Category Archives: Cross border taxation

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

 

‘I choose you – Pikachu!’

Let’s tax about tax (and hybrids).

Early in my first stint in the field I properly discovered hybrids. I was just so impressed. Impressed in a German high command discovering Enigma had been cracked kinda way – but impressed none the less. Here were instruments/entities/transfers that could render up tax benefits without tax authorities getting exercised and using words like avoidance, unacceptable or frustration. In the midst of the Structured Finance investigations to look at something so clean and so simple but so (tax) deadly was awe inspiring.

Some people may remember where they were when JFK was shot. I remember when I fully analysed my first Australian Limited Partnership – sitting at my desk at work – ticking off all the legs; finding it fully complied with Australia AND New Zealand’s law but it generated a net deduction. Like I say – completely blown away. As time went on I started to see a place for those words avoidance, unacceptable and frustration- but first love is a very special thing. Ash Ketchem may have got subsequent pokemon but Pikachu was always his first love; and the Australian Limited Partnership was my Pikachu.

And then like pokemon once you see/catch one – you start seeing them everywhere. There were your every day hybrids hiding in plain sight like the workhorse the redeemable preference share. Like Bulbasaur, solid and dependable. Deductible in Australia and imputable in New Zealand – until they weren’t. Then came blasts from the past the convertible note sisters – mandatory and optional – Squirtle and Charmander respectively. Deductible in New Zealand and not taxable in Australia. Or even the well old vehicle the New Zealand unit trust, like Snorlax always there. Loss consolidatable in Australia and New Zealand – until it wasn’t.

Charizard, or repos, played a major part in the Structured Finance transactions. Full bodied and lethal. Here legal ownership was recognised in New Zealand but not in the United States. Whoa. Definitely an evolved form.

There were also lesser known ones. The New Zealand unlimited company – like a company but with no ltd at the end. Kind of an Ekans with no tail. Company treatment in New Zealand and partnership in United States. Losses counted twice – Awesome. 

And not to be out done New Zealand also created its own. The New Zealand Limited Partnership; like an Australian Limited Partnership but newer. So Raichu in other words.

There were also exotic ones. My particular favourite was the mandatory preferred partnership interest aka the redeemable preference share for limited partnerships. Like Togepie (or Jigglypuff) just so cute.

So many pokemon hybrids so little time!

But now Hons Bill and Mike have decided they should all get back in their balls; pokemongo should be deactivated; and the gameboys should be retired. Good call boys good call. Because like pokemon they were glorious but now it is time for us all to do some real work.

 
Namaste

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