Multinational lobby wins NZ tax victory behind closed doors

A shadowy multinational lobby group appears to have achieved a big win lobbying the Government behind closed doors over a proposed tax clampdown.

The United States-based Digital Economy Group (DEG) said a March proposal to tighten the rules that determine whether multinationals are deemed to have a taxable presence in New Zealand were the ‘‘most extreme in the world’’.

But the lobby group has gone silent on the claim after winning a key concession when the final rules were outlined by the Government this month.

It has not responded to calls for comment on whether its concerns remain.

The DEG described itself in its April submission to the Inland Revenue Department as an ‘‘informal coalition’’ of software, social networking and e-commerce companies.

It did not identify its members, and has not responded this week or in 2015 to requests from Stuff for clarification on which businesses it represents. Britain’s Guardian has speculated Apple, Google and Amazon may be members.

At issue in DEG’S April submission was the tax treatment of foreign companies that pay subsidiaries or other agents a fee to market their products in New Zealand but which book their sales overseas. Examples have included Apple, Microsoft and Dell Computer.

Inland Revenue said in March that the fee paid to the New Zealand subsidiaries by their parent companies ‘‘generally only exceeds its costs by a small margin’’.

That usually shifted most of the profit from New Zealand sales overseas, it said.

Inland Revenue said it knew of cases where companies claimed their local subsidiaries or agents only carried out ‘‘support activities such as marketing’’ but in reality were heavily involved in negotiating sales. ‘‘However, these cases are very resource-intensive to prosecute in practice,’’ it warned.

Inland Revenue’s original solution was that multinationals with a global turnover of more than €750 million (NZ$1.2B) should be deemed to have a taxable presence if ‘‘a related entity’’ carried out sales-related activities for them in New Zealand.

But DEG said that so-called ‘‘permanent establishment (PE) anti-avoidance rule’’ would represent ‘‘the most extreme unilateral PE measure in the world’’.

There were commercial reasons for multinationals structuring their operations the way they did, which were not to do with tax, it argued in its submission.

The Government partially backed down in August, with Finance Minister Steven Joyce and Revenue Minister Judith Collins agreeing in a Cabinet paper that the changes to PE rules should be ‘‘more narrowly targeted at avoidance arrangements’’.

Deloitte tax partner Bruce Wallace said Inland Revenue’s original proposals had caused ‘‘a significant amount of uncertainty’’ and other submitters shared the DEG’S concerns.

Even if foreign firms were deemed to have a taxable presence here, it was only activities that were carried out in New Zealand that should be taxed by Inland Revenue, he said.

Inland Revenue refused to release the submissions on the tax proposals until after ministers had made their decisions, prompting an investigation from Chief Ombudsman Leo Donnelly. Donnelly said Inland Revenue had agreed to provide an explanation by August 30.