Taxation (Neutralising Base Erosion and Profit Shifting) Bill

Part 2 is a very important component. It really relates to amendments to the Tax Administration Act 1994 and the implications for the IRD. I think this was an area that occupied a lot of the committee’s time. I’m looking across at members of the committee on the other side as well as our own colleagues here. The issue around how the Inland Revenue Department goes about getting information from foreign investors who have money here—invested in companies doing work in New Zealand—was a crucial aspect. There were a number of submissions around it, and I think, of course, all of us accept there is a balance where if you want to operate in New Zealand, you need to comply with New Zealand rules. You need to comply with them in the sense of providing information and making sure that you’re operating appropriately. On the other side, we wanted to make sure that the Inland Revenue’s discretion and obligations and powers were also commensurate with what would be the normal course of action in these types of arrangements.

The bill has created an opportunity for the IRD to have greater powers. That was the subject of debate for much of the committee’s time. There were a number of components to that, but particularly in clause 50. We had a number of submissions, actually, a whole host of them, from ASB, BNZ, Chapman Tripp, corporate taxpayers, accounting, law firms—the whole works. Their main point was that in clause 50, which is “Section 17 amended (Information to be furnished on request of Commissioner)”, it talks about the requirements on a multinational to provide information.

The first point that these people made was that the proposal was a significant overreach and should not proceed. Of course, that was quite a strong statement. What some of the submitters were saying was that the amendments may be impossible to actually comply with and are not necessary, given existing powers. Another one was that a similar proposal had been rejected previously by another select committee that had looked at this issue and that there was no international precedent for the powers that were proposed in the bill.

The IRD had a slightly different perspective, as you’d imagine, because they needed the powers, in their view—and I agreed with this—to be able to properly investigate and challenge tax positions taken by multinationals with New Zealand operations. Of course, the issue was how they should go about getting that information. The point that the IRD made—and it’s true. It’s a fact that multinationals—if you conduct and manage your tax affairs outside of New Zealand, maybe in some tax haven or even in another jurisdiction entirely, that makes it much more difficult for the IRD to get and source that information when you’ve only got what may be a small branch or subsidiary or even just a sales office in New Zealand with just a few people, none of whom have got any accounting experience or tax experience or any tax responsibilities.

So the issue really for the IRD was: how do you get your hand on that relevant information with the tax position of the multinational, which may be held in another jurisdiction? Of course, on one side of it the IRD was suggesting, you know, a very heavy-handed approach, which was one where they could have powers to require that and to locate that information and bring it back, even though you may be talking to one salesperson in New Zealand, and that’s the difficulty. That was the difficulty with this issue.

Of course, if a multinational was trying to minimise tax—and, you know, we’ve got to be realistic that many multinationals do try and minimise tax, which is not illegal—then, if they’re slow in providing that information or just uncooperative, it makes it very difficult for New Zealand tax authorities. So for us as a committee we were, of course, very mindful that we should give adequate powers but not too much.

One of the proposals suggested was that we should rely on the international tax treaties that New Zealand has. I know many of you will know that we’ve got 72 tax treaties. Of course, most of those are with our good trading partners, but the IRD made a very compelling case to say that to rely on tax treaties to be able to compel foreign multinationals to provide the information is a long bow, because, in effect, we may have a treaty and the IRD, through the Government, may make a request for information on a multinational, but in some cases there is no obligation or ability of that international jurisdiction to require that multinational to comply with our tax treaties and our tax requests. Therefore, again, the hands of the IRD are constrained.

The other thing around the secrecy laws was that, in fact, in order to meet their new secrecy laws, many countries were establishing new rules around disclosure. It was something that was discussed at the Global Forum on Tax Administration over a long period of time. What the officials would recommend is an amendment to limit the provisions in the bill so it requires the requested information to relate to an investigation of the multinational’s tax position rather than relate to an investigation of a natural person. That’s an important nuance, and I’m not sure everyone might pick up on that nuance, but, from a tax perspective, making sure that it’s limited to the multinational’s tax position rather than a natural person is a very, very important sort of fundamental principle.

Similarly, section 17A of the Tax Administration Act 1994 states that a person cannot be excused from complying with a court order to provide information simply because providing the information would subject the taxpayer to a fine, penalty, or conviction, because in some cases, obviously, people want to hide behind rules and regulations or—even if they’re a listed company to say, as an example, “Look, we cannot comply with New Zealand’s request for information, because we’re operating under the London Stock Exchange rules and, therefore, to divulge that information would breach confidentiality.”, which will impinge on the rights of that company and the obligations on the directors of that company. So, again, the nuance around this was really important.

I think the other thing was that we just noted the practicality of trying to address this issue. I think inland revenue believes that where we ended up was a balancing act, and I’ve got to say I think it was to some extent shaped by the position of the select committee members. As I said before, a lot of these proposals around the heavy-handedness have been previously rejected by the Finance and Expenditure Committee. So I think the issue is: how do you do it in a way that’s appropriate and doesn’t overtly give the IRD too much power?

I think it raises the issue of criminal liability and civil liability and also the question of penalties. The Act actually now provides for penalties of $100,000, and the big issue is around criminal and civil liability. In that context, I think we also had quite a significant debate around that. So if we are talking in respect of the New Zealand representative, the idea is that if you are going to require a representative in New Zealand who represents a multinational, to what extent can you require them to actually make and facilitate their provision of that tax advice to the IRD? I think that is a fundamental issue, and when the bill was originally introduced, it included both criminal and civil liabilities.

Unfortunately, I’m going to run out of time on this, but I think that’s an issue that I really want to listen to the Minister’s view on because I think the issue around that is a very fundamental tenet of having a successful treaty and tax system that deals with our base erosion and profit shifting obligations.

It’s a pleasure for me to take a brief call on Part 2 of the Taxation (Neutralising Base Erosion and Profit Shifting) Bill. I want to talk specifically to two provisions, new section 78G, “Country-by-country report from large multinational group”, in clause 52, and new section 139AB, “Penalty for members of large multinational group failing to provide information”, in clause 53.

The reason I raise those two is I’ve been worried—very, very worried indeed—since we completed the select committee process, because, collectively, we put a lot of work into Part 1, and I’m just wondering now whether we did delve into Part 2 deeply enough to fully understand the implications. But I know that the Minister will give us some good answers, and I want to congratulate the Minister again for the way he handled his questions through Part 1 on Tuesday night.

The first one, new section 78G, talks about the requirement for a large multinational with an ultimate owner—that is, a New Zealand resident—to provide the commissioner a report on tax information etc., etc. So does this apply to the likes of Google and Facebook? I assume the answer to that is that it definitely does. Then I just want the Minister to think about what’s the likely reaction to a chief executive in Palo Alto, Silicon Valley, getting a letter from the Commissioner of Inland Revenue saying “Please supply us with this sort of information.”, which looks to me like it’s fairly broad-based. It could be information as to the tax structure they have established in any of the 50 or 100 other countries they operate in. What’s going to be the likely first response?

If he or she takes it seriously, he or she may get involved and make sure the answer’s given, but that leads me to the second point that’s raised—

I’m sorry to interrupt the right honourable member, but it has come time for me to report progress.

House resumed.

The Chairperson reported progress on the Taxation (Neutralising Base Erosion and Profit Shifting) Bill and no progress on the Social Security Legislation Rewrite Bill.

Report adopted.

The House adjourned at 5.56 p.m.