NZ can't close tech tax loopholes alone

HAMISH RUTHERFORD
Last updated 16:28 19/12/2012

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New Zealand has no power to ensure internet giants like Facebook and Google pay more tax, according to an IRD report.

The new report appears to back Revenue Minister Peter Dunne's claim that New Zealand cannot solve corporate tax loopholes alone, arguing that even law changes would be overridden by international treaties.

The issue of tax rates on international companies, especially in the technology sector, has hit headlines since it emerged Facebook paid less than $14,500 in New Zealand last year, or less than 1 cent for every one of its 2.2 million Kiwi users.

Following attacks from Labour revenue spokesman David Clark on the issue, Dunne ordered IRD officials to prepare a report on the issues facing tax collectors.

The report conceded that expectations that major companies "will pay tax on their business profits somewhere in the world are being thwarted by some multinationals" by using a combination of complex measure structures to either avoid tax, or move profits to regimes with low tax rates.

However the report indicated that New Zealand would likely be powerless to crack down on the schemes if it acted alone.

"Even if we changed our domestic tax laws so that we could tax all business income earned by non-residents from any sales to New Zealanders, our tax treaties would override the new laws,'' the report, released this afternoon, warns.

It added that there were "strong reasons" for New Zealand to be in line with international norms on tax, otherwise it "may become an unattractive place to base a business".

The report said that working out what portion of a multinational's profits relate to sales to customers in a particular country was often highly complex.

Technology companies in particular were increasingly able to make substantial revenues in a country, while having little or no physical operation there.

While there were rules around "profit-shifting" there were gaps and weaknesses in these, with companies exploiting one or more of':

- Ineffective controlled foreign company rules
- Arbitrage between different countries' domestic law rules
- Related party transactions which shift profits from a high tax to a low tax country

"The end result is that there is less profit in the high tax country and more profit in the low tax country and a lower overall tax bill," the IRD report stated.

In a statement Dunne said New Zealand would continue to work with the OECD, and especially Australia, in working out how to tackle the issue.

"It is a problem facing many countries, but no one country can solve it alone. It is a global issue and it will have a global solution, and New Zealand is constructively working on being part of that solution," he said.

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"There is no doubt that more needs to be done, but I am satisfied that we are on the right track."

Proposals on how to address the issue would be put out for consultation early in the new year.

Labour's Clark said Dunne's position was shifting, having initially claimed the issue was legitimate tax avoidance, to then say it was an issue the world was unable to solve, to a new position of claiming action would be taken with international partners.

"I welcome his u-turn because it is a report that says New Zealand can and should do more."

Clark said the report made no effort to estimate the scale of the problem, but with expert analysis done in Britain estimating the issue could be as large as 6 per cent of gross domestic product, it could cost New Zealand as much as $1.5 billion a year.

"If a problem is even potentially worth $1.5 billion to New Zealand, it's worth tackling, it's worth setting up an expert advisory panel through the Treasury, like the Australians have done, to report back on ways to address this issue," Clark said.

The IRD report also made no effort to address the issue of fairness, with New Zealand companies attempting to compete against much larger players which were paying less tax.

"It's very hard for small New Zealand businesses to compete with multinationals who aren't paying their fair share of corporate tax."

- The Dominion Post

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