Let’s talk about tax.
Or more particularly let’s talk about Apple and their taxes.
Your correspondent is currently in Sydney – family stuff nothing glamorous or exciting – and had started to put together a post on Donald Trump and his 2005 tax return. Coz the Sydney Morning Herald had actually explained some stuff behind it and there were some issues that I thought – dear readers – you would find interesting.
But Saturday morning I opened my Herald app to find the latest on multinationals and tax. Apple this time. And yeah that is me. Apparently they have paid no tax in New Zealand. Whether that is 100% true only the Department would know but from looking at the accounts and how it has organised itself – looks pretty damn likely.
So let’s go!
Apple appears to sell products to New Zealand through a New Zealand incorporated company called Apple Sales New Zealand. Note no Ltd at the end. It is owned by an Australian company Apple Pty Ltd.
Now normally a New Zealand incorporated company means New Zealand has full taxing rights on all its income. No need to consider whether income has a NZ source or not . If it has earned income it is taxable. Well that is unless a tax treaty would take away some of those rights. And how could that happen dear readers? Yes that’s right – if it is managed or has directors control in another country.
And is Apple Sales New Zealand (not limited) controlled offshore? Yup the directors are Australian. Ok so then not a New Zealand company for tax purposes.
Now all the income comes from New Zealand so it should be taxed here – right? Well yeah if it has a New Zealand source. And remember that trading in v trading with thing again. Now once upon a time if you wanted to sell almost a billion dollars worth of consumer products you would kinda need to be here. But now http://www.apple.com/nz/ does the business. So thanks to the internet trading in can morph into trading with meaning bye bye income tax base.
Limits of diverted profits tax
Oh but the new things announced by Hon Judith should fix it? You know the diverted profits tax – NZ style? Well not really. The NZ diverted profits tax has some use if there really is stuff happening in New Zealand but clever things have happened to make it look like there isn’t. But here there isn’t stuff happening in NZ. Just people buying stuff from a website.
And remember how all the things a diverted profits tax would help with? Remember how trading with v trading in wasn’t one of them? Yeah this won’t save us.
But the pretending to be a New Zealand company when it is an Australian company. That is a bit cute isn’t it and doesn’t tax avoidance stop cute stuff. Yes it does so what are the facts?
- New Zealand incorporated company
- Australian directors with Australian control
- US website
- Shipping from Australia
- GST registered
- No presence or activity in New Zealand
So taking away any clever stuff. What is actually happening?
An Australian company is selling products to New Zealand via the internet shipping from a warehouse in Australia. What is the tax consequence of this? No tax – as Apple is only trading with New Zealanders not trading in New Zealand.
Compare to current outcome – no tax. Soz nothing for tax avoidance to bite on.
Could it be fixed?
Of course it is possible Apple will get shamed into paying tax here. Putting in New Zealand directors would do the trick. Not holding my breath though. There are also plans by the Government to strengthen our source rules – but nothing proposed tho that will bite on this issue.
What would need to happen is an extension of the ‘contracts made in New Zealand’ rule to say it is deemed to be made in the country of the purchaser for online sales.
So technically not hard.
But here’s the thing. If we do that for Apple – other countries might then do it to Fonterra; Zespri; Fisher and Paykel; Fletcher Building; and Rank when they trade without a footprint. And in this case Apple NZ seems to be paying some tax in Australia. So that will be an interesting discussion with the Australian Treasury.
And it won’t just be the nasty multinationals that get caught. Your correspondent has an extensive vintage reproduction wardrobe. All purchased online from the US and UK from relatively small companies. Risk is such suppliers would see NZ as not worth the effort and stop selling to us. But then now I live in active wear not such an issue for me.
Oh and the not limited thing? It will be a US check the box company as will the Australian Pty company meaning it is an entity hybrid and Apple Inc can choose how to treat it for tax. Cool – but don’t think it impacts on us. Phew.
Thanks to a comment below – I missed a point I really shouldn’t have.
Even if we do change our source rules every treaty we have requires there to be a permanent establishment or fixed place of business before business income can be taxed. So if our source rules were expanded to make income prima facie taxable in NZ the treaty would then allocate taxing rights to Australia.
So short of resinding our treaties – or shaming Apple into paying tax here – we have to suck it up.
There is also the issue of whether it is right to expect tax given Apple isn’t using anything that taxes have paid for. But currently that seems like an argument from another time given the public outrage.
So while taxes are inherently unilateral – this is something that has to be sorted multilaterally. Except I am not aware of any real work on it. And on that I would love to be proved wrong!
Let’s talk about tax.
Or more particularly let’s talk about tax and fairness.
On leaving the bureaucracy last year there were two issues that drove me absolutely mental and I wanted to put my energies into. The first was the rising prison population at a time of falling crime rates and the second was homelessness. Since then with the former I have become the policy coordinator for JustSpeak and a trustee for Yoga Education in Prisons Trust. For the latter – zip.
So with that in mind I went to a recent Labour Party thing on Housing stuff. But about mid way Phil Twyford said that the Labour Party in its first term of office was going to do a comprehensive review of the tax system to improve its fairness. Now I have heard them talk about this before – but comprehensive review. Wow.
Since then Andrew Little has said they aren’t putting up taxes. So maybe this means this working group will be ‘tax neutral’ in the way Bill English’s was?
Now on the basis that this isn’t simply code for a capital gains tax, I thought I’d do a bit of a scan as to what this could mean in practice. My focus will be on the revenue positive items as the tax community will have their own laundry list of revenue negative ‘unfairnesses’ they will want fixing.
But first I am going to get over myself. Yes fairness could mean a poll tax but when the Left talks about tax and fairness it is implicitly a combination of horizonal and vertical equity. Horizontal equity where all income is taxed the same way and Vertical equity where tax rises in proportion to income.
Alternatively tax and fairness to the Left can also mean using the tax system to remove or reduce structural inequities in the economy and not just in the tax system itself. So here we go:
Now the most obvi unfair thing is the way capital income is taxed more lightly than labour income. Always loved Andrew Little’s comment about the average Auckland house earning more than the average Auckland worker. Dunno why he doesn’t use it more.
Now the lighter taxation might be there for some good reasons including:
- Long periods before it is realised. Is it fair to tax people when don’t have cash to pay the tax?
- Valuation issues. Although this goes once move to realisation based taxes.
- International norm. Soz unfortunately everyone taxes capital more lightly – sigh.
- Lock in effect. If have to pay tax would you ever sell?
- Incentive for entrepreneurship which is a good thing apparently.
Oh and not being able to get elected.
Options include a realised capital gains tax or Gareth’s wealth taxation thing. Both have issues but both would be an improvement if fairness or horizontal equity is your thing.
Alongside the not taxing capital gains is that we don’t tax imputed rents. Remember how owning your own home is effectively paying non-deductible rent to yourself and earning taxable rent? Except the value of the rent is not taxed? Awesome. But its non-taxation also offends the horizontal equity thing – even if it is your house – and so is unfair.
Active income of controlled foreign companies
New Zealand companies that earn foreign business income in their own names are taxed. New Zealand companies that earn foreign income through a foreign company aren’t. Why? International norm. Not fair but everyone else does that too. Also brought in by Michael Cullen. Nuff said.
Capital or wealth taxation
While Gareth’s thing is potentially wealth taxation it really is taxation of an imputed or deemed return on wealth rather than a tax on wealth per se. Actually taxing capital or wealth is where inheritance or gift duties come in.
Now neither of them are actually income taxes. They are outright taxes on capital. And if that capital arose from taxed income then would be very unfair to tax. However not entirely sure that is the case and these taxes are relatively painless as they tax windfalls; don’t effect behaviour and only apply to the well off. So they potentially promote fairness from a ‘reducing inequality’ sense rather than a horizontal or vertical equity sense.
There are a few things here. There are all the issues with interest and capital gains but they reduce if you ever tax capital gains or do Gareth’s thing. Others include:
- Borrowing for PIE investment can get deductions at 33% while PIE income is taxed at 28%
Donations tax credit
Now this isn’t an obvious one as everyone can get a third back of their donations up to their total taxable income. So that is pretty fair. But the more taxable income you have the more subsidy you get. And it can go to a decile 10 school; your own personal charity or a church with an interesting back story. But dude – seriously – who can afford to give away all their taxable income? Perhaps worth a little look.
Labour income that is earned as an employee is subject to PAYE and no deductions are allowed. Labour income that is earned as a contractor is only sometimes subject to withholding taxes and deductions are allowed. Aside from deductions which are likely to be pretty minimal with most employee type jobs – there is an evasion risk when people become responsible for their own tax. Spesh when such people are on very low incomes. Whole bunch of other ‘fairness’ issues too like access to employment law; but this is just a tax post.
Labour – and any income – can also be earned through a company. And a company is only taxed at 28% while the top rate is 33%. So if you don’t need all that income to live off you can decide how much stays in the company and how much you pay yourself. Is that fair?
Now of course there is always the old staple – increasing the top marginal tax rate. And yes that does enhance vertical equity but it also causes other problems elsewhere. So if you are going to make the system more misaligned please make sure that it doesn’t become the backdrop for widespread income shifting as it did last time.
Oh and secondary tax. Now there are many things that are unfair including precarious work and over taxation. Not sure secondary tax is one of them. While you have a progressive tax scale and multiple income sources – you get secondary tax. It appears that under BT – page 22 – the edges can be taken off getting a special tax code which should help but secondary tax in some form is structurely here to stay.
Look forward to it all playing out.
Let’s talk about tax.
Or more particularly let’s talk about the release of the recent government discussion documents on taxing the nasty multinationals.
You correspondent had spent the week before last on stage two of her yoga teacher training. No inner child this time but lots of describing poses in anatomical language. ‘The spine is flexed at the pelvis’ aka you bent over. Same lovely people though. Unfortunately my time on the course was punctuated by a day trip to Sydney – yes day trip – for a family funeral. I did however spend both legs watching a documentary on Oasis. So not entirely wasted. Also brought home number 2 son for a week’s visit.
So after all that I was seriously contemplating giving this week a pass too from posting. Coz like: ‘I am enough; I have enough; I do enough’ and other such lessons from the training. I was even looking for a cartoon to stand in its place:
Or possibly – as it is in colour:
But then Friday morning when I was working thru the details for a big family dinner for number 2 son and girlfriend – on comes the lovely Hon Judith Collins announcing the release of the discussion documents on taxing multinationals. Right. Ok. Mmm perhaps the cartoons won’t really cut it for Monday. But channelling my inner bureaucrat – where March counts as ‘early next year’ – Tuesday can count as Monday. Well broadly.
And the proposals are pretty good. Proper thin cap rules for finance companies are still missing but then a seven year time bar for transfer pricing! Whoa tiger. Even at my most revenue protective I’d never have thought of that. Lots of quite detailed techy stuff all which looks pretty effective to your correspondent.
On interest I am also pretty happy. No earning stripping rules but putting a cap on the interest rate should remove the structural flaw discussed previously and levelling the field by removing non- debt liabilities alg.
There is of course the small matter that with the House rising in July(?) and a Budget in May – there is no hope in hell it will even make a bill before this government finishes. Still no sign of any decisions on the Hybrids stuff that was released in September. And that is just as hard.
But if there is change in government this work will give Grant, Mike, James and Deborah an early taste of implementing fairness in the tax system. Coz there is nothing large well advised companies enjoy more than tax base protection. And they hardly ever lobby Ministers; harangue officials; brief journalists or turn up to select committees to advise them of the damage such tax measures will do to the New Zealand economy. So quite a good warm up for their fairness working group.
But I digress.
There are many and varied ways for non-residents to not pay tax with many and varied solutions. Most of which are in the discussion documents. But the one potential solution that gets all the airtime is the diverted profits tax. Which is a pretty narrow solution to a pretty narrow problem. But hey much like the iPhone 7 – irony intentional – even if our tax environment is different or our iPhone 5 is still fine – the UK and Australia have one so we want one too.
What is being proposed is the diverted profits tax equivalent of the iPhone SE – a 6 in a 5’s body. But when your existing phone really isn’t that bad.
And because it all gets so much media attention – this is the one techy thing I’ll take you through dear readers. But I am very sorry there is a bit of background to go through first. Kia Kaha. You can do it.
All taxpayers – resident and non – resident – are taxed on income with a New Zealand source. Our source rules however were devised in 1910 or so. Long before the internet and possibly even before the typewriter. Tbh tho they aren’t that bad and periodically get a wee tweak. They are broadly comparable to other countries. They include all income from a business in New Zealand which can include foreign income as well as income from contracts completed here.
Case law however has narrowed this to income from trading in New Zealand rather than trading with New Zealand. So foreign importers selling stuff to punters here are out of scope but a business here – even an internet business – game on.
The source rules are further narrowed by any double tax agreements. Here now New Zealand business income of a non-resident is only taxable in New Zealand if it is earned by a permanent establishment aka PE. And a PE is a fixed permanentish place of business. Once upon a time it would have been pretty hard to be a real business and not to have a fixed place of business. Possibly not so much now.
So if the non-resident earns business income through a fixed place in New Zealand – taxable – otherwise not. And for historic reasons the fixed place can’t include a warehouse. Coz that is like only preparatory or auxiliary to earning the income – not like the main deal. Yeah I don’t get it either.
Tax planning Apple and Google style
So when you put together the combo of no tax when:
- contracts not entered into in New Zealand;
- income earned from trading with New Zealand;
- no fixed place of business; and
- warehouse doesn’t count.
You kinda get the most widely known of the BEPS issues. The Google and Apple thing. Tbf I think they also use treaty shopping and inflated royalties but above is also in the mix.
Diverted Profits tax UK Style
Now a diverted profits tax doesn’t deal with the ‘trading with’ thing coz that is pretty entrenched and there are limits to anyone’s powers on that. And of course this would mean our exporters who ‘trade with’ other countries would become taxable there too. But it has a go with the other bits.
In the UK their diverted profits tax pretty much deals with situations as above where there is trading in a country and a permanent establishment should arise but doesn’t. The way it works is to say : ‘oh you know the income that would have been taxable if you hadn’t done stuff to not make it taxable – well now it is taxable.’ ‘Oh and it is like taxable at a much higher rate than normal – coz like we don’t like you doing that.’
And now New Zealand
Now in New Zealand that kind of I know you have followed the letter of the law – but dude – seriously is countered by the tax avoidance provisions. And much to the chagrin of the Foreign banks; specialist doctors; and Australian owned companies it does actually work in New Zealand.
And just because the tax avoidance provisions are being successfully applied doesn’t mean that the law shoudn’t be changed. It is a bucket load of work to investigate; dispute and then prosecute successfully. And if there are lots of cases – and there do appear to be – law changes are ultimately less resource intensive.
But even given all that I am somewhat surprised that what they have proposed is very similar to the handwavy tests of the UK. A bunch of clear questions of the structure and then asks if ‘the arrangement defeats the purpose of the DTA’s PE tests.’ Ok. Not a million miles from the parliamentary contemplation test with tax avoidance. So not entirely sure what extra protection it gives us other than being a bright shiny tax thing.
But then how different was the iPhone 6 from the iPhone 5 after all? And while the iPhone 7 is newer and flasher is it actually better?
Who knows though maybe New Zealand’s version of a diverted profits tax has a signalling benefit to the Courts. And its not like it will do any harm. So long as you don’t count additional complexity as harmful.
So all in all not bad. With the earlier Hybrids and NRWT on interest – even if the diverted profits tax equivalent may not add much – all the rest of the proposals should deal to undertaxation of non- residents.
Let’s talk about tax.
Or more particularly let’s talk about non-residents buying property in New Zealand.
Your correspondent has never understood the expression the devil is in the detail. Coz as someone who has spent her career in detail – I have always found the truth or the clarity to be in the detail. Because surely it is only from the detail that the high level stuff can come? Otherwise how do you trust that the principles or concepts are right?
All of this came back to me – as I mentioned last week – when a reader asked about the non- resident stats on property purchases. And how they kinda get touted as being both evidence and not evidence of low levels of foreign ownership in New Zealand.
As it all just very confused with claim and counterclaim – it is worth starting at the beginning. And in the beginning was Budget 2015. The government wanted a demand side measure or measures to help cool the housing market aka something to reduce the number or value of buyers in the market. And yeah that is me in the early stuff.
Where they landed was a combination of the:
So the people who have to provide NZ IRD numbers are all companies, trusts and partnerships as well as individuals who have limited connections to New Zealand or are not selling a main home. So pretty much everyone except anyone who can vote and is selling their family home. This meant IRD could track buying and selling of property better and stand a better chance of enforcing the Brightline test as well as the intention test.
And the people who had to supply foreign IRD numbers were anyone – individual or entity – who a foreign country had claimed under their tax residence rules. And it was tax residence before any treaty would apply too so these people could also be tax resident in New Zealand. Think Mr Thiel. This meant IRD could let foreign tax authorities know what their tax residents were doing here . And if the foreign country had a capital gains tax – very likely – they might be interested in this information.
Now let’s have a look at the LINZ pie chart. This chart is simply a summary of those who gave foreign IRD numbers and those who didn’t. So what can it tell us about the level of ‘foreigners’ buying residential property? Well actually absolutely nothing. Coz in the 3% this could include:
- A New Zealand incorporated company with New Zealand shareholders but with directors control in either Australia, China, Canada or the UK. Coz remember from last week how shareholding was irrelevant for residence?;
- A company incorporated offshore with New Zealand shareholders but with high level control in New Zealand;
- An American citizen who lives here all the time buying an investment property;
- A trust with any of the above as a trustee.
Now in practice some scenarios are more likely than not. But the key point is that even tho 3% is small it could also include buyers – as above – that don’t exactly feel foreign.
And in the 60% green – NZ tax resident only – the reverse becomes even more pronounced. This group can include a:
- company incorporated in New Zealand with high level control in New Zealand but offshore shareholders;
- trust with a New Zealand resident company or individual as a trustee but offshore settlor and beneficiaries aka our friends the foreign trusts;
- foreign citizen on a working or student visa in New Zealand for more than 6 months.
And all of this makes complete sense when the objective is helping treaty partners enforce their tax laws. As where there is no tax claim on the individual or entity by a foreign country there is no need for a foreign IRD number. But to consider this group ‘not foreign’ – bit of a stretch really.
Now the really interesting thing tho in all this stuff is there is a defintion in the mix that is a reasonable approximation of ‘foreign’. That is the term ‘offshore person’ (pg 15). It is used for the NZ IRD number requirement and as a carve out from the main home exclusion.
In offshore person there are no tax concepts and comes pretty close to what intuitively would be considered a ‘foreigner’ or a NZ citizen with limited ties to New Zealand. For individuals an offshore person includes non-citizens; citizens who haven’t been here in 3 years or permanent residents who have been absent for a year. For companies, partnerships and trusts it is where the 25% of the beneficial ownership is by these individuals who have these limited ties to New Zealand. Peter Thiel may be an offshore person given how little he seems to be here.
So if you actually wanted a proper foreign register of buyers of residental property or wanted to assess the level of foreign ownership in NZ – that offshore person definition really isn’t bad. It would need work if you started banning these sales as it does include actual NZ citizens and the company/trust foreign threshold is a 25% ownership which is kinda low. But still a lot better than anything based on tax residence.
So is that question asked anywhere? Nah. Facepalm. I guess coz like they really really don’t want a foreign buyer register.
But if you think it through – all the Budget 2015 things were really actually only about tax. And with LINZ being the easiest place to collect the data. So it makes complete sense that this stuff is administered by LINZ – joined up government and all that.
But what doesn’t make sense is why poor old LINZ has to produce these reports. Because honestly why does anyone care what percentage of land sales might be exchanged with a foreign tax authority? Even your correspondent the international tax geek – as the Americans would say – could care less.
But though much like the:
- Bright Line test which is the infrastructure for a capital gains tax;
The offshore person’s test could be the basis of a register of foreign buyers. Thereby continuing this government’s kind provision of the springboard for the next lefty government’s policies. And who says John Key doesn’t have a legacy?
But first LINZ would have to start collecting that information.
PS This is the last post for the next two weeks. I have part 2 of my yoga teacher training coming up. Namaste.
Let’s talk about tax.
Or more particularly let’s talk about tax residence for companies and trusts.
Following Mr Thiel’s post a reader asked about the non- resident purchaser stats that LINZ produces. And so I wrote a post on that. I really did. But as I was going through it it became clear to me that the LINZ stuff was actually super hard. Even for you dear readers. And – given I hadn’t taken yet taken you through the joys of tax residence for companies – super hard was actually super impossible.
So dear readers today you get company residence. And hang in there coz next week you get a discussion of the LINZ data where I try to clear the smoke and mirrors that is those stats. But that is next week. So back to tax residence and companies.
Ok now companies have separate legal personalities and so they can contract and do stuff independent of its shareholders. And the total wheeze is that if the company fails shareholders are not liable for its debts if their capital is fully paid. They do lose the dosh they put in as capital and of course if that was spent on deductible expenses and it is a closely held company those losses can be offset against other taxable income. But you know that already so you won’t get any more on that from me today.
So back to residence. As a company is its ‘own person’ the concepts of prescence or connections with New Zealand used for actual people make no sense with them. They need their own bespoke tests. And in New Zealand they are:
- Head Office
- Directors control
- High level management
If anyone of those is in New Zealand then game on – New Zealand resident – taxable on worldwide income. Or at least before a treaty comes in.
But looking at that list and thinking about how often in tax policy the statement ‘a company is a vehicle for its shareholders’ is used. What is not on that list?
Well done – shareholding. A company could have 100% foreign shareholders – hit one or all of those tests and still be prima facie taxable on its worldwide income in New Zealand. The opposite also applies. A company could have 100% New Zealand shareholders and meet none of those tests. It then would be non-resident and so not taxable on its worldwide income. Now because that is just too cute there are other – controlled foreign company – rules that then come in. But they are for another day.
So key message – residence does not equal shareholding or beneficial ownership. Now in practice there will be significant overlap coz NZ companies are really for NZ resident shareholders. But won’t be a complete set.
And joy of joys other countries have similar tests:
Australia – incorporation or directors control
Canada – Incorporation or directors control
US – incorporation
And yes dear readers – you’ve got it – two countries could claim a company. A NZ incorporated company with effective management offshore in UK or China or Australia or Canada could be claimed by those countries too. Similarly an Australian incorporated company with NZ high level management will get claimed by both Australia and New Zealand.
And then – as with Mr Thiel – the treaty will decide who gets the rose. With companies the test in the treaty is usually the place where the high level decisions aka place of effective management is. So as with Mr Thiel there is domestic law tax residence and residence for the purpose of a treaty. And the music finally stops with the treaty.
Ok well done. Now that wasn’t too hard. Now let’s try trusts. In a trust is a settlor that puts in stuff; a trustee that legally owns the stuff and manages it on behalf of the beneficiaries.
For those of you who followed the foreign trusts thing you may have heard something like ‘ NZ has a settlor based system for taxing trusts’. Now that is almost right. New Zealand has a settlor based system for the taxation of distributions. The residence of the trustee, however, is the starting point for the taxation of trusts.
And the tax residence of the trustee is the tax residence of the company or individual that is the trustee. So again the residence of the trustee could be completely different from the residence of the settlor or the residence of the beneficiaries.
Now why I am labouring this potential disconnect will make more sense next week. Feel free to pre read the LINZ reports in the first link.
Let’s talk about tax.
Or more particularly let’s talk about the charitable tax exemption given to Scientology.
For reasons that are beyond me I have seen very few of Tom Cruise’s movies. Even in the mid/late eighties when he and I were in our respective heydays. Whether it was my twice weekly Rocky Horror attendance that crowded them out or the current boyfriend didn’t want the competition – couldn’t tell you. And it wasn’t as though I was super geeky or anything. Both The Breakfast Club and Merry Christmas Mr Lawrence ‘spoke to me’ – I was young what can I say – so defo the target audience for Mr Cruise. Also have never seen An Officer and a Gentleman but I think that’s Richard Gere.
I did see All The Right Moves an early film that wasn’t too bad. And I did see one of the Mission Impossible films with my boys. Truly excreable but it was clear my offspring not me were the target audience there.
Apart from his films and rotating cast of wives, Tom Cruise is also famous for being a member of the Scientology church which became newsworthy last week. Now again for reasons that are beyond me I had always thought that the Scientology Church wasn’t a registered charity in New Zealand. But recently a former colleague told me that I was wrong. Perhaps I was thinking of the Jedi? Coz they aren’t a registered charity.
Yeah that must be it. I was thinking of the Jedi.
But just in case I am not the only one confusing them with the Jedi, I thought I might look at what is public on the Charities Register and how they could have got registered.
Mr CharityWatchNZ and Society for the Promotion of Community Standards – name which is a blast from the past Patricia Bartlett who didn’t like swearing or nudity – have both done more fulsome discussions on Mr Cruise’s religion in New Zealand which are worth a read.
Now I am sure you remember from A Plague on all your Houses that there are two ways Scientology could become registered. One through the advancement of religion where the benefit to the community is just assumed or through the catch all option of other matters beneficial to the community where there is also a public benefit test that needs to be met.
It appears to have been registered as a religious charity but its purpose statement seems to cover all bases. Arts and culture; social services; human rights as well as emergency disaster relief . All for the general public and not just members of Scientology. Lucky us. A degree of divinity is defo needed to do all that.
And from the news reports that is what they say they are doing too. Refurbed a heritage building complete with dolls and help disenfranchised youth. Your correspondent is big on help for disenfranchised youth and am sufficiently twee to enjoy a nice heritage building. So go them.
But of course being charitable they not only don’t pay tax on trading income – they also get access to the donations tax credit. You know the one where the ever tolerant taxpayers of New Zealand effectively give a charity one dollar for every two donated. And looking at their annual return this means potentially $600k in 2015 and $250k or so in 2014 and 2013. So – assuming all donations claimed the credit – over $1m in 3 years. But it is a lovely building and what about all those disenfranchised youth.
Now they apparently do other stuff. Auditing or something. And if that isn’t beneficial to the community I don’t know what is. Wonder if I can get a donations tax credit for my CAANZ registration? Don’t actually know how to audit though. I wonder if investigate is close enough?
Let’s talk about tax.
Or more particularly let’s talk about tax residence.
There is currently is a big to do about Peter Thiel both here and in the foreign press about exactly how did a US billionaire become a New Zealand citizen. Soz can’t help with that. But on my Facebook feed this morning is coming the question – so is this guy tax resident? Now that I can do off the public stuff and is pretty much probs yeah/nah. But citizenship – scmitzerzenship – really not relevant much at all.
There are many concepts of residence used in the bureaucracy. The main one is permanent residence – an immigration concept – which pretty much gives the recipient the rights of a citizen except maybe you can’t stand for Parliament.
Tax residence however – who would have thought – is a completely different concept. While in practice most New Zealand permanent residents and citizens will be tax residents. It is by no means a dead cert.
Now why tax residence matters is that residents are taxed on any foreign income earned and fully taxed on New Zealand income. Tax non-residents are not taxed on foreign income and have concessionary rules on how New Zealand income is taxed. Think Google.
For an individual there are two ways – you can become tax resident and a number of ways you effectively lose it.
The two ways are:
- Being here – an individual who is physically in New Zealand for 6 months in ANY 12 month period becomes New Zealand tax resident.
- Connections to New Zealand – even if you are here less than 6 months in any twelve month period if you have a house you live or have lived in while you are here AND you have other connections you will become subject to tax in New Zealand on your foreign income.
So looking at Mr Thiel. According to reports the dude has two houses in New Zealand. Combined with his New Zealand citizenship and the stuff wot he did to demonstrate commitment to NZ – not free from doubt but – I would say there was a pretty high chance he would hit the connections to New Zealand test. And yes tax friends I am talking about a permanent place of abode but there are non tax people who read this and we’d all agree as terms go it is not the most intuitive.
Now you might be thinking dear readers – woohoo – New Zealand can tax his foreign income. Hello mega surplus and Scandinavian levels of public services.
Ah but not so fast there is now the small matter of the US/NZ tax treaty.
On the basis that he is a ‘naturalised American’ he is also tax resident of the US and they will also claim taxing rights on his foreign income. And here the treaty will sort that out:
- First question is which is the country where he has a home available to him? Ah probs both. Next question.
- Second question which country is where his personal and economic ties are stronger? Mmm tough. A late forties ‘naturalised American’ with business interests there and a confidante of the President v really likes NZ and invests in tech companies. Tricky but I think we can call it for the US.
Now is this tax dodging or tax avoidance? Should we feel aggrieved as New Zealanders that he is a citizen but unlikely to be a tax resident?
I defo don’t think this is tax dodging or tax avoidance as there is nothing cute or clever or structured in being taxed where your stuff is and where your links are stronger. Given the NZ diaspora who are NZ citizens – not all of them will be residents under the two tests and even if they are they will also have the benefit of their treaty. And in theory anyway he should be paying tax on his foreign income in the US.
But I can only hope that when the ‘exceptional circumstances’ were being weighed in Mr Thiel’s application the Minister knew that while we were getting a citizen – given how international tax works – it was unlikely we were getting a taxpayer.
Lets’s talk about tax (and interest deductions for non- residents).
Over the last couple of months, your correspondent has become completely obsessed with the Netflix series The Crown. There really is something for everyone: fifties fashion; power plays and constitutional crises. On top of that it should also be a training video on how NOT to give advice. Some of the incomplete partial advice the young QEII received from her chief advisors – as well as close family – was nothing short of incompetent and unprofessional.
From time to time the Duchess of Windsor makes a minor appearance usually as a plot device for the Duke to explain things too. As well as coming from central casting as chief villian in the abdication saga – even though it wasn’t actually her that abdicated cherchez la femme I guess – she is also famous for that equally feminist quote that a woman can’t be too rich or too thin. I will have to take her word for that having never got that close to either.
Now the thin part turns up in tax in something delightfully known as thin capitalisation. Now while it sounds – and is – quite techy it is a concept that underpins our ability to get tax from non-residents. So you know like quite important then. And also the basis of all my moaning that for all the talk on the government getting tough on multinationals a big ticket item like interest deductions keeps sliding away. And and no one is calling them on it.
Taxation of New Zealand debt
Soz dear readers but before we get to the truly exciting tax thin thing – kinda need to talk about how debt is taxed. But you can do it dear readers – you can do it. Breathe in and out.
When a totally New Zealand business borrows from a totally New Zealand bank – say the local dairy from Kiwibank – the interest paid reduces the dairy’s profit which in turn reduces the dairy’s tax to pay. However Kiwibank has to pay tax on that income.
And the tax is according to the normal rules – the progressive tax scale if an individual or the company or trust rate. So if a business was earning $500 profit before interest of $100 – it now pays tax on $400 but the lender also pays tax on the $100 so $500 is still taxed. So in a closed system – interest causes a repackaging of how tax is paid rather than being a net reduction. [Yes there is lender’s deductions but I am assuming that away ATM as this is hard enough already.]
Taxation of foreign debt
Now this is not the case when the lender is non-resident. Payments are still deductible but the non-resident lender is only taxed at most at 10% non-resident withholding tax. So in the previous example the $500 taxable profit has effectively become $400 taxable profit.
The thing tho is that normal commercial and business considerations will naturally put a lid on how much debt a business has. As you actually have to pay it back and you have to have the cashflow to meet the interest payments. For the economists reading – a graph to keep you interested.
But this isn’t the case though when you are a New Zealand subsidiary being directly funded by a foreign parent. It is going to have to fund you anyway and its balance sheet is taking the risk of your failure. So faced with the choice of funding by debt which costs 10% tax – at most – or 28% the company tax rate if funded with equity … Mmm tricky – let me get back to you in that one.
So as a way of attempting to reapply some commercial pressure on a foreign controlled New Zealand company – the tax rules say if your debt is more than 60% then you are thinly capitalised and interest deductions effectively start to be denied.
And what could be more fair than that?
All – directly or indirectly – foreign controlled companies are restricted to interest deductions on a debt to assets ratio of 60%. Actually two things:
1) Nature of business Some firms through the nature of their business aren’t naturally funded by debt – and so costs other than interest are their major deductions.
Take for example a supermarket that rents its premises. It’s major asset will be its inventory that will primarily be funded by the terms given by its creditors. Its major deductions will be purchases, staff costs and electricity. This means that such a foreign owned business has the ability to insert additional debt and strip out profits based on its asset base that capital intensive businesses that are naturally funded by debt cannot. This is because for them the 60% threshold is already used up to pay for actual assets.
And capital intensive businesses naturally funded with debt can’t just add additional purchases; staff costs and electricity to level the playing field as those costs won’t get profit back to its shareholders.
In practice it isn’t supermarkets as I think they are all New Zealand owned cooperatives. But it is Life Insurers which are naturally funded by their policyholder base and distributors which are also naturally funded by their creditors.
2) Finance companies One of the other parts of the thin cap rules is that any firm that lends to third parties – finance companies – get a reduction in their debt amount and their assets amount by the value of their third party lending. It was originally brought in as a way of not making the rules too onerous for foreign owned banks. As it is completely legit that banks don’t carry equity levels of 40%.
Unfortunately as the tax base found in the Banking tax avoidance cases it really didn’t put any practical constraint on excessive interest deductions.
Now registered banks have their own special banking thin cap rules. But foreign owned finance companies – nothing. Effectively unconstrained interest deductions as was the case previously with the banks.
And then there is a final hole in the rules that might be fair to everyone in the thin cap rules but not so much to anyone not controlled by a foreigner.
Now you have all done really well to get this far. Go and get and drink of water or a cup of coffee and come back. You need to know this next bit.
The thing about the thin cap rules is that they constrain the quantity of debt. Transfer pricing however sets a price for the interest on the debt. And the higher the levels of debt the higher the market price for the interest – as high levels of debt mean there is a higher risk of bankruptcy. This is what the economists graph says above – so it must be true.
But but dear readers I hear you say – the thin cap rules constrain the amount of debt a company can hold so alg. The interest rate can only be at most that which relates to a 60% threshold.
Now well done for getting this far. Unfortunately – close but no cigar. The sequencing – as the economists would say – is:
1) Interest rate is worked out under transfer pricing based on actual amount of debt. Say 20% instead of 7% if really high bankruptcy risk.
2) Interest rate x amount of debt calculated to give potential interest deduction.
3) Potential interest deduction reduced by proportion of debt over 60%.
So as you see the higher interest rate still gets embedded as a deduction. It isn’t like transfer pricing insists on the interest rate that applies to the 60%. It seeks an armslength price for actual debt levels. And that is embedded in our treaties so no way around that.
Now the OECD has proposed an option that would cut right through this. They are proposing that countries adopt an earnings stripping rule which would link the amount of allowed interest to the profit before tax. To the accountants – base the restriction on the P&L rather than the balance sheet.
And yeah that would work. There are a bunch of issues that freak people out like what if I had a bad year and my sales fall and you restrict my interest deduction and I have to pay tax and I have had a bad year and it’s not fair. For these type of reasons there may be reasonable resistance to moving to the OECD proposals.
But our current rules are far from even handed and contain a structural flaw. So Hon Judith if you choose not to adopt the OECD proposals – I look forward to your improvements to the existing rules coz a level playing field they ain’t. And with potentially a wall of American interest deductions looking for a new home, we need to make sure we are protected.
Let’s talk about tax.
Or more particularly let’s talk about Oxfam’s recent press release on inequality and tax.
Now dear readers when I moved to weekly – hah – posting it was because this blog was supposed to be my methadone programme. Getting me off tax and on to other issues. So when I posted last night – after having posted 3 times last week – I gave myself a good talking to. This had to stop. One post a week was quite enough to keep the cravings at bay. To continue in this vein would risk a relapse.
But this morning while I was getting dressed my husband came and turned on the radio. Rachel LeMesurier from Oxfam was talking about inequality and then she talked about tax and then Stephen Joyce came on and then he talked about tax and then he talked about BEPS.
Just one more little post won’t hurt I am sure and I’ll cut down next week honest.
Oxfam has compared the wealth of 2 New Zealand men Graham Hart and Richard Chandler to the bottom 30% of all adult New Zealanders. Now the inclusion of Richard Chandler seems to be a rhetorical device as from what I can tell he hasn’t lived here since 2006. So very unlikely to be resident for tax purposes.
In the interview Rachael Le M also made reference to the tax loopholes that support such wealth. So using what is public information about Graham Hart and what is public about the tax rules I thought I’d make a stab at setting out what these ‘loopholes’ are.
Now first dear readers please put out of your head anything you have heard about BEPS or diverted profit tax or any of the ways that the nasty multinationals don’t ‘pay their fair share of tax.’ None and I repeat none of this is relevant when dealing with our own people. It might be relevant for the countries they deal with but not for New Zealand. I am hoping that officials will also explain this to new MoF Steven Joyce as when he came on to reply to Rachael – he talked all about BEPS. Face palm.
Graham Hart is a serial business owner. Buying them sorting them out and then selling off the bits he doesn’t want all with a view to building up a Packaging empire. A Rank Group Debt google search also indicates that a substantial proportion of all this buying and selling was done through debt. And at times quite low quality debt which would indicate a proportionately higher interest rate. A number of his businesses are offshore.
So then what ‘loopholes’ – or gaps intended by Parliament – could Mr Hart be exploiting?
The first and most obvious one is that there is unlikely to be any tax on any of the gains made each time he sold an asset or business. The timeframes and lack of a particular pattern – as much as Dr Google can tell me – would indicate that the gains would not be taxable.
The second is that income from the active foreign businesses will be tax exempt and any dividends paid back to a New Zealand will also not be taxed. Trust me on this. I’ll take you all through this another day.
The third relates to debt. Even though it assists in the generation of capital gains and/or the exempt foreign income it will be fully deductible. Now because of the exempt foreign income there will potentially be interest restrictions if the debt of the NZ group exceeds 75% of the value of the assets. A restriction true but not an excessive one given exempt income is being earned.
Now also in Oxfam’s press statement is a reference to a third of HWIs not paying the top tax rate. I am guessing some version of one and three plus the ability to use losses from past business failures is the reason.
Unsurprisingly Eric Crampton of the New Zealand Institute is not sympathetic to Oxfam’s views and points to our housing market as the main driver of inequality. So then in terms of tax and housing the other tax ‘loophole’ then would be the exclusion of imputed rents from the tax base.
Now one answer could be Gareth’s proposal. That is if someone could explain to me how to tax ‘productive capital as measured in the capital account of the National Income Accounts’ in a world where tax is based on financial accounts according to NZIFRS.
The second could be a capital gains tax even on realisation and the third some form interest restriction or clawback when a capital gain is realised. Oh and taxing imputed rents.
How politically palatable is this? Not very given National, Labour, Act, New Zealand First and United Future are all opposed to a capital gains tax – at least Labour for their first term.
But then maybe it is stuff for Labour’s working group. Will be interested to see this all play out.
Let’s talk about tax.
Or more particularly let’s talk about the Republican party’s recent proposal to impose ‘border adjustments’ as a reform of their corporate tax system.
To date this has passed me by. Slowly though things have percolated up to various feeds I follow. All talking about how Trump can balance the budget and punish companies that export jobs. The first I saw looked like a GST where imports are taxed and exports aren’t. Fair enough I thought if the US wants to impose import duties – ok but nothing to do with me. I do income tax not tariffs. I won’t be commenting. Good luck with the WTO on that. And our US tax treaty only covers federal income taxes not value added taxes so no issue there.
Then I saw something that said it was income tax. Sales to foreigners wouldn’t be taxed and purchases from foreigners wouldn’t get deductions. And no interest deductions coz it was a cashflow tax. Whoa I thought – that’s odd. How do you deny interest deductions as they are a cashflow? And what about restricting deductions for local purchase costs when you aren’t taxing foreign income? How’s that going to work?
But in that article Professor Alan Auerbach is talking positively about the proposals. Penny dropped.
A few years ago Prof A came to New Zealand with some other academics and gave two presentations on destination taxation that I am embarrassed to say did not understand one word of. Awesome so that is what this is about and I will have to do some actual work to comment rather than accessing my increasingly failing tax memory.
Having now done some work – that is I found the good professor’s 2010 paper and read it – I can see why I didn’t understand. It is a major change in how income tax systems work and so nothing really would have resonated.
Now let’s see if I can paraphrase the 29 pages.
Focus is on taxing cashflows that originate in the US – so:
- Foreign sales not taxed;
- Foreign purchases not deductible;
- All domestic purchases – including capital items – are deductible;
- All domestic borrowings – full amount borrowed not typo keep breathing – are taxable;
- All domestic lending is deductible; and
- Foreign borrowing and foreign lending – not respectively deductible or taxable.
Wow just wow. So wish I had followed this when Prof A came out. I would have had soooo many questions.
The advantages of this are said to be:
- Tidies up the US treatment of foreign income and removes the incentive to move US income to havens because the US would tax it even less. Yep agreed.
- Treats debt and equity equally and removes the tax preference for debt. Yep does that too as while capital items are fully deductible the full amount that is borrowed – so long as it is borrowed domestically – is taxed.
Issues with this though kinda are:
- Not only originally US income could find its way back from abroad. So could most actual foreign income actually earned overseas – as Auerbach is proposing the US become the MacDaddy of tax havens.
- No deductions for foreign purchases but deductions for the same domestic purchase. Mmm what does that sound like? Ah discrimination according to the US/NZ treaty – is what it sounds like. Article 23(4) to be precise.
- Foreign purchases not deductible but domestic sales taxable. Mmm how long will it be before foreign subs start servicing the US market? Now that can be stopped if they reform their controlled foreign company (CFC ) rules – but a CFC is by definition foreign – and isn’t foreign stuff out. It can also be stopped through a reform of the permanent establishment rules as proposed by the OECD but isn’t that a nasty pinko Obama thing?
- Domestic borrowings fully taxable but foreign borrowings not. Too easy. Bye bye local banks. Hello City of London.
There are other things like I am not at all sure that full deductibility for long lived assets is at all the right policy as it doesn’t match the decline in their economic life. So the longer lived the asset the greater the tax expenditure – because why? Is there a shortage of long lived assets in the US economy? And accelerated depreciation was the basis for the double dip leases that were all the rage around and before 2000. But maybe the requirement that the asset has to be in the US will protect them this time.
Now that was 2010 and an academic paper. Let’s see what has actually proposed by policy makers – Paul Ryan nonetheless.
Paul Ryan’s 2016 tax policy allows: full deductions for capital expenditure; repatriation of foreign dividends tax free; ‘border adjustment’ aka taxing imports and exempting exports; ‘streamlining’ subpart F aka CFC rules and denying deductibility for net interest. So pretty much Professor Auerbach’s proposal with a corporate tax cut to 20c and not the foreign bank preference.
As a big interest whinger – here, here and here – I am going to be really interested to see how interest denials stay the course. The rest of the proposal looks pretty standard right wing with a bit of foreign bashing with the foreign purchase deduction denial. But denying interest – wow – that is huge. Further than I would go even with a reduced corporate tax rate. But then maybe the interest deductions will flow into foreign countries at the same time the income is flowing out. All the more reason for New Zealand to a make sure we have interest deductions for non- residents properly sorted. Next week’s post promise.
In Paul Ryan’s thing there are some spurious references to the WTO and how they are mean to the US – I think that is called doing their job – but no reference to the tax treaty breaches. But the IRS international tax counsel know all about these issues and I hope they are being funded properly – coz buckle up boys – their competent authorities are about to get really busy. Oh and it’s Article 23(3) in the US treaty with China.
And the servicing of the US from say Canada and Mexico – don’t know how far drones can fly – pretty sure though it’s higher than the average wall or fence. But that is my bet as to what will happen when imports are denied a tax deduction. Not more tax revenue and not more jobs. And lots of warning for the companies who can start looking at border real estate. Just like the GOP – so very business friendly.
Yep. Making America great again – one own goal at a time.