5th April 2017
Finance Minister Steven Joyce and Revenue Minister Judith Collins, when calling for a crackdown on multinational companies that avoid tax obligations in New Zealand, estimated that the country was losing $300 million per year in uncollected taxes. That number was based on a review of surveys, tax returns and investigations compiled by Inland Revenue, related to companies operating within New Zealand.
Other studies have put the figure even higher – suggesting that $500 million, $700 million or even $1 billion of tax revenue per year is being lost due to base erosion and profit shifting (BEPS). Total losses from BEPS are notoriously difficult to calculate by their very nature, but estimates have put the annual global tax losses due to BEPS at roughly US$500 billion.
In its simplest form, BEPS refers to the practice of companies transferring profits internally, out of high-tax-base jurisdictions and into regions where few or no tax obligations apply. Through such accounting practices, companies are able to do significant business in areas with nominally high tax rates, generating profits whose associated tax requirements are circumvented as a result of bookkeeping practices that exploit internal company trading rules, thereby allowing the profits to be reported as existing in an offshore location.
One commonly cited effect of such accounting practices is that the countries near the bottom of the world’s income and development indices are often the ones to suffer most from the loss of taxable income.
Along with other countries, notably Australia, New Zealand is beginning to make positive and proactive efforts to counteract the losses from BEPS by strengthening and enforcing tax reporting requirements, particularly among international companies. This effort relies on lessons learned from investigations of the BEPS phenomenon, as well as New Zealand’s adoption of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.
The long-term effect of this renewed interest in stopping BEPS-related losses is unknown, but increasing political pressure suggests that closing tax loopholes such as these will remain a priority for the government for some time to come.
New Zealand has also instituted new requirements for disclosure in areas not directly related to BEPS. Foreign trusts with New Zealand-resident trustees will now see increased reporting requirements, including obligatory registration with Inland Revenue, filing of annual disclosure returns, and payment of fees associated with registration and filing.
Another change involves GST rules on services connected with land. GST will now apply to services "intended to enable or assist a change in the physical condition, or ownership or other legal status" of New Zealand land. The rule is aimed at professional services, supplied to non-residents outside of New Zealand, but which nevertheless pertain to land in the country.