The New Zealand Government has announced its final decisions on proposals to address "base erosion and profit shifting" (BEPS), a technical term for tax avoidance by multi-national companies.
The new measures will stop foreign parents charging their Kiwi subsidiaries high interest rates to reduce their taxable profits in New Zealand, Finance Minister Steven Joyce and Revenue Minister Judith Collins said in a joint statement today.
They will also stop multi-nationals using artificial arrangements to avoid having a taxable presence in New Zealand, as well as ensuring multi-nationals are taxed in accordance with the economic substance of their activities in New Zealand.
Furthermore, they will deploy counter strategies that multi-nationals have used to exploit gaps and mismatches in different countries’ domestic tax rules to avoid paying tax anywhere in the world, and make it easier for Inland Revenue to investigate uncooperative multi-nationals.
Technology companies have been the focus for most of the discussion about BEPS, with many paying minimal tax in local territories and some paying very little tax overall due to the use of complex international structures.
Less commonly mentioned is Microsoft, which earlier this year was reportedly subject of a tax audit focusing on transfer pricing, the ability to levy charges between different multi-national business units for things such as the use of a brand and other services.
Microsoft New Zealand has had a long-standing structure where its local business is effectively sales and marketing, with sales being fulfilled from Singapore - this year its ownership was shifted from Luxembourg to Bermuda.
“The new measures will significantly strengthen our tax rules and our ability to ensure that multinationals are taxed fairly and on the basis of their actual level of economic activity in New Zealand,” Finance Minister Steven Joyce said.
The changes will result in an estimated $200 million a year in additional tax, he added.
“The government budgeted for $100 million annually in out-years for additional multi-national tax, and these decisions mean that will be increased by a further $100 million annually from Budget 2018 onwards.”
The decisions have been arrived at after weighing up public feedback on three government discussion documents relating to: hybrid mismatch arrangements; interest limitation rules; and transfer pricing and permanent establishment avoidance, Collins said.
In some instances, public feedback made a good case for refining the scope of proposals or for fleshing out technical detail.
“It is very important that every company operating in New Zealand pays their fair share of tax,” Joyce said.
While most multi-national companies follow the rules there are some that attempt to minimise or eliminate their New Zealand tax obligations.
It is expected that the BEPS measures will be included in a tax bill to be introduced by the end of the year, for enactment by July 2018.