OECD backs BEPS plan in face of critics

The OECD has endorsed New Zealand’s crackdown on multi-national tax evasion, despite significant criticism from local businesses that it departs from OECD standards, Thomas Coughlan reports.

David Bradbury, head of the OECD’s tax policy and statistics division, told Newsroom that the OECD was “very pleased with the strong support that New Zealand had provided to the BEPS project”.

But this goes against the position of many New Zealand businesses who submitted on the bill saying that it departed from several OECD standards, specifically the arm’s length principle.

It places the OECD in a position where it must reach consensus between its member states and the international business community. It’s a thorny issue, but possibly less of a challenge than Bradbury’s previous role as assistant Treasurer in Australia’s warring Rudd-Gillard-Rudd Government.

How do they do it?

New Zealand has a relatively high corporate tax rate of 28 percent, but this is only charged on profits. One of the ways a large corporate can minimise its tax bill is to make it look like it is making less profit than it actually is.

It can do this by using an international part of its company to lend to the New Zealand arm. This reduces the income taxable in New Zealand and allows the revenue to be taxed in an international jurisdiction where tax rates are lower.

The way this is currently policed is by using the ‘arm’s length’ principle. This means that inter-company lending needs to be conducted at ‘arm’s length’ — or, more plainly, conducted as if the international and New Zealand branches were not actually the same company.

The rules have helped some of the largest companies in New Zealand pay extraordinarily low taxes on large amounts of revenue.

Google reported a $1 million loss in New Zealand this year on revenue of $13.8 million.

That means the Government earned more tax revenue from thirty pack a day smokers than from one of the largest companies in the world.

This will change under the new rules.

How does the Government want to stop it

Under the proposed legislation, lending between a New Zealand business and its international parent or associate must be done on the basis that the company here uses a credit rating two notches below that of its overseas parent.

By effectively telling businesses what their lending conditions should be, the Government is hoping to stop large multinationals from using spurious justifications to claim inflated borrowing costs.

Some businesses are concerned that such strict regulation of transfer pricing will mean that companies with legitimate reasons for costly inter-company lending will find it difficult to raise that capital.

When the bill was in select committee, Deloitte Tax Partner Patrick McCalman told Newsroom that the concern with transfer pricing restrictions was that they were “one size fits all”.

“In some cases it will be entirely appropriate and in some cases it won’t be,” McCalman said.

OECD not aware of divergence

“The arm’s length principle is the basis on which the OECD and NZ to date has signed up to how we deal with when people transact across border with associates,” McCalman said.

ANZ’s written submission also noted the bill, with its conditions on transfer pricing, departed from the OECD approach on the arm’s length principle.

But Bradbury was not aware of this departure from OECD standards and was not able to respond when supplementary information was sent to him.

“As far as we are concerned, New Zealand has been very diligently progressing the implementation of those minimum standards,” he said.

The minimum standards are just four of the fifteen proposals that were part of the OECD’s BEPS package and do not relate specifically to transfer pricing. Other aspects of the package would need to be tailored country to country, he said.

“Some of the other aspects of the BEPS package that are not minimum standards we certainly encourage convergence towards the best practice that we set out in the BEPS package,” Bradbury said.

“But we recognise that there will be some variation in the implementation from country to country,” he said.

“But we certainly would want to ensure that countries that implement their measures in a spirit that is consistent with the spirit of what was agreed as part of the package,” he said.

“I don’t see anything at this point that New Zealand is proposing that would depart from that in any significant way”.