An unpleasant dose of BEPs to solve our taxation woes?
While government officials and members of the OECD debate the nuances of how to remedy the dilemma that is international taxation, New Zealand businesses wait with baited breath as to how these discussions will impact them.
Our Government recognises the importance of these discussions and is comfortable sitting around the OECD table, assisting and influencing the outcome – all the time realising that once the proposals are finalised, we’ll have little say in whether they are adopted globally.
But could we actually be left worse off by what’s finally proposed? Should the Government be looking to take actions sooner, by implementing new domestic tax measures in the upcoming Budget?
The key focus of the OECD’s discussion has been around BEPS (base erosion and profit shifting). The most public examples of this have been exemplified through global organisations, such as Google, Starbucks and Amazon, who transfer profits globally, based on recognised international tax principles. In effect, profits are drawn away from the country of the customer, and often placed somewhere with low or no tax, effectively enhancing the return to the shareholder. And while this doesn’t offend the letter of the law, it has been called into question morally.
Make no mistake; if there was an easy answer to resolve this, it would already have been put in place. Some countries have implemented their own remedies, with India and China being two notable examples of jurisdictions that modify their domestic laws and interpretations to the benefit of their respective Governments.
But therein lies the problem. International business embraces multiple jurisdictions, none of whom have the same rules of taxation. While there are some broad principles on which tax regimes are based, the local implementation of these is unique. Likewise, while there are broadly accepted principles for the pricing of related party transactions, each country has its own interpretation of these. Reliance is often placed on Mutual Agreement Procedures contained in Tax Treaties to solve the impasse. However, the process of resolution is often arduous and long. And of course not all countries have Tax Treaties, particularly not tax havens!
Critically, there are only 34 countries which comprise the OECD. The notable omission of all BRIC countries (Brazil Russia, India and China) is an example of the potential lack of global reach of the proposals.
Our Minister of Revenue also recently acknowledged that the success of whatever solutions are proposed relies on the majority of countries adjusting their domestic tax laws to embrace the new international tax best practice. Even the most optimistic of us would agree this will take a considerable amount of time to implement, if it’s implemented at all. For years countries have sought to attract business through tax breaks and incentives (take the Ireland resurgence for example which was solely based on its reduced corporate tax rate to entice international head offices). It is hard to see a simultaneous and multilateral adjustment relating to BEPS recommendations being adopted by most countries, retrenching inducements they have in place and implementing uniformity of approach. Assuming there is the political ability to make these changes.
One of the proposals, to require taxation in the country of the customer, would be certain to leave New Zealand business worse off. With an export lead economy, the Minister of Revenue has recognised the devastating effect this would have on our economy. However, he remains confident this proposal will not be finally suggested.
It is certain there will be greater focus on ensuring multinationals pay tax somewhere in the world. The logical outcome would be to tighten the rules in the shareholder’s home country which would attract more tax revenue to that country. This would not be beneficial to New Zealand either, given the preponderance of foreign owned multinationals that run most New Zealand big business.
Somewhere in the mix of solutions, New Zealand needs to put its own stake in the ground. Several countries have already decried “enough is enough” and have addressed this issue through their own domestic tax rules. The New Zealand Government needs to consider whether it should be doing the same – and using this year’s Budget as a starting point. While generally unpopular (India’s 50 year backdated legislation last year was an example) implementing new domestic tax rules would be more beneficial than allowing the pillaging of New Zealand Gross Domestic Product by foreign countries seeking to shore up their own tax reserves.
Will we continue to wait for the OECD, or see some more of our own measures to grab a greater share of the global tax pie?