Muzzle on IRD over firms' tax affairs may go

The Government may scrap a centuries-old law that prohibits Inland Revenue from discussing the tax affairs of companies.

Revenue Minister Peter Dunne told BusinessDay he had "loosely discussed" removing the legal muzzle on the IRD and was open-minded about whether to do so.

The matter arose after Dunne ordered the IRD to back an international effort to expose and eradicate tax avoidance by multi nationals. "It is the sort of change we have got to be prepared to contemplate."

Dunne said the potential change might be as part of an international agreement.

It was more likely the secrecy clause would be modified rather than axed completely. For example, IRD might be allowed to talk about the tax affairs of companies but not those of individuals.

Dunne said he was also willing to talk to colleagues about changing the Financial Reporting Bill, which is being examined by a select committee. The bill, as now drafted, would remove an obligation on many overseas-controlled firms to file accounts with the Companies Office that show, among other things, how much local tax they paid.

Auckland University tax professor Craig Elliffe said the secrecy issue concerned whether IRD could respond to questions.

Its prohibition on discussing taxpayers' affairs dated back to William Pitt the Younger, he said.

"We have had a long history of information being provided on the basis of confidentiality, driven by the English class system."

International treaties prevented the Government from using tax rules to discriminate against foreign firms. Elliffe said that meant it might not be possible to let IRD respond to questions about the tax affairs of overseas-owned companies without removing the prohibition on it discussing the affairs of Kiwi companies.

However, that could be a grey area, he said.

Last month, Dunne ordered IRD to work closely with the Organisation for Economic Co-operation and Development on the OECD's Beps (base erosion and profit-shifting) initiative that aims to make big changes to international treaties to eliminate tax rorts.

Tax avoidance accounting schemes include the "double Irish" and "Dutch sandwich" that are reportedly used by organisations such as Google, Microsoft, Facebook, Pfizer and Starbucks to route profits to tax havens and dodge billions of dollars in corporation tax.

Dunne said the international situation with regard to multi national tax avoidance was moving "very quickly and quite dramatically".

The British Government appeared from public statements to have hardened its attitude in the past few days, he said.

The Guardian newspaper reported yesterday the Labour Party in Britain was promising greater transparency on the tax paid by multinationals by saying it would force them to declare how much tax they paid, and reform tax laws to ensure they paid tax on profits made in Britain.

"New Zealand certainly doesn't want - and I think most OECD countries don't want - to see multinationals using devices and techniques that minimise their tax liabilities right across the board," Dunne said.

His comments follow the OECD's top tax official, Pascal Saint-Amans, welcoming New Zealand's support for Beps and saying a comprehensive, global action plan could be implemented within two years.

Elliffe said multinationals would be concerned about the negative publicity tax avoidance was generating, especially in Britain where it had garnered an "enormous amount" of attention.

"The whole international tax system has been based on the principle of reciprocity; you surrender some tax rights because another government is going to take tax.

"The real problem that has emerged is double non-taxation.

"You have got weak ‘controlled foreign company' rules, the ability to strip out profits from source countries and to put them into jurisdictions where they will effectively not be subject to tax at all."

Google, which has previously proudly defended its use of tax rorts as "capitalism", refused to say whether it intended to accept a request from the OECD for businesses to work with it to eliminate double non-taxation.

In a separate move to tighten up on corporation tax, IRD published yesterday proposals intended to prevent overseas-owned companies from loading their New Zealand subsidiaries with excessive amounts of debt.

The new "thin capitalisation" rules, foreshadowed last month, would mostly affect private foreign companies, rather than large publicly-listed ones, IRD said. Businesses have been given a month to respond to the proposals.