Inland Revenue is stepping up its campaign on ensuring small businesses meet their tax obligations, so naturally the finger once again points at multinationals to stump up the cash to meet theirs. After all, the tax revenue from multinationals has the potential to materially increase Government revenues. This requires a change in rules which should be definitively signalled in Budget 2016, rather than a continuation of the rhetoric surrounding the current measured progress being made toward possible rule changes.
However, there is a fine balancing act that the Government needs to maintain to ensure these changes deliver successful outcomes. Our export presence overseas needs to be treated fairly to encourage foreign and domestic business in New Zealand, and our robust voluntary tax compliance regime needs to remain solid. All taxpayers should feel that everyone is paying their fair share. These competing factors are critical to avoiding an inappropriate focus on a particular revenue stream and risk alienating or “cutting off” an important part of our economy.
The debate over an appropriate level of taxation being paid by multinationals is not a new one. After running a programme to revise the rules of international taxation for several years, the OECD released a detailed recommended action plan surrounding 15 key areas in October 2015. Countries all over the world are revisiting their domestic rules to address these recommendations, but everyone simply changing their rules simultaneously isn’t that simple.
While global taxation principles share some common characteristics, there is no global uniformity. Tax also does not operate in isolation; it’s just one economic lever to manage people, resources, and to fund operations. Politics also plays a major part in which tax policies are seen as acceptable, and to help attract foreign investment.
Australia and the United Kingdom have already broken ranks and implemented rules targeting the perceived rorting of their countries’ taxes by certain multinationals. India and China’s tax authorities have sought to achieve the same outcome through more aggressive policing. New Zealand, on the other hand, has implemented minor changes to date but has held back on more substantive initiatives that correspond with the OECD’s programme. Our implementation will also be subject to the impact on the country’s business and compliance costs, and the generic public consultation process.
Caution is warranted by the Government, but it needs to actively do something so that New Zealand taxpayers do not remain aggrieved at the perceived inequality. The current tax proposals around global automatic information sharing - while to be commended as a necessary step in creating transparency between tax authorities - doesn’t sit well with New Zealand taxpayers as affirmative action.
This measured approach recognises multinationals play a significant role in our economy. We need the foreign investment to grow and develop our domestic markets. We also need to ensure we are not considered heavy handed by other countries when our exporters seek to do business in their country.
Kiwis are proud of their country, punching above their weight and their place on the international stage, but in reality, we are a small global player, often lost in the roundings of global businesses. Special rules or treatment for multinationals can easily lead to the tap in New Zealand being firmly turned off. We’re not that special in the eyes of the world, and that can have a significant impact on our economy, and the New Zealand customer experience.
We also shouldn’t lose sight of the range of requirements tax authorities place on multinationals, which could be implemented without being seen as overly heavy handed. For example, compulsory contemporaneous transfer pricing documentation based on the New Zealand presence (rather than a global transfer pricing study), or annual transfer pricing policy disclosure could lift the focus on New Zealand tax principles, rather than the current practices of imposing world policies on New Zealand.
We can’t afford to antagonise international businesses. Equally, New Zealand’s tax system shouldn’t be seen as a “soft touch” internationally. And most importantly, we need to ensure that New Zealand domestic taxpayers are treated fairly and that voluntary compliance is not compromised. Proactive and public implementation of enhanced rules on multinational business is required, and should be outlined in the Government’s 2016 Budget rather than the current approach which will take some time to see the full light of day.