Multinational tax ‘breakthrough’: what we know
G7 countries announced at the weekend they had reached a historic agreement on how to reform the taxation of multinationals.
But the share price of Apple, Microsoft and Facebook appeared unaffected. In fact, they all closed higher on Tuesday, their first day trading after the announcement.
The G7 proposal could also mean New Zealand companies paying more tax overseas, and correspondingly less here.
Many details of the proposal have yet to be fully explained by the G7 or the Organisation for Economic Co-operation and Development (OECD) which will have the job of brokering an actual global agreement.
But the muted market reaction reflects the fact that what the G7 has come up with is something of a compromise.
What have they proposed?
Firstly, big multinationals would need to pay a minimum of 15 per cent tax on every dollar profit. This minimum tax rule is known to multinational tax boffins who have been following the OECD’s work in this area as ‘‘pillar two’’.
The rule wouldn’t stop New Zealand continuing to tax the profits of the local subsidies of multinationals such as Google and Microsoft at its current corporation tax rate of 28 per cent.
But if Ireland continued to charge a 12.5 per cent tax rate on the profits of the subsidiaries based there, for example, then that would need to be topped up to 15 per cent.
Brendan Brown, a partner at Auckland-based law firm Mayne Wetherell, says the extra 2.5 per cent tax would be collected by the country where the multinational was headquartered, which would often be the US.
So no gain for New Zealand there. But Brown says multinationals would also be stopped from deducting money from one subsidiary and paying it to another for expenses, if they were intending to send money to a country where they weren’t paying 15 per cent tax. As such, it looks like a big blow for tax havens.
Secondly, if large multinationals earned more than 10 per cent profit (Brown assumes this figure would be based on comparing their global profit with their global revenues), then 20 per cent of their profits above that 10 per cent figure would also be subject to company tax.
Think of it like an extra tax on super-profits. Unlike the minimum tax top-up though, that extra tax would be carved up between the countries where the multinational did business, most probably based on their sales in each country or a similar formula.
This so-called ‘‘pillar one’’ rule should mean some extra tax dollars for New Zealand.
But Brown believes that to avoid ‘‘double taxation’’, multinationals would be able to deduct the ‘‘extra’’ tax payments they made in each country against their overall tax bill in the country they were based.
Assuming that’s the case, multinationals’ overall tax bill would not go up as a result of the pillar-one change, but where they paid tax would be a bit more spread out. The new profit rule would be an alternative to the road some countries have gone down imposing new additional taxes on the revenues of some multinationals.
Would these new rules apply to all multinationals?
The current assumption is both rules would only apply to multinationals that had a turnover of more than €750 million a year, as they have been the focus of the OECD tax talks to date.
How much tax would NZ gain from all of this?
There doesn’t seem to be any projection yet.
It could be tens of millions a year, or perhaps more, though still only a fraction of a per cent of the country’s overall tax take, which is estimated to be almost $109b this year. ‘‘We are not talking massive amounts of extra revenue,’’ Brown says.
Also bear in mind, a few large Kiwi companies might need to pay more tax overseas, and correspondingly less tax in New Zealand if international deductibility does apply to pillar two.
Fisher & Paykel Healthcare, one of New Zealand’s most profitable exporters, could not immediately comment on whether it expected the G7 proposal to affect it. But it would appear to be one of the few Kiwi companies large and profitable enough to be affected. PWC tax partner Geof Nightingale believes Fonterra would be excluded as a ’’commodity exporter’’.
How likely is the G7 to get its way?
Quite likely, and we may know as early as next month.
Brown and Nightingale both believe the G7 proposal has a decent chance of being adopted by the G20 and then by the OECD.
But Nightingale notes China is a massive digital exporter and not so far in the tent.
OECD secretary-general Mathias Cormann has himself described the G7 proposal as ‘‘a landmark step towards the global consensus necessary to reform the international tax system’’.
The problem for any country that wanted to ignore the proposal and impose its own revenue tax on multinationals, such as the digital services tax considered by the New Zealand Government, is that they would probably be breaking either tax treaties or World Trade Organisation rules.
With the G7 now rallying behind a multilateral solution, there is unlikely to be ‘‘safety in numbers’’ and the risk of retaliation for unilateral actions is likely to go up hugely.