A movement of change has been quietly happening for a while in the tax world here in New Zealand. Our government is trying to update our systems to be easier to use and comparable on a global scale while providing a fair market for large and small businesses to operate in. Many Multinationals are not paying their fair share of tax this is known as Base Erosion and Profit Shifting (BEPS)
Giants of the likes of Apple have for some time paid basically no tax in New Zealand, this is achieved using BEPS Strategies. In short, these companies create arrangements where they shift profits to countries with lower taxed jurisdiction, thus reporting significantly lower income from sales in New Zealand despite having a physical presence in the market. These particular BEPS strategies are known as transfer pricing and permanent establishment avoidance (TP and PE avoidance).
The New Zealand Government is seeking to strengthen our tax laws to combat is including
- the Income Tax Act 2007
- the Tax Administration Act 1994
There is a focus on improving transfer pricing rules, preventing abuse of double tax agreements used to avoid NZ tax, and improve administration systems to better enforce collection of tax from multinationals. This is being done in accordance with the G20/OECD standard for Automatic Exchange of Financial Account Information in Tax Matters otherwise known as the “Automatic Exchange of Information”, “AEOI”, or the “AEOI standard” in financial publications.
AEOI is a global initiative to address the international problem of offshore tax evasion, which is evading tax by hiding wealth in offshore accounts. In essence, a government implements the AEOI standards requiring financial institutions to investigate financial accounts to identify those held or controlled by non-residents. If non-residential ownership/control is found the following information is shared with the government
- identity information (including tax residence)
- financial information (account balances and interest earned from accounts)
- non-residents local tax administration.
To amend our tax laws in a way that removes any loopholes takes time and diligence, so these new requirements on financial institutions and multinationals will not come into effect until July 2017. After this time we may see a flow on effect in the New Zealand economy.
WHAT DOES THIS MEAN FOR YOU?
When these changes begin to impact multinationals the New Zealand market will see the results of the choosen strategy to minimise the impact on their bottom line, some may accept that paying tax in each country is part of being a good global citizen, while others will taken other paths, we may find one or many of the following:
- products from these companies have no significant change in size, price or availability
- products from these companies increase in price
- products from these companies decrease in product size but remain the same price (this strategy is call the ‘Just Noticeable Difference’)
- products from these companies decrease in availability in the market (higher demand for fewer products allows a high price to be charged and accepted by consumers)
- products from these companies are withdrawn from our market completely.
In the end we all want fair treatment of businesses in our economy and for these goliaths the New Zealand tax bill is a only one drop out of the ocean of their profits, do you think it’s fair they don’t pay tax?
Tax Policy BEPS – Transfer pricing and permanent establishment avoidance
A special report from Policy and Strategy – Automatic Exchange of Information