Category Archives: interest deductions

Two men one press release

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.

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

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