Let’s talk about tax.
Or more particularly let’s talk about the tax rules for deregistering charities.
It has been a big intellectual week for your correspondent. Tuesday night White Man Behind a Desk. No tax. An interesting riff on immigration that Michael Reddell clearly wasn’t the tech checker for. Wednesday night Aphra Green Harkness Fellow on US criminal justice reform coz States just ran out of money. I tried to run an argument that this was the good side of low taxes. Didn’t resonate – go figure. And Wednesday morning – Roger Douglas on turning taxes into savings coz #taxesaregross.
And it was on the lovely Roger I planning to write but on Friday was the Greens on how there were bugg@r all foreign trusts reregistering. So I thought I’d write about that and the genius decision to require disclosure rather than taxation.
And as if that wasn’t enough. Saturday morning the latest Matt Nippert on a US and charities thing. An elderly couple with no heirs wanting to transfer wealth to a charitable institution – awh lovely. So nice they chose NZ. But also Panama, low distributions and references to the IRS. Ok. Initial reaction was it looks like FATCA avoidance coz NZ charities are outside its scope of reporting to IRS. Really must get on to my ‘US citizenship is not a good thing for tax’ post. It has been in the can for longer than this blog has been running. So embarrassed.
But one thing really caught my eye. The charities had voluntarily deregistered. Mmm interesting.
Your correspondent now moves a tiny bit in the Charities NGO sector. And from time to time I hear ‘should we stay a charity? Coz need to be careful over advocacy and ActionStation isn’t a charity and it is alg for them.’
To which I try to reply in my best talking to Ministers language: ‘ That’s one option. It would mean handing over a third of your reserves in taxes or all of your reserves to another registered charity. But totes – if that is what you want.’
Strangely the conversation doesn’t continue.
Coz the law changed in 2014 to stop the rort of charities getting lots of lovely tax subsidised donations, not distributing; deregistering and then keeping all that lovely taxpayer dosh for themselves. Go Hon Todd!
Now on the face of it this should apply to our friends here very soon. Section HR 12 applies a year after deregistration and turns the reserves – less wot go to another charity – into taxable income.
Except there doesn’t seem to be anything explicit that makes it New Zealand source income. Possibly personal property or maybe indirectly sourced from New Zealand. But the source rules are kind of old school and want to bite on real stuff not deemed income. No matter how worthy of New Zealand source taxing rights it should be.
And of course none of this matters dear readers if the entity is New Zealand resident. Coz everything gets taxed! And as the trustees are a New Zealand company – high chance it will be. So alg.
Coz if the dosh in the charity all came completely from non-residents – the trust rules make it a foreign trust. And foreign source income aka income wot doesn’t have a New Zealand source is not taxed. So initial view – unless the source rules can bite on this deemed income or the trust isn’t a foreign one – there will be no wash up for our friends here.
Now on one level that is cool. The final tax was all about clawing back the tax benefits given on the initial donations and the charitable tax exemption on income. Here it would have been tax exempt anyway. So alg.
The other argument is that these guys intentionally registered as a New Zealand charity. Got all the good stuff like potentially non- disclosure to IRS as well as being to say they are a legit NZ charity. But now don’t get the bad stuff.
And NZ gets the bad name but not the income. What does that sound like? Oh yes the NZ Foreign Trust rules.
So glad that – according to the Greens – is coming to an end. Shame it had to be such a resource intensive way of doing it.
Let’s talk about tax.
Or more particularly let’s talk about Facebook and their tax payments.
The methadone programme that is this blog is working pretty well and I now have an awful lot of non blog commitments these days. So until after the Budget I will just post when I can rather than every Monday. So those of you who haven’t already – you might like to sign up to email notifications on the right of the screen. Coz dear readers I would hate for you all to miss anything I had to say.
As a further aside I am also open to topic suggestions firstname.lastname@example.org altho I give no guarantee as to when they may turn up.
Now after dealing with Apple, family stuff and Sydney last week; dear readers I was and am a little tired. So as a bit of lite relief after all the nasty multinationals stuff I thought I’d finish off a post on GST I have had in the can for far too long. A reader asked for it last year but it keeps getting crowded out. Soz J.
But then this morning on my feed was a news item on Facebook and how they have very little income or tax paid in New Zealand. And how everyone who gets advertising in NZ contracts with Ireland. And they have very few staff here but earn all this money. But it’s not in their accounts.
Ok right. GST post down you go and Facebook here we come.
Now I have said a number of times there are many and varied ways of not paying tax. Apple uses a wheeze where they give the appearance of being a NZ company but because they are really an Australian company with no physical presence here they don’t pay tax here.
Looking at the 2014 accounts of Facebook New Zealand Limited and the news item Facebook’s wheeze seems to be separating out the income earning process so only some of it sticks in the New Zealand tax base.
Again once upon a time businesses advertised in newspapers or magazines that were physically based here. They would also have had a sales force that would have been a department of the newspaper or magazine probs also based in the same building as the publication.
The New Zealand company
Now the newspaper or website is in the cloud which just means a server somewhere. But there is still a sales force – or at least a sales support force – based in New Zealand. These guys are employed by Facebook New Zealand Limited a NZ incorporated company that earns fees from for its sales supporting.
Now a NZ incorporated company as you know dear readers this is prima facie taxable on all its income as it is tax resident in NZ. Ah you say but ‘what about the directors? Where is the control?’ Well done dear readers yes there are three foreign directors . Sigh. An Australian, an Irishman and a Singaporean. Beginnings of a bad joke. But good news is probs hard to show control in any one country.
So probably still resident under a treaty in New Zealand. And even if it isn’t as the sales support income is being earned from a physical presence here – note 7 shows office equipment – so probably fully taxable here. But expressions involving small mercies are coming to mind – it is only sales support income. But should be at armslength rates – usually done as a markup on cost. So there should always be taxable income here even if it is small.
The Irish company
And in the old days not only would the sales force be in NZ, the advertising contracts would be made with a NZ company. Not now. The Stuff article shows advertising agreements being made with a sister company in Ireland – Facebook Ireland Limited. This is also referenced in note 13 of the 2014 accounts so it must be true.
Now it is conceptually possible that Facebook Ireland Ltd is a NZ resident company if it had NZ directors – please stop laughing – but I am going to assume it isn’t. So let’s do the source rule thing.
Trading in v trading with
By now dear readers you will be quite expert on the whole trading in versus trading with thing. If there were no people here I would have said that this was trading with again. However the people on the ground – albeit employed by the NZ company – complicate the issue and what with the possibility that the contracts are partially completed in New Zealand. Hey I am going to give it a New Zealand source!
Limits of the permanent establishment rules
But then we go to the Irish treaty. Now the normal fixed place of business stuff can’t apply as it is Facebook NZ not Facebook Ireland that has the fixed place of business. However Article 5(5) provides that if another company – Facebook NZ – habitually enters into contracts for Facebook Ireland then game on – PE.
However your correspondent being the somewhat cynical – I have always preferred realist – individual she is is guessing the line is: ‘Dude they don’t conclude contracts for us – they are just like sales support – you know like preparatory and auxiliary. All the like real commercial work is done in Ireland not New Zealand – so bog off Mrs Commissioner.’
Yeah that is a bit clever and yeah that is what the tax avoidance provisons are for. And we can’t assume that the Department isn’t trying to use them.
Diverted Profits Tax – NZ style
Now PE avoidance is exactly how this all appears to your correspondent and that is what the government’s proposals are trying to counter. So lets see how that goes. Tests are:
Second point check – Facebook NZ does sales support;
Third point check – seems unlikely that only $1million was sales revenue in 2014
Fourth point – Ah.
The Irish treaty was concluded in 1988 long before BEPS; the international tax rules were only just coming in; and the Commissioner engaged in trench warfare that became the basis of the Winebox. Number 4 might be a bit of a struggle.
This struggle is alluded to in the discussion document’s technical appendix. Apple is example 1 and Facebook example 3. Example 3 discusses the application of the DPT NZ style and says it really is only any good if new treaties get new PE articles. And then says that maybe some countries won’t want them. Let’s all take an educated guess what Ireland will think.
But don’t panic. The OECD is doing some work on this which should come out in 2020. Awesome but wasn’t this exacly what Action point 1 was all about?
Changing the subject slightly last week Gareth Morgan put out his international tax policy. Most proposals were either the existing law – payments must be armslength or won’t get deduction – or government proposals – burden of proof should be on taxpayer. But his key point of difference is he wants all treaties ‘wound back’. I am not there yet but good on him for putting it on the table.
And given the public anger on all of this and OECD not reporting until 2020 when it was one of the original primary issues with the BEPS project – I would watch this space!
All this discussion on Facebook is only possible because until 2014 they had to file accounts with Companies Office. This changed in 2015 to large companies only. Because compliance costs. They still have to file accounts with IRD but rest of us don’t get to see them and their related party transactions anymore.
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 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.