OECD reveals plan for global tax avoidance crackdown

New Zealand’s latticework of double taxation agreements would come under pressure as a side effect of the global crackdown on tax avoidance being initiated by the OECD.

That looks likely to be the main practical effect on New Zealand’s business from the move, which was sketched out at the G20 Finance Ministers meeting in Moscow in the early hours of the morning New Zealand time.

The ‘BEPS’  (Base Erosion and Profit Shifting) action plan will go to the OECD meeting in mid September.

The proposals are not quite as far reaching as were earlier being suggested but are still large.

The OECD has in effect proposed a vast and ambitious international programme to increase government tax-gathering activity.

The initiative is formally aimed at global firms such as Starbucks, Google, Apple and Facebook which shift their declared profits and the locales of their intellectual property around the world to locations where they can minimise tax.

None of the practices are illegal but because of the network of double tax agreements - which have been developed to prevent firms being taxed twice for the same profits  - many such firms are now able to avoid paying much tax at all.

It is also likely to go well beyond those high profile firms. While New Zealand does not have any such firms the most direct impact on business here will be any unintended consequences of any tightending of double tax agreeement (DTA) provisions.

That, and increased information gathering and sharing. 

Last year New Zealand signed up to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, a 70-member treaty which enables much greater information sharing between tax authorities.

This agreement is to be the vehicle for a stepped up wave of information sharing. Today’s OECD proposals – and they are only proposals at this stage – involve automatic sharing of a large variety of financial information.

This includes interest, dividends, account balance and income from some insurance products; sales proceeds from financial assets and other income generated by assets or from payments made with respect to the account.

Common reporting, due diligence, and compatible computer technology and software are also being called for to enable such monitoring.

Backing that up is to be what the report calls “strict rules on confidentiality and proper use of information.”

A “model agreement” for this could be finalised by the end of the year, the report says with implementation of any action within 18 to 24 months.

The information would be used to align taxation with the “substance” of profits, the report says.

The main focus is to stop firms artificially shifting profits by shifting non-tangible assets (such as intellectual property) entirely to low or no-tax jurisdictions.

For New Zealand, the government might be able to collect more tax from such firms, although just what and how much, is not likely to be known for some time.

The less tangible impact should be to shore up confidence in the tax system, the report says.

Globally, tax regimes were devised for a pre-digital world and are now full of gaps, the report says.

“Globalisation has benefited our domestic economies. … Globalisation has boosted trade and increased foreign direct investments in many countries. Hence it supports growth, creates jobs, fosters innovation, and has lifted millions out of poverty.

“Globalisation has resulted in a shift from country-specific operating models to global models based on matrix management organisations and integrated supply chains that centralise several functions at a regional or global level.

“These developments have been exacerbated by the increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the boundaries of acceptable tax planning, thus providing multinational firms with more confidence in taking aggressive tax positions.

“This has led to a tense situation in which citizens have become more sensitive to tax fairness issues. It has become a critical issue for all parties.

“Many governments have to cope with less revenue and a higher cost to ensure compliance. Moreover, Base Erosion and Profit Shifting (BEPS) undermines the integrity of the tax system, as the public, the press and some taxpayers deem reported low corporate taxes to be unfair. In developing countries, the lack of tax revenue leads to critical under-funding of public investment that could help promote economic growth. Overall resource allocation, affected by tax-motivated behaviour, is not optimal.

“When tax rules permit businesses to reduce their tax burden by shifting their income away from jurisdictions where income producing activities are conducted, other taxpayers in that jurisdiction bear a greater share of the burden.”

rhosking@nbr.co.nz