Multinational companies in New Zealand are a major contributor to our tax base, paying more than $6 billion a year, which is almost 55% of the total corporate tax base.
But multinationals also present a unique set of challenges. Operating as they do in different tax jurisdictions around the world, it can be a complex matter to determine if a given company is paying the tax here that it should be.
Inland Revenue must thoroughly scrutinise company structures and supply chains to determine the amount of business activity (and the value of the activity) that is actually taking place in New Zealand - and on that basis, understand whether or not a company is meeting its obligations here.
One basic rule is always the same - taxes are levied on a company’s profits (what’s left after expenses are deducted) and not on the total revenue it turns over. Also, income tax does not apply to companies that access the New Zealand market solely via the internet, while basing their physical operations in another country.
There has been a lot of publicity given to the matter of multinational companies minimising their tax obligations in New Zealand and in other countries. Technology companies in particular have been in the media spotlight. Inland Revenue is often asked why they aren’t paying more tax, especially considering many of their products are so popular here. It’s a fair question but often, most of their business activities, are actually taking place outside New Zealand. The ability of a country to tax non-residents on business income depends largely on the extent of their presence in that country.
An example
Think of it like this: Gary’s Gadgets International sells a popular mobile device that New Zealanders have been buying in their droves. The company has a head office in Europe and its manufacturing base in South-East Asia. In New Zealand, Gary’s Gadgets (NZ) Ltd is a small sales operation run out of an office in New Plymouth, employing five people. It services a network of independent retailers in New Zealand that sell Gary’s devices to consumers here.
So in thinking about how Gary’s Gadgets is taxed in New Zealand, Inland Revenue is likely to determine that most of the company’s business activity and value add, is offshore so that’s where most of its tax will be paid.
Tax that Gary’s pays in New Zealand will be determined by the much smaller level of business activity actually taking place in New Zealand – that is, the Gary’s Gadgets (NZ) Ltd five-person sales operation. We shouldn’t forget, of course, that the retailers selling Gary’s devices will pay GST on those sales and income tax on their own profit margins.
Inter-company transactions
The sale of gadgets from the South-East Asian operation to the New Zealand distributor constitutes an inter-company transaction and this is where what’s called “transfer pricing” comes into play. Income tax needs to be paid when companies sell goods, services and other intangibles to their own subsidiaries.
Companies operating in New Zealand are invited to consult with Inland Revenue on the price for these transactions so the right amount of tax can be paid on these transfers. In our example, Gary’s Gadgets could have simplified matters by requesting an advance pricing agreement when it was transferring goods to its distributor in New Zealand to on-sell its devices. Advance pricing agreements represent a more cooperative approach to compliance where transfer prices are dealt with upfront. Demand for these agreements has been increasing by the year as multinationals choose certainty at the start rather than ‘a knock on the door’ later.
With a little help from our friends
Taxing multinationals is increasingly underpinned by much more international cooperation. More and better data, supported by sharper analytics, is being exchanged between tax authorities under a variety of international instruments.
New Zealand is an active participant in the OECD’s work on Base Erosion and Profit Shifting (BEPS) and is strengthening laws in conjunction with other jurisdictions to make sure multinationals are paying the right amount of tax in all jurisdictions, not just New Zealand. We recognise that global problems require global solutions.