Three hard ways to make multinationals pay more tax
Former tax lecturer Deborah Russell identifies three ways to make multi-national companies pay a fairer share of tax and finds none of them are easy
The problems associated with the taxation of multinational companies are well known. The solutions to the problems are not so easy.
The first solution is to keep taking part in the Base Erosion and Profit Shifting project (BEPS) led by the OECD, which is aimed at ensuring that each OECD country can maintain its tax base and tax the profits earned within its borders. More than 100 countries and tax jurisdictions are involved, including New Zealand. Participants are working on developing tax measures that will be implemented in each country, so that taxation can be aligned with economic reality. It is a consensus-based approach and, in the OECD’s words, the first renovation of the international tax rules in more than a century.
Some of the first changes under way around BEPS include greater disclosure of information across borders, and new rules for hybrid mismatch arrangements. New Zealand’s government is planning to strengthen its rules around transfer pricing, and considering limiting the amount of interest deductions that can be claimed in respect of loans from overseas companies to New Zealand subsidiaries. Both these changes are part of the BEPS project as recommended by the OECD. However, the project is comparatively slow-moving, given the need for intensive negotiation between jurisdictions. Even when agreement is reached with other countries, each nation must change its own tax law through the usual policy and parliamentary processes. It all takes time.
New Zealand could take unilateral action by introducing new ways of taxing multinational companies. However, our domestic tax laws are already reasonably robust, and multinationals typically exploit the differences in laws between countries rather than use loopholes within individual ones. So unilateral action will usually not solve the problem.
Some countries have tried to take unilateral action outside of the BEPS process through a ‘diverted profits tax’. Under this type of tax, if it can be proved that a multinational company has arranged its affairs so that it has no taxable presence in a country, and thus has diverted its profits offshore, then it will not only be required to pay the tax in the country concerned but it would also be subject to a penalty tax. Australia has announced that it will introduce a diverted profits tax on July 1, 2017, set at 40 percent.
Although the concept of a diverted profits tax is straightforward, its implementation is likely to be difficult. If it were introduced here, Inland Revenue would need to prove that a company ought to be regarded as having a taxable presence here but the profits had been diverted through highly specific application of tax treaty rules. This could be very difficult to prove, given that the arrangements are legal. Any company targeted would probably respond with litigation. A diverted profits tax would also be an extra tax in addition to income tax, imposed somewhat arbitrarily on multinational companies. That might run the risk of economic or tax retaliation against our exporters, but the deeper concern relates to reducing the internal coherence of our own tax system. More broadly than that, arbitrariness undermines the rule of law. In any case, in an ideal world, a government would never to be able to charge a diverted profits tax, because the tax rules would be sufficiently robust, across countries, that companies would be unable or unwilling to divert profits.
In this respect, a diverted profits tax would be similar to any ‘sin’ tax: ideally, no tax is collected because the sin is not committed in the first place. It would essentially be a threat – a signal that a government intends to rigorously police the taxation of multinational companies. New Zealand arguably doesn’t need a diverted profits tax as the general anti-avoidance rule fulfils this role already. The anti-avoidance rule (colloquially known as “Big Guy One” after its section reference) enables Inland Revenue to ‘reconstruct’ a transaction involving a tax avoidance arrangement. In 2009 after Inland Revenue applied these provisions against Westpac, ANZ, BNZ and ASB over their use of ‘structured finance’ deals, the banks ultimately agreed to pay more than $2.2 billion in tax and interest.
The third approach is to persuade the companies, and their advisers, of the value of paying taxes. If taxes are what we pay for a civilised society, then multinational companies and other taxpayers who engage in aggressive tax planning are free riders, taking benefits from the countries where they do business but not helping to cover any costs. New Zealand provides many benefits for companies who choose to do business here. Our population is well educated, so we are well-placed to consume high-tech products and services. We have comparatively good healthcare, so employees are less likely to be unable to work for long periods of time because of illness. We have a developed welfare system, so it is possible for people to work for fewer hours or to be on call for jobs, rather than all employment needing to be full-time. This provides a reserve pool of labour for business. Provided that pool is not exploited to drive wages lower, and that people are happy to be part of it from time to time, then having access to it provides real benefits to business.
We also have the standard fixtures of any First World society, ranging from the physical infrastructure of roads, telecommunications and public transport to the less tangible structures of the rule of law, a well-developed legal system, a competent and incorrupt judiciary, and a highly regarded democratic parliament.
Our highly effective legal system is particularly important to entities such as Google, Facebook and Uber, which are eager to protect their intellectual property. To do that, they rely on the legal systems in countries such as the Britain and the USA, and even on the system developed here in New Zealand. The on-going attempt to extradite Kim Dotcom is a case in point.
The benefits of health, welfare, education, roads, legal systems and so on are all paid for in large part by our taxes. They are the institutions of civilisation in our society, and those who benefit from them ought to contribute to their support.
*Deborah Russell is a former lecturer in taxation at Massey University and she is now the Labour party candidate for New Lynn. She has written a book with Accountant Terry Baucher called Tax and Fairness, which is published by Bridget Williams Books May 2017. The views in Tax and Fairness are not nor are intended to be Labour Party policy.
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