By Gareth Vaughan
With the Government’s new law aimed at ensuring multinational companies pay their fair share of tax in New Zealand set to have minimal impact on Visa and Mastercard, one tax expert has another suggestion.
Interest.co.nz reported earlier in the week that the the Taxation (Neutralising Base Erosion and Profit Shifting – BEPS -) Bill, which took effect from 1 July, means little for Visa and Mastercard, whose NZ payments revenue is booked in Singapore where the companies enjoy sweetheart tax deals..
Andy Archer, a former EY tax partner who now runs consultancy Acumen Ltd, says the new BEPS tax measures won’t change much for Visa, Mastercard or other businesses running digital/e-commerce/internet type business models.Taxing Visa and Mastercard would require some form of transaction tax, Archer suggests.
“You have to ask yourself, what is their business model? Fundamentally they earn revenue from charging a small transaction percentage on every transaction – that is, every time a Visa card is swiped, something like 0.1%, but the numbers [of transactions] are enormous. They do not provide credit. They do not lend money. Thinking about it, there are four players – the retailer or merchant, the merchant’s bank, the card issuing bank which lends the transaction credit amount and takes the default risk, and Visa. So Visa has no tangible product, good or service,” says Archer.
“The same challenges apply to Facebook and Google, Uber, Airbnb, and other internet based business. To tax Visa/Mastercard, you would be looking at some form of transaction tax. This is a second, or possibly third, cousin of the GST impost on imported services.”
Low hanging fruit
Archer says NZ’s BEPS measures strike at what might be termed the low hanging fruit.
“The main new tax measure to tax foreigners doing business here, but not previously subject to tax, are changes to our ‘permanent establishment’ (PE) rules. But these are really targeted anti-avoidance measures that apply where a foreign entity uses an incorporated NZ company to undertake some ancillary work to facilitate, market, or promote their products and services, and drops off a modest amount of commission or income that it ‘volunteers’ to be taxed locally, but retains the substantive activities and value creation offshore so doesn’t fall foul of our taxing rules,” says Archer.
For the new PE rules to apply the local activity must play a role in bringing about a sale, he adds.
“The problem the proposed rule is trying to address is the ability of some multinationals to structure their affairs so they do not have a PE in New Zealand, despite having significant economic activity carried on for them here. This usually involves the non-resident entity establishing a New Zealand subsidiary to carry out local sales related activities.”
“The NZ facilitator must carry on an activity for the purpose of bringing the supply about. It is intended that only activities designed to bring about a particular sale to an identifiable person should potentially result in a deemed PE. Therefore activities that do not relate to a particular sale, such as advertising and marketing, would not be sufficient to trigger a possible PE under this requirement. After sales activities, such as technical support, would not be sufficient to meet this requirement, as they occur after the supply has been made. The kinds of activities that are within the intended scope of this provision primarily include activities designed to convince a particular customer to acquire the supply,” Archer says.
This means the new rules are really for more conventional business models where a foreign owner has put a structure in place to minimise their NZ tax liabilities. For example this could be fragmenting or splitting activities, some in-country, most outside the country, to avoid having a PE that subjects them to full profit attribution and tax.
“The core Action Plan 1 of the Organisation for Economic Co-operation and Development’s BEPS initiative was to tackle multi-national tax to address the tax challenges of the digital economy. On this the OECD has hit a wall. Their March 2018 interim report shows that this OECD action boat is taking in water, or another analogy, this significant elephant is not leaving the room soon,” Archer says.
A formidable challenge
Globalisation and the digital economy was always going to be a formidable challenge for international taxation and this remains the case, Archer notes.
“This is particularly the case with our tax systems foundered on taxing foreigners with an actual presence in-country, bricks and mortar if you like. Existing international tax rules are inadequate when it comes to addressing the lack of tangible borders, which characterises the digital economy. Currently, a company with no, or very little, physical presence in the economy of another country, but with a significant digital presence, is not liable for taxation. While the way we do business has changed enormously, international tax rules have not evolved with this and the gulf is enormous,” Archer says.