the Bill which is intended at improving the technical aspects of New Zealand’s international tax law and strengthening some of Inland Revenue’s administrative powers.

Recommendation

That the submissions be declined.

Issue: End Tax Havens: New Zealand to support Pacific Island Nations to establish alternative sources of revenue and implement BEPS

Submission

(Oxfam)

The New Zealand Government should support Pacific Island nations cited in the recent publication of the ‘EU list of non-co-operative jurisdictions for tax purposes’ to establish alternative sources of revenue and to implement BEPS measures. Oxfam also urges the Government to explore the role it can play in actively supporting the Cook Islands and Vanuatu, who have committed to implementing the BEPS minimum standards by 2018.

Comment

New Zealand does provide support through participation in forums including the Pacific Island Tax Administrators Association through attendance at its annual meetings. New Zealand hosted SGATAR in 2016 and held sessions to raise awareness on BEPS. Historically New Zealand has assisted Pacific Island countries to navigate new standards on Exchange of Information promoted by the Global Forum on Transparency and Exchange of Information. Capacity building and support is also provided for all developing countries through international organisation including the United Nations, the World Bank, the International Monetary Fund (IMF) and the OECD’s inclusive framework. A particular example is New Zealand’s support as one of five donors to the Pacific Financial Technical Assistance Centre, established by the IMF to promote macro-financial stability in Pacific Island Countries. More recently, these agencies have started to coordinate their engagement with developing countries under an umbrella group called the Platform for the Collaboration on Tax. New Zealand officials have actively worked to bring issues affecting the Pacific to the attention of these organisations. We are also providing an assessor to the Global Forum for Micronesia as we are committed to helping out in the Pacific.

Recommendation

That the submission be noted.

Issue: New Zealand to actively support the creation of a new global tax body

Submission

(Oxfam)

New Zealand should co-operate internationally and work with political leaders globally and call for a new generation of international tax reforms. This will be most easily done through a new United Nations based global tax body, such as updating the UN Tax Committee. This second-generation reform process should include all countries on an equal footing and tackle a number of key issues that have not been sufficiently addressed by the recent global tax reform led by the OECD BEPS process, including:

  • corporate tax incentives and lowering of corporate rates;
  • tackling corporate tax havens and harmful tax practices;
  • reallocation of taxing rights between countries e.g. revising tax treaty terms, transfer pricing and permanent establishment rules; and
  • preventing manipulation of internal transaction prices within MNC groups.

Comment

New Zealand already co-operates intentionally on international tax reforms, and is well represented within international tax policy organisations such as the OECD, Global Forum and United Nations.

Unlike the OECD, members of the United Nations Tax Committee (the Committee of Experts) are selected in their personal capacity, and not as government representatives. However, since 2013 New Zealand has had a member on the panel who has contributed to the specific work undertaken by the United Nations to address BEPS issues. Specifically, the Committee of Experts has been actively working towards publishing an updated United Nations Model Double Taxation Convention between Developed and Developing Countries which will contain measures that address BEPS that are in line with the OECD reforms, and other measures which go further or address issues specific to developing nations. It is expected that this will become publically available later in 2018.

Officials consider that these international tax policy organisations, including the UN, are performing effectively and that New Zealand’s engagement on the issues discussed is strong. The submitter’s request for a new organisation to replace the existing architecture is unfounded.

Recommendation

That the submission be declined.

Issue: Remove tax on wages, salary, and superannuation benefits

Submission

(Michael Robinson)

The submitter has suggested that tax should be collected from savings, such as Kiwisaver (which should be made compulsory), and assets such as investment properties. The submitter also thinks business tax compliance should be simplified and tax breaks and loopholes should be closed.

Comment

Officials consider that the submission is outside of the purpose of what the Bill is intended to achieve.

Recommendation

That the submission be declined.

Issue: No interest payments to a related party should be deductible regardless of the rate

Submission

(William Sheat)

The submitter is concerned with a particular situation where a particular company’s operating surpluses are absorbed by interest paid to related party lenders overseas. They consider that the issue will not be fixed by the proposed interest limitation rules because there is no reason to believe the interest rates on the borrowing are artificially high, despite no significant income tax being paid.

It is submitted that no interest payments to a related party should be deductible, regardless of the interest rate.

Comment

Officials consider that the various measures contained in the Bill to limit interest deductions, in conjunction with existing measures, are sufficient to prevent related parties from stripping profit out of New Zealand using debt.

Officials consider that denying interest deduction on all debt between related parties would be an over-reach that unduly punishes taxpayers that are not involved in BEPS and would put New Zealand out of step with international norms.

Recommendation

That the submission be declined.

Issue: Henry George “one tax solution”

Submission

(Phil Carver)

The submitter has asked the Committee to endorse the views of Henry George as to a “one tax solution” to the business cycle and various other economic problems.

Comment

Officials consider that the submission is outside the scope of the Bill. The submission would be better targeted at the Government’s Tax Working Group who have called for submissions on the future of the New Zealand tax system.

Recommendation

That the submission be declined.

Issue: Bill will change how businesses operate in New Zealand

Submission

(Google)

The submitter expects that the Bill will change how overseas companies operate in New Zealand in respect of whether they have a permanent establishment. The Bill also sends a clear signal to the corporate community that their behaviour is expected to change.

The submitter is also planning on altering its operating model in New Zealand in a way that will result in its customers entering into contacts with the submitter’s New Zealand entity. This New Zealand entity will pay tax on the profit from these contracts in line with its role in the transaction. This new operating model will increase transparency on the revenue generated by the submitter in New Zealand.

Comment

Officials agree with the submitter that the Bill is expected to change how overseas companies operate in New Zealand. Officials acknowledge the changes the submitter has outlined to their operating model.

Recommendation

That the submission be noted.