KPMG: Moves to curb international tax dodges
Global international tax takes from multinational companies will almost certainly increase in the next 5-10 years as governments around the world look to level the taxation playing field.
Commenting on the New Zealand Herald’s series examining ‘the tax gap’ – multinationals channelling earnings to lower tax regimes, disadvantaging some of the countries they trade in – Bruce Bernacchi, a partner in KPMG’s tax division, says change is on the way.
The Organisation for Economic Cooperation and Development (OECD) recommendations on international taxation, developed along with the G20 nations – one of the biggest OECD projects in decades – should be that levelling influence when it comes to international taxation, he says.
The OECD’s Base Erosion and Profit Shifting (BEPS) action plan is an attempt by the world’s various economies to address the widespread concern corporations may not be paying their fair share of taxes in the nations in which they operate.
Multinational companies are able, because of differing tax regimes globally, to work legal tax manoeuvres by shifting income from locations where they operate to other jurisdictions with lower tax rates. That costs the countries in which they operate, who are denied a tax take.
Support from around the world suggests large-scale acceptance of the OECD rules – effectively making international tax rules consistent around the globe – but here is still a way to go before they come into effect.
“Yes, these proposals have been in process for two years but it is an extremely complicated field and they are gathering pace; countries like the UK and Australia have already made moves ahead of the OECD recommendations and most member countries will be starting to change their domestic laws to bring them into line with the recommendations,” Bernacchi says.
In New Zealand, Inland Revenue will release discussion documents on two OECD recommendations this year – but Bernacchi suggests those hoping major international corporates pay more tax should be careful what they wish for.
“I think we will see a levelling of the playing field in the next 5-10 years,” he says. “Two reasons: first, there is a high level of public awareness about this issue so governments are being forced by public opinion to take a harder look at things.
“Second, governments will act in their own self-interest; a number of OECD economies are running large structural budget deficits. So those governments are short on tax revenue and, increasingly, the corporate tax take will be seen as one way to plug the hole.”
However, if multinationals were caught in a more exacting international tax net, their response might also not be popular.
“If Apple, for example, starts paying a lot more tax and starts charging $50 more for every i-Phone, I don’t expect that will be greeted with universal acceptance either.”
While most of the spotlight has fallen on companies like Apple, Facebook and Google, the Herald series suggested a figure of $500 million in annual uncollected income tax might be on the low side.
The 20 companies highlighted had subsidiary profit margins varying most from those of their parents – a cluster of technology, energy and drug companies. They collectively booked $10 billion in revenue in New Zealand, but only $133 million in profit and, after a range of deductions, paid only $1.8 million in income tax. The 1.3 per cent average local profit margin reported by those 20 companies contrasted with their parents, which profited at a rate of 20.6 per cent on their revenue.
Bernacchi says such an estimate is simplistic and may not be anywhere near as significant once other holistic factors are taken into account.
“New Zealand has companies operating overseas too, so it is swings and roundabouts. Many multinationals operating in New Zealand also do little more than distribute goods here. Tax is usually assessed on where value is really added – which is not New Zealand when goods and services are simply sold with little or no risk for the local distribution operation, so it’s not as easy as it seems.”
New Zealand also already has a “robust” tax regime recognised internationally as one of the “top performers” in corporate tax collection, consistently rating in the top five OECD countries for corporate tax collected relative to GDP. Inland Revenue appears to have taken a stance of being a “fast follower” in BEPS, rather than a leader, says Bernacchi, a stance he agrees with.
The success of BEPS could depend on whether financial giants like the US “play ball”.
“The US tax regime is one of the most complex in the world” he says. “But it is also quite flexible in terms of how their multinationals can structure their international tax affairs. For BEPS to work, the US will have to legislate fundamental tax reform.
“This has been on the US political agenda for over five years now but, with a gridlocked US Congress, there’s been no action. The current political situation in the US doesn’t fill me with a high degree of confidence anything will change soon.
“That risks many countries implementing OECD recommendations while others do not – leading to a real mess in the international tax world and the risk of double taxation for multinational companies.”
In a recent report from the US, Paul Morton, Vice-Chair of the International Chamber of Commerce Commission on Taxation agreed, saying BEPS would “…create uncertainty and lead to a higher risk of double taxation. This would increase the number of taxation disputes which is why ICC believes a solid dispute resolution mechanism with mandatory agreements should remain a cornerstone of the BEPS outcomes.”
Bernacchi warns the introduction of BEPS recommendations into New Zealand law is just one of many big moves in a year when taxation takes centre stage, like Inland Revenue’s enormous transformation of its IT systems and how taxpayers interact with it.
“It’s a time when companies need to be highly aware of the changing tax environment and to seek advice so they are not caught out.”
