Category Archives: Cross border taxation

Much ado

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?;
  • 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.

Andrea

PS This is the last post for the next two weeks. I have part 2 of my yoga teacher training coming up. Namaste.

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The company in residence

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:

  • Incorporation
  • 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

China – incorporation or place of effective management

UK – incorporation or place of effective management

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.

Andrea

Being there

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?

Me nope.

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.

Andrea

Too rich or too thin

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.

Structural flaw

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.

Until February.

Andrea

Destination anywhere

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 – herehere 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. 

Andrea

Timothy W Edgar (1960 – 2016)

2016 has been some year. 

Donald Trump; Brexit and then the deaths of Leonard Cohen; David Bowie; Prince; George Martin; Helen Kelly; Zsa Zsa Gabor, George Michael as well as the heart attack of Carrie Fisher. But one friend has had a baby and two have got engaged – although not to each other – so not a complete write off.

One death though – that has recently made the international tax community poorer – was that of Tim Edgar a Canadian tax academic.

Tim originally trained as a lawyer – and taught at law schools – but a less lawyery person you could not meet. Cases drove him mental. Once in conversation he suggested that instead of the Courts we should just use a random number generator for tax avoidance. Although to be fair it would also work for any of the objective subjective cases like capital/revenue or residence. 

Odd numbers for the Commissioner – even for the taxpayer. Very fair. And would – he argued – have the effect that taxpayers would just stay away from anything that would get them put in the generator in the first place. Good policy outcomes with reduced fiscal cost. What’s not to love?

Tim came to Wellington with his family on sabbatical in early 2000s and worked in Inland Revenue policy. I can’t remember what he was supposed to be working on – GST possibly – but because of his ability and good humour very quickly became a sounding board and contributor to pretty much every team in the division.  He also lived close to me and our families had a lot to do with each other over that time. We introduced the Edgar family to the joys of Fish and Chips.

After that period in Wellington, we kept in touch and our paths crossed a number of times including a joint stint presenting an OECD course in India. Again his depth of knowledge and good humour made him very popular with the participants while his North American tipping practices made him popular with the staff at the hotel.

By the mid 2000s I had become completely obsessed by hybrids in the way my children were with pokemon. So I wanted to analyse them and their effects for my masters dissertation. There was a small difficulty in that there was no one in New Zealand with the expertise who could supervise me. So I approached Tim. 

With his usual good humour and generosity – although possibly it was the opportunity to earn $100 in NZ foreign exchange that clinched it – he agreed. And within 2 weeks I had a parcel of the key items of the hybrids literature in my mailbox. Not sure that is standard operating practice for most supervisors. But then Tim wasn’t most people.

At the time (2004- 2006) there were two views on hybrids. The first – dude get over it countries can do what they like aka the sovereignty argument and the second – it is double non -taxation/ bad aka the economic distortion argument. I wasn’t fully convinced by either view. Tim, however, was very firmly in the latter camp and – quelle surprise – history has proved him right.

Tim was a high level strategic person – but in the sense that he did actually have big picture insights – rather than just someone who can’t cope with complexity or detail. He was expert in Financial Arrangements; GST; international tax; tax structuring or pretty much anything he decided to have a look at.

I particularly remember him sharing his views on formulary apportionment which is touted by parts of the left as the ‘fair’ way to allocate worldwide tax revenues. The thing is – he said – there is nothing normative about allocating through source and residence. What that has going for it though – is that all the countries agree. Formulary apportionment throws all that up in the air – and who knows where you’ll end up?’

We last caught up around his fiftieth birthday – which I am embarrassed to see is almost 5 years ago. He shared with me the changes in his personal and professional life and how proud he was with how his children were doing. He was more subdued than previously but was looking forward to the next stage of his life.

I don’t think this and similar articles was what he had in mind though – particularly as he was always so fit. I struggled to find a photo that represented how I remember him. Even this one which I swiped from his uni’s obituary doesn’t show the exuberant enthusiasm he had for discussing any one of the topics around his head.

I had him on my list of people to contact now I have left the reservation but sadly this post will have to do instead. I will however always remember the laughter, the low ego/high ability combo and the non-standard approach to thinking about tax.

So go well my dear friend. Hail and farewell.


Andrea

Nineteen to Nine

Let’s talk about tax (and Michael Woodhouse).

Any reader of these august pages would be left in no doubt I have a bit of a professional crush on the outgoing Minister of Revenue.

Now all of that may seem seriously weird given that he is a member of a centre right government and I am an out lefty – social progressive please. Except that here’s the thing. So is he. 

And before you protest Hon Mike let’s look at your record. Highlights include:

  • Tightening up the foreign trust rules; 
  • Making foreign debt capital pay tax in a way they haven’t for decades; 
  • Releasing a discussion document to remove the too good to be true hybrid mismatches and 
  • Is thinking about considering finally taxing multinationals properly. 

All stuff that would be more at home in a Green Party manifesto than the Business Growth Agenda. Now until this week I would have thought him a solid performer but not exactly a political operator. And its not like that is a bad thing. Chilled out entertainers get on my nerves.

But then the Herald stuff started on Wednesday. Bylines and headlines of the government taking unilateral action and the Opposition saying it wasn’t going far enough. What?  How was any of this news?

Going through all the detail – coz that is what I do – here are the facts:

  • In June  Hon Bill and Hon Mike announced they were doing lots of multinational stuff including reviewing the interest  limitation rules which is a big ticket way of not paying tax.
  • A month ago Hon Mike announced there would be a discussion document on the whole diverted profits tax thing and interest deductions in February. I never covered it coz it looked quite sane and thought I’d wait for the detail.
  • The reality of a discussion document in February is that while it might make a bill before the election. There is no way it can be passed into law by the time we go to the polls. So it will be become the next government’s problem to actually make it happen.
  • Wednesday the Herald gets an advance copy of a cabinet paper probs also written a month ago. It says no to an actual diverted profits tax but proposes a bunch of stuff based on the work the OECD that should broadly have the same effect but without the drama of overriding our tax treaties.
  • Oh and of course tax is inherently unilateral. Some how that seems to have got missed.
  • The other thing that got missed is there was no detail on any moves to counter interest deductions. That is important but hard. And according to the June statement from both the boys was coming out this year. Waiting. Waiting.

Now from these little factoids Hon Mike got four articles in the Herald and me tomorrow in The Spinoff. Wow. Breathtaking. And – it is worth repeating  – all on a subject announced at least a month ago that cannot become law in this term of government.  And and he got a complete free pass on what he didn’t mention – interest deductions.

Sir. I have underestimated you. A solid performer AND a player.

And now you are leaving me and picking up ACC. But the real news is the change in your ranking from 19 to 9. This week has paid off for you.

Now I am not sure if I am going to find that Hon Judith is a closet lefty. But just in case my advice is:

  • Carry on with the work on withholding taxes and particularly look at how vulnerable workers are treated and their risk of tax evasion;
  • Interest deductions. Coz it is actually a key plank of work of OECD and is on a permanent foreshadow; and
  • Keep an eye of those intermediaries and what they are doing with taxpayer data.

But otherwise good luck. I am pleased that Revenue is going to a senior Minister and none of this ‘outside cabinet’ nonsense. Michael Wood is going to have his work cut out for him marking you.

Namaste

What a capital affair!

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 
  • secrecy. 

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.

Namaste

Working on my playstation tan

Let’s talk about tax (and multinationals).

In her time your correspondent has been mistaken for a number of things. This has included being a

  • Catholic;
  • Card player; and 
  • Lawyer

But  – you know what – apologist for foreign capital really hasn’t ever been one of them. So with this in mind I have been following the campaigns against multinationals and their non-taxpaying behaviour. And much as I hate to say this  –  I actually feel a bit sorry for them. Not a lot mind – but a bit.

A year or so ago while I was still at Treasury I went to the Accountants tax conference. Highlights included a Hip Hop presentation from a group in South Auckland in lieu of an after dinner speech. Pretty progressive for a bunch of tax geeks.

Also one of the main presentations showed the UK enquiry on multinationals where politicians – with no sense of irony – were giving Apple and the likes biffo for how they structured their businesses in response to the laws the politicians had enacted. Facepalm.

Now the public information surrounding multinationals non-taxpaying isn’t pretty. Double Dutch Irish sandwiches and the like. Great for headlines but not for taxbases. 

All done through a combination of being in a country in substance but not for tax  – the preparatory and auxillary out from a permanent establishment; treaty shopping in the form of royalties going to low tax counties and/ or excessive royalty payments. None of it – even to me – is the behaviour of a good corporate citizen.

But here’s the thing – in New Zealand a country where tax laws can be changed and cases can be run successfully in the courts – one of two things will be the case:

Option one. It is tax avoidance. 

Now when I say ‘tax avoidance ‘ – this is tax avoidance in terms of the statutory provisions not tax avoidance coz people think they should pay more tax than they are. 

If it is tax avoidance according to the law then my former colleagues will be getting right stuck in. Now Corporate Legal – remember breathe out – all these issues are beyond public domain. They would – Corporate Legal note conditional tense  -be getting right stuck in as they/we did with the banking cases; avoidance of the top marginal rate; and the hybrid instrument cases. None of which required public outcry before that happened. Just a tax department getting on with its job.

However public outcry is pretty awesome for the front line in tax policing. Always good to know you are on same page as people you are serving.

Now there is quite a delay from problem indentification to going to court – dispute rules; fully discussing the issue with the taxpayer; briefing experts and ensuring all parts of the department are on board or at least don’t disagree and so on. And then there is the possiblity a taxpayer settles; in which case it is never public.

But dear readers never assume that just because you haven’t heard anything that nothing is happening. Because secrecy provisons. The very same ones I spend every blog post negotiating. 

Option two. It is not tax avoidance in terms of the statutory provisions. 

Now if that is the case this means the outcome was intended by Parliament. In the same way currently:

  • Sales of businesses; houses; farms and other assets such as shares  bought without the intention of resale are not taxed;
  • Interest deductions for capital assets that may have incidental income are allowed and can be offset against other unrelated income;
  • Income earned by contractors who do very similar work to employees are allowed work related deductions;
  • Imputed rents are untaxed;
  • Industries such as bloodstock and forestry either have accelerated deductions or deductions for capital;
  • Businesses operated by charities are untaxed;
  • There can be significant delay between income earned at the company level and when it is paid out to shareholders
  • Transfer pricing or associated persons rules don’t apply to consortiums acting together as one entity;
  • The thin capitalisation rules allow businesses funded by creditors the ability to strip profits by way of excessive interest.

Now there is also a move to make multinationals disclose how much tax they pay. Ok cool. But why is it only multinationals and not any beneficiary  – which would include a lot of you dear readers I know it would include me – of the above list? Why is their non taxpaying so special?

And here’s the thing. Parliament  – or really the government of the day – can change its mind. So if any or all of the above is ok but the multinational thing isn’t – Hon Mike can propose a law change. The current solution du jour is a diverted profits tax.

So maybe the target of the campaigns should be the politicans who continue to allow it rather than some companies that couldn’t help themselves? Just saying.

The campaigns will have been very useful in giving Hon Mike an ’empowering environment’. But maybe coz Hon Mike hasn’t done anything yet maybe it is tax avoidance. Even then taking avoidance cases ad infinitem is no way to run tax system.

So Hon Mike GET ON WITH IT!

Coz it is not like boycotting products is an option. At least for me. I am an Apple addict. Not so sure about ios 10 though.

One final thing dear readers – although I am now back to posting twice a week – Monday is Labour Day. So as a good lefty I am downing tools and will be back next Friday.

Namaste.

´╗┐Switzerland of the South Pacific

Let’s talk about tax (and foreign trusts).

Your (foreign) correspondent is having a lovely holiday – thanks for asking  – and is about to get on a train to visit a friend in Geneva.

Several lifetimes ago – my children and hers – and long before I discovered tax or yoga, as young women we worked for a US oil company in London as management accountants. As well as being pleased to see her I am always interested to see how she is doing in a  parallel lives kind of way. She stayed and career tracked and I – well – didn’t. In a substantive sense though our lives are very similar other than maybe her husband had to give up work and my french is better.

Before the Panama Papers our prime minister – bless him – gave an interview where he had a vision for New Zealand as the Switzerland of the South Pacific. Interesting desire as it is a country where women only got the vote in 1971 and one in which a senior employee of a major US company cannot afford to live comfortably. It is french speaking though so maybe it could grow on me as an idea. But then maybe he was just thinking rich with awesome mountains and great chocolate rather than exclusive and secretive. Somehow I doubt it.

And pre Panama Papers foreign trusts fitted a little too well into that vision. Professional advisors charging fees to help rich foreigners hide their money from others. Or maybe not.

In ‘Thank you for Smoking‘ a favourite line of mine is that:

[cigarettes]  are cool, available and addictive. The job’s almost done for us!.

And with foreign trusts there was no tax, little disclosure and no requirement for the money to actually ever come to New Zealand – the job was almost done for them! But after 25 years our valiant foreign trust industry with extensive marketing had only managed to earn $24 million a year with $3 million in tax.

In all the arguments about whether New Zealand was a tax haven or not, one argument got missed by the opposing side. Tax havens charge fees or levies or require the dosh to be parked in the country concerned. None of which applied here. So as a country we got the bad name but not the income – genius.

Now we have the Shewan report and  John had recommended increased disclosure as had other commentators and the  Greens. And I agree this should staunch any reputational damage. The difficulty I have with this though as this simply replaces one cost – our reputational damage – with another cost – additional Inland Revenue administration and distraction from their real job of ensuring compliance with our tax system.

All for $3 million in tax which may well reduce once increased disclosure is in place. At least Hon Mike please reconsider Mr S’s rec for registration fees. $50 upfront and $270 per year – really? I had no idea the department could do its job so cheaply.

Personally I prefer taxation as these are ultimately entity hybrids creating double non-taxation in the same way as the limited partnership or the unlimited liability company – both of which are registered. And it appears from paragraph 7.29 Hons Bill and Mike are open to it. Whether it survives consultation is another thing entirely.

Coz Hon Mike you are right to be considering it and I’m right behind you. If we really aren’t a tax haven then isn’t it fair that the NZ foreign trust is treated the same way as all other entity hybrids? Isn’t consistency a hall mark of a good tax system? And aren’t the foreign trusts in New Zealand  for a bunch of legitimate reasons that have nothing to do with tax?

So – On y va!

Namaste

 

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