Compliance focus helpful - to a point

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The Inland Revenue Department is turning up the heat on multinationals, with the release of a new compliance document targeted specifically at how it will police foreign multinationals operating in New Zealand.

The document aims to provide “transparency on tax compliance so business can get on with business” and sets out an expectation that tax risk management should be a key focus for good corporate governance.

Helpfully, the compliance document also lists 10 red flags – areas that will put the Revenue on alert  – along with “particular areas to which we pay special attention”.

Generally the document is user-friendly and easy to read.

Trouble is, the key issue confronting multinationals – the uncertainty and lack of boundaries around tax avoidance – are, yet again, not addressed.

The line around what is and is not tax avoidance is not delineated clearly in the Income Tax Act or in case law.

According to the Commissioner, “there is tax avoidance if an arrangement uses tax legislation in a way that Parliament did not intend, where the commercial reality and economic effects of the arrangement are taken into account”.

Paradoxically, in a huge font, the Compliance Focus also says: “Even when an arrangement is complex or unusual, or produces tax results that may be undesirable from a policy perspective, it may not be interpreted as tax avoidance.”

If an outcome of an arrangement had an “undesirable” effect from a policy perspective, it is difficult to envisage that the Commissioner would not allege it did not confirm with Parliament’s intention or contemplation.

This is contrary to our recent experience and subsequent pages in the compliance document reveal that if an arrangement is complex or produces tax outcomes that reduce the overall tax take for New Zealand, it will be scrutinised.

In a business environment that is still recovering, certainty is a critical issue for multinationals.

Clearly the Commissioner wants to be seen as supporting the OECD’s BEPS (Base Erosion Profit Shifting) action plan to curb the ability of multinationals to organize their operations to dodge global tax.

This has become a major concern for governments facing a significant revenue shortfall after the bailouts needed to keep their economies afloat during the Global Financial Crisis.

Governments are also facing pressure from the effects of globalization and the effects of the digital economy on their tax bases.

But it is important to remember that large corporates are major generators of wealth and creators of jobs. New Zealand is also an 80% capital importer, and attracting inbound investment is critical to our long-term financial health and well-being.

Some degree of uncertainty is necessary to have an effective general anti-avoidance rule. But the level of uncertainty in New Zealand relating to the use of the rule, essentially to make tax policy changes via the courts rather than the legislature, is getting to a point where it may have the long term chilling effect of discouraging investment. This could cost jobs and growth in the future. A longer term perspective is needed.

Kirsty Keating is a Principal of EY Law and leads the New Zealand Tax Controversy Practice. The views expressed are her own, and do not necessarily reflect the views of EY Law.

Read more about the Compliance Focus in our Tax Alert