Multinationals feeling heat on tax rorts
Hopes are rising that multinational companies operating in New Zealand may soon be paying a fairer share of tax.
The French official leading the global clampdown on multinational tax rorts says the scrapping of the notorious “double Irish” tax loophole shows aggressive tax planning is on the way out.
Organisation for Economic Cooperation and Development (OECD) tax director Pascal Saint-Amans said tax planning had become the core strategy of some companies, which were competing on how much tax they could avoid rather than on the quality of their products.
Speaking to Fairfax Media from Paris, Saint-Amans said the environment was changing. But he said new moves by some countries, including Ireland, to offer companies tax breaks on profits that were derived from patents had the potential to undermine progress, if rules concerning the concessions were not made clear.
Saint-Amans is in charge of the OECD’s Base Erosion and Profit-Shifting (Beps) programme. It was established with the support of the G20 last year to prevent multinationals exploiting gaps in international law to dodge tax.
The Beps project appeared to chalk up an early victory recently when Irish Finance Minister Michael Noonan announced the country would call time on the double-Irish rort by 2020.
Companies including Google, Apple, Facebook, Starbucks and Pfizer are reported to have routed billions of dollars of profits to Caribbean tax havens using the loophole, which exploits the fact that companies can be registered in Ireland but not deemed resident in the country for tax purposes.
Ireland’s decision showed the Beps project was being taken seriously and a game-changer, Saint-Amans said.
“It is a recognition that the environment has changed and that tax planning will not be as it used to be in the future. Companies should of course optimise and should plan, but to reduce marginally the tax burden, not to massively reduce it as the core element of their strategy,” he said.
Angst over multinational tax rorts has been bubbling in New Zealand for several years, aided by a Dominion Post report in 2010 that Google New Zealand expected to pay just $7726 tax in respect of its previous financial year, less than the average teacher or construction worker. Bloomberg put the international spotlight on Google’s tax affairs in 2010 when it reported that the internet search giant paid just 2.4 per cent tax on the billions it earned outside the United States.
Then revenue minister Peter Dunne ordered an “urgent report” from Inland Revenue in 2012, amid media coverage of Facebook’s low tax bill and claims of government inactivity from Labour, before instructing the department to throw New Zealand’s weight fully behind the Beps initiative.
KPMG Sydney-based tax partner Grant Wardell-Johnson said he did not expect the closing of the Irish loophole would have a direct effect on the way multinational companies structured their businesses or tax affairs in countries such as Australia or New Zealand, for example by encouraging them to base more of their operations locally.
“Changing the Irish tax concessions is not going to affect Australia or New Zealand’s tax base at all, others may disagree but that is my view.”
However, he said Saint-Amans was correct in claiming the net was closing on aggressive tax planning worldwide and possible changes to rules governing interest payment deductions by “controlled foreign companies” (CFCs), could have more impact locally.
There were 44 countries involved in the Beps project and agreement was inevitable given they were they were all still onboard, he said. Interest in international tax rules had been unprecedented over the past two years, both in the media and “at backyard barbecues”, he said.
Saint-Amans said the OECD was on track to complete the Beps project next year and told Fairfax he believed it could force Ireland to plug the double-Irish loophole earlier than 2020.
But he said that belief should be seen in context. “The overall tax planning of companies and what has been happening in the past 20 years is coming to an end, so is not just about phasing out the double-Irish; it is about rethinking the overall strategy and do they need to rethink the overall strategy before six years? Oh yes.”
He downplayed suggestions multinationals might simply switch to lesser-known loopholes, arguing that would not be simple.
The same week Ireland moved on the double-Irish, Switzerland announced it would also put an end to tax regimes that had been considered harmful, he said. “The secretary of state of Holland has written to the Dutch parliament to say it would have to make changes in 2015. Luxembourg is under tremendous pressure . . .
“It is not the case that there’s one thing closing down, so they will shift to another country.
“All the countries are changing.
Saint-Amans said that assuming the Beps project was successful and put an end to tax loopholes, that would still not mean countries would stop competing with one another by offering lower corporation tax rates in a bid to attract multinational business.
Ireland’s standard corporation tax rate is 12.5 per cent, half the OECD average, while New Zealand’s rate is 28 per cent, for example.
“What I would foresee is, if we put an end to double-non-taxation, tax competition will not go away. A number of countries may reduce their tax too, which is fine, so long as activities are taxed where they take place,” Saint-Amans said.
