by Jolayne Trim

The Government has just introduced legislation to help ensure multinational corporations are paying their “fair share” of tax. What is this all about and what do the new rules say?

Base Erosion and Profit Shifting (BEPS) is a term used by officials and others to describe a perceived practice by multinational entities to pay lower amounts of tax. The term refers to international businesses shifting their profits to countries they operate in that have lower tax rates, thereby lowering their overall tax to pay on the same amount of profit. It is perceived that large businesses achieve this outcome by:

• shifting profits out of high-tax jurisdictions (for example, through internal charges); and 
• putting profits into low-tax jurisdictions (for example, by locating intangible assets in low-tax jurisdictions and using the assets to generate a revenue stream). 

To combat this, the OECD has drafted a series of rules to ensure international businesses are paying the right amount of tax and in the right place. The rules have two components. Pillar One is designed to ensure that multinational businesses pay tax in countries where they earn their income. It was originally aimed at tech companies and has also been known as a “digital tax”. Pillar Two is aimed at ensuring companies pay a minimum amount of tax on their income across all countries.

The second Pillar

Pillar Two has progressed more quickly at the OECD and the legislation recently introduced into New Zealand law is to bring Pillar Two into our domestic legislation. Meanwhile, Pillar One is still being worked on at the OECD.

The Pillar Two rules are complex but in essence, if a business pays less than 15% tax – as a percentage of their accounting income – they will need to pay a “top-up”. This is done through two interlocking rules known as the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR). The Income Inclusion Rule ensures that tax has been paid on income earned. The UTPR acts as a “backstop” to the IIR by requiring the destination country, rather than the source country to collect the tax.

The aim of the rules is also to stop a “race to the bottom” – that is, countries unilaterally lowering their corporate tax rates to attract international businesses to headquarter themselves there.

The unusual thing about the rules, for New Zealand at least, is that they adopt standard definitions of “income” and “tax”. The test is not whether a New Zealand multinational has correctly paid tax under the New Zealand tax rules, but whether it has paid the correct amount of tax as a percentage of its accounting income, as defined by the OECD.

What will this mean for New Zealand businesses?

The Tax Bill currently before Parliament proposed that the rules could apply from 1 January 2024 for New Zealand MNE operations under the income inclusion rule and 1 January 2025 for overseas MNEs subject to the undertaxed profits rule. However, the rules will not apply at all if a “critical mass” of countries do not adopt them. We are still waiting to see whether that will happen.

The rules apply to very few New Zealand taxpayers. The current threshold is global minimum turnover of EUR 750M. In reality, very few New Zealand businesses will be required to pay additional tax under the new rules because the entry threshold is so high and we have a corporate tax rate well above 15%.

The Government has decided not to repeat the rules into New Zealand law. Instead, they will be incorporated by way of reference to the OECD model rules. So if the OECD rules change, ours do too.  This has the advantage of keeping the rules consistent across jurisdictions. The disadvantage is that New Zealand is enacting laws it has very little say over.

CA ANZ’s submission

CA ANZ have just finished a submission to the Finance and Expenditure Select Committee on the rules. In the submission we have not commented on the substance of the rules, because the New Zealand Government did not make them. We have commented on:

• the method of incorporation into New Zealand law; and
• the administration of the rules

Because the rules could change at OECD level, it will be important that New Zealand businesses subject to the rules are aware of the changes. We have suggested that Inland Revenue officials be required to let affected New Zealand businesses know about any changes and the compliance with the new rules be made as simple as possible especially for New Zealand businesses that are simply proving they have no additional tax to pay.

Watch this space for an update on Pillar One once that information is available.