Jonathan Underhill: BEPS frictions show there’s no need to be a first mover

Apple chief executive Tim Cook says the company will appeal the decision that will see Apple paying billions of euro in ...

Apple chief executive Tim Cook says the company will appeal the decision that will see Apple paying billions of euro in unpaid back taxes to Ireland.

OPINION: Less than a year after the OECD issued its final BEPS recommendations on how nations should combat multinationals' tax-avoidance strategies two of the biggest parties to the project are butting heads.

The European Commission (EC) last month concluded Ireland had granted tax benefits to Apple of up to €13 billion (NZ$19.8b), which is illegal under EU state aid rules.

The EC investigation was especially chilling for United States multinationals because it looked back as far as 1991, a time when the US tech giant might have had no notion its tax-breaks-for-jobs deal with the Irish government might be deemed illegitimate decades later.

Last week the US Business Roundtable, representing US companies with US$7 trillion (NZ$9.6t) of annual revenue and almost 16 million employees, wrote to all 28 European Union states to remind them Roundtable members "invest billions of euros and employ millions in the European Union member states".

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The EC decision "raises questions as to whether [EU] member states have the capacity to enter into and honour their treaty commitments," the Roundtable wrote.

"The retroactive nature of the EC decision means that a business can never have certainty even on its past tax liability unless or until the EC chooses to decide accordingly."

The tone has been blunter at government level. Treasury Secretary Jack Lew effectively accused the EC of trying to get its hands on America's corporate tax base.

One of his offsiders, Deputy Assistant Secretary for International Tax Affairs Robert Stack, said last month that the commission's approach to state aid "undermines US tax treaties and international transfer pricing guidelines already accepted broadly in the global tax community, and undermines the work done as part of the BEPS project."

BEPS, the OECD's Base Erosion and Profit Shifting project, aims to tackle "gaps and mismatches in the current international tax rules [that] can make profits disappear for tax purposes, or allow the shifting of profits to no or low-tax locations where the business has little or no economic activity".

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BEPS joins the US Foreign Account Tax Compliance Act or FATCA as one of the global standards developed nations are under pressure to adhere to.

New Zealand is one of the 85 signatories, and an Inland Revenue Department discussion paper on one of the key aspects of BEPS, "hybrid mismatch arrangements" which exploit the different ways jurisdictions treat financial instruments and entities to create tax advantages, is now out for submissions by Oct. 7.

In the New Zealand context this has come to light in mandatory convertible notes issued by New Zealand entities to their Australian parents. The notes were treated as debt in New Zealand and created deductible interest satisfied by issuing shares, which didn't result in income having to be recognised by the parent.

Inland Revenue succeeded in a test case involving Australian firm Alesco (settled before an appeal hearing in 2014) and has subsequently settled with companies including Toll Holdings over the use of such securities between 2002 and 2005.

OECD-led tax arrangements are also creeping into other domestic tax laws.

The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill, now before the finance and expenditure committee, incorporates the OECD's automatic exchange-of-information global standard and related commentary.

That, Chapman Tripp said in its submission, "raises significant sovereignty issues" and issues of how local taxpayers would be kept up to date with a dynamic foreign document that had a bearing on New Zealand tax law and potentially their compliance with it.

The US Treasury's Stack has been portrayed in the media as an opponent of BEPS. He said last year that in part it had been "more narrowly focused on short-term political objectives, which sometimes inform tax administration" in some countries.

But he says there is much to like about the reforms, including the work on hybrid structures, transfer pricing, and country-by-country rules.

New Zealand is lagging behind Australia and the UK in embracing BEPS but local tax experts say that isn't a bad thing.

There's no need for New Zealand to be a first mover or to adopt the "complex" OECD proposals in their entirety, says EY's David Snell.

"It's important that we consider what is best for the New Zealand economy as a whole - revenue at least cost - but we also need to be mindful not to increase the cost of inbound capital to New Zealand."

The US is concerned about another pot of cash that sits outside its clutches and could potentially be in the sights of other tax jurisdictions – profits US corporations have stashed offshore because they aren't taxed at home until repatriated.

The Economic Policy Institute, a US think tank, estimates US corporations have US$2.4t squirrelled away overseas, representing US$700b in unpaid US taxes.

About 55 percent of those profits are in tax-haven countries attracting tax rates of 3 to 6.6 percent.

Or in the case of Apple in 2014, less than 1 per cent.


Pattrick Smellie is on leave.

 - Stuff


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