Business

New tax framework could be costly for TransTasman business

06:20 am on 9 June 2017

A crackdown on tax avoidance by multinational corporations is set to get serious with a new global tax treaty which has just come into force.

Activists from the Association for the Taxation of Financial Transactions and Citizen's Action (ATTAC) demonstrate in Paris against tax avoidance. Photo: AFP

New Zealand has joined more than 70 other countries in signing the Organisation for Economic Cooperation and Development (OECD) sponsored framework in Paris.

"We are about to make tax treaty history," OECD secretary-general Angel Gurria told the gathering.

The convention is aimed at tackling the problem of companies setting up structures to exploit differences in tax policies around the world.

They do this by shifting their costs and profits so that they pay the least amount of tax possible - known as base erosion and profit shifting.

Multinational companies such as Facebook, Apple, Google, and drug powerhouse Pfizer have long been criticised for using mechanisms to minimise tax.

Mr Gurria said multinationals were conservatively estimated to be avoiding up to $NZ333 billion a year in taxes.

Countries signing up to the convention agree to swap information between tax departments, and to use processes to decide where companies were earning their money and where they should be paying their tax.

Last year electronics giant Apple had sales of $744m in New Zealand but reported a profit of $9.5m and paid tax of $3m.

A tax partner at accounting firm Deloitte, Bruce Wallace, said New Zealand was expected to adopt most of the convention's provisions.

But he said New Zealand companies operating overseas would also be affected by the new measures, and it could make doing business more costly and complex, especially for those operating in Australia

"It is inevitable that the tax rules become harder for everyone to comply with," he said.

"This has the potential to cause headaches for a number of New Zealand businesses."

He said an example would be a company operating on both sides of the Tasman having to get the agreement of the respective tax departments about where it should pay its tax, rather than making the decision itself as currently happened.

Meanwhile, New Zealand has just announced a new tax treaty with the United States, which incorporate many of the OECD measures, including information sharing.

"This will further enhance Inland Revenue's risk assessment processes to make sure that the right amount of tax is being paid," Revenue Minister Judith Collins said.

The government has estimated that it can gather up to $100m in extra tax over the next couple of years in closing tax loopholes.