Let’s talk about tax (havens).
After eight days on a yoga course the role of balance in postures and in life was a recurring theme. And upon finishing the course this was brought home to me quite starkly. As after eight days of sequencing Sun A and B without naming the poses, understanding my inner child and hugging people that were a week ago complete strangers – your correspondent spent the subsequent week talking about multinationals and tax havens.
Yin and yang. Perhaps not as it is traditionally known but defo in my life.
Now my views on multinationals are ‘on the record’ but I realised I haven’t ever properly discussed tax havens.
Putting aside for a moment that no country has ever owned up to being a tax haven. And so much like the term ‘fat’ – it is in the eye of the beholder.
There are a number of criteria floating around but really they can be summarised as:
- low or no tax and
So yeah for New Zealand and foreign trusts pre Shewan report probs more tax haveny than not and post Shewan less tax haveny than not.
In the campaigns against them, tax havens are often swept up with the ‘multinationals – bad’ messaging. And the story goes something like this:
Multinationals strip profits from developing countries to tax havens. No tax paid in developing country or tax haven. Profits then not sent home coz they don’t want to pay tax on them. Double non-taxation – bad thing – everyone loses.
But in that story there are 2 quite distinct players:
- The developing country who is capital importing and
- the home country who is capital exporting.
The concerns of the developing or capital importing country – of which New Zealand is one – is to ensure that some tax is paid for the use of resources or on the location specific rents.
The concerns of the home or capital exporting country is to ensure that it receives some tax – after foreign tax is paid – for the capital invested.
Traditionally these two concerns have been reconciled through the OECD model for tax treaties. Broadly the approach is to let the source or capital importing country tax first but not too much. Then let the residence country also tax the income but give a tax credit for tax paid at the source country level.
Now that all works beautifully when structures are very simple and the person earning the money in the source country belongs to the capital exporting country. It becomes much more complicated when even simple entites like companies are in the mix. And it all starts to completely break down when tax paid in the capital importing country has no value as a tax credit to the ultimate owner of the capital.
Coming back to tax havens. For capital exporting countries where the multinationals are headquartered, tax havens then are a complete bugg@r. They potentially – will come back to this – put a block on the return on capital from the source country to them.
For capital importing countries like NZ the issue is not so clear. As IMHO isn’t the real concern returns leaving the country untaxed rather than where they go? Coz we have already seen with the use of hybrids it is quite possible for tax to be paid nowhere without a tax haven in sight. Also that income could also be directed to companies in the international group that were otherwise loss making – cross border loss refreshment. So really for capital importing countries, tax havens are just a tool in the mix rather than the definitive source of tax badness.
The story with tax havens being a blight on developing nations is also more nuanced than would first appear as they are often tax havens themselves. Vanuatu? Cooks? Admittedly more low rent – and therefore I would imagine more exploitable – than say Jersey or Bermuda but they still turn up on lists of potential havens.
Also capital exporting and importing countries are not as powerless against tax havens as it would first appear.
For capital exporting countries there is a 50 plus year old tool called the controlled foreign company rules that can be used against tax havens. The way it works is to say – you know if any foreign company is ultmately controlled by anyone in our country – well guess what we want to tax that income too. Trick can be knowing that income exists and so that is why the disclosure campaigns, TIEAs and automatic exchange of information are so useful. And if there continues to be non- disclosure this ups the ante with the tax administration to become potentially tax evasion and the spectre of the prison wall.
For capital importing countries its weapon of choice is the even more old school withholding taxes. Payments made to tax havens can have tax withheld at what ever rate you choose if you don’t have a tax treaty with that country. And if the treaty is a problem – it can strictly speaking be withdrawn.
The fact that these don’t happen really – IMHO – comes down to an international consensus to tax capital income more lightly than labour income. Aggravated by:
- The zero rate of tax borne by charities and pension funds;
- The active income exemption from the controlled foreign company rules;
- Classical taxation of dividends.
None of which provide any incentive to pay tax at the source country or even the home country.
Now tax havens can still be annoying to New Zealand to the extent our people have undisclosed money offshore – and the non- complying trust is worthy of its own future post – but as a country we are a net capital importer and so have much the same issues as the developing countries. And at times the label tax haven comes our way too – fairly or not.