A new voice for tax justice
International tax avoidance has a perplexing label: Beps. It might sound innocuous but Beps – or base erosion and profit-shifting – is fraudulent, harmful, and quasi-criminal. The New Zealand Taxation (Neutralising Base Erosion and Profit Shifting) Act, enacted in June this year, is an attempt to do something about this tax abuse.
At present, companies operating across borders can use myriad accounting and legal tricks, basically smoke and mirrors, to avoid paying their due tax. These strategies go under the general guise of ‘‘profit shifting’’.
A widely used tactic is to shift tax obligations from one jurisdiction (where tax is owed), into low or zero-tax states, otherwise known as tax havens. Such profit-shifting is estimated to cost New Zealand billions of dollars; worldwide it’s trillions. Profit-shifting erodes a country’s tax base and reduces the revenue needed to provide quality public services such as healthcare and schools, not to mention longer-term goals such as tackling poverty and inequality.
Getting this law enacted was doubtless challenging, so can we now just relax?
Unfortunately, no. The new law will make only a modest difference to the ability of multinationals to avoid paying tax. The act simply doesn’t address the root causes that enable tax minimisation. Instead, accounting ingenuity will enable more creative forms of tax avoidance (that’s the polite term – others would say tax abuse or even fraud).
To make real progress, we need much more collaborative action by the international community and individual countries. An important step would require every country to impose at least a specified minimum rate of taxation for corporations and trusts (instead of allowing zero tax as at present).
We also need to ensure corporations are taxed across the business as a whole. Current law allows multinationals to structure themselves as individual business units in different countries, and transfer tax obligations between units to take advantage of favourable rates and legal arrangements in different countries until their tax obligations magically disappear.
A level playing field with harmonised rules would ensure companies can’t take advantages of different rules in different countries. Some degree of international oversight of international tax law, for example by the United Nations, would be extremely useful. Effective enforcement is essential, with significant criminal penalties.
New Zealand is ideally placed to be at the forefront of combating tax avoidance. We could act now by removing non-transparency and other tax haven-like features from our companies and trust law (and proudly announce this). We could also help other South Pacific nations to do the same.
Issues about the fairness and justice of our tax system also arise at the domestic level, and are a focus of the Government’s current Tax Working Group review. Changes are needed to enhance fairness, transparency, and the common good through a system that requires less tax from those who are least able to pay.
Our taxation system should focus on wealth as well as income. Changes should also help ensure that taxation compensates for ‘‘externalities’’, such as environmental degradation – a topic important for all of us. At present the tabs for environmental, social and health harms are generally picked up by the taxpayer, not the company shareholder.
Tax is fundamental to how society operates, and to the wellbeing of its citizens. A collective voice is needed for advocacy and action. Until now, however, no New Zealand group has existed specifically to provide a voice for tax justice.
Hence the formation of the Tax Justice Network for Aotearoa New Zealand, which will be launched at the Fabian Society, Wellington, on Monday.