Tax reform advocacy group Tax Justice Aotearoa is calling
on the Government and opposition parties to remedy the
failures in our taxation system illustrated by a new report
from the Centre of International Corporate Tax
Accountability and Research, which looks at transparency and
corporate tax issues in the heavily public-funded aged care
sector.
“Instead of talking about the possibility of
reducing our corporate tax rate of 28 per cent, the
Government should be finding ways to increase financial
transparency, and ensuring that multinational corporates pay
their fair share of current corporate tax by reviewing the
thin capitalisation rules,” says Glenn Barclay,
Chairperson of Tax Justice Aotearoa.
“This is
particularly urgent where public funds are paid to
multi-national corporations delivering services on behalf of
the government.”
The report focuses on the
transparency of public funding in the aged residential care
sector, and shows how our tax system allows multi-national
providers to avoid paying the taxes that the public would
expect them to pay, demonstrating this through the example
of UK-owned BUPA.
BUPA had an average effective
corporate tax rate over the past decade of only 4 per cent,
much lower than the headline rate of 28 per cent, driven
largely by tax-free capital gains.
In
addition, the company appears to have used inter-company
interest payments on a substantial loan to an
Australian-incorporated BUPA company, which may have reduced
taxable income by around $151m over the decade, trimming tax
revenue by as much as $27 million over that
period.
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“This ability of
multi-nationals to set up loans between subsidiary companies
in different countries and then claim tax deductibility on
the interest from those loans is a major issue,” says
Glenn Barclay.
“While entirely legal, this ‘thin
capitalisation’ is an approach that most members of the
public would find questionable. It also gives multi-national
players an advantage over wholly New Zealand-owned companies
in competitive markets.”
“New Zealand does have
thin capitalisation rules that are supposed to prevent this
kind of activity, but this example shows that they are
simply not strong enough,” says Glenn Barclay.
“We
note that Australia and the UK have introduced a ‘fixed
ratio’ test for interest payments on related party debt
which limits allowable interest deductions in any one year
to 30 per cent of gross earnings and this is the kind of
measure that we should also seriously
consider.”
“On a related matter, we note that IRD
is looking at relaxing the existing thin capitalisation
rules for infrastructure projects as part of its work
programme agreement with the Minister of Revenue.
This
could well be in the Budget and would be a big step in the
wrong direction,” says Glenn Barclay. “We urge the
Government not to go down this route, but instead look at
tightening this provision across the
economy.”
The report questions the tax
exemptions in the sector for capital gains arising from
revaluations of assets, which is significant given the
amount of real estate that companies in the sector
own.
“It seems that aged residential
care providers are intentionally using the capital gains
they make from selling both rights to occupy properties to
new residents, and sometimes the properties themselves, as
part of their income streams,” says Glenn
Barclay.
“If this is true, then the current law, which
says that capital gains on sales made intentionally for that
purpose are taxable, should be enforced. If, for some
reason, it is not enforceable, then the law should be
clarified. A comprehensive tax on capital gains would
resolve these issues in a much clearer way.”
The
report also raises questions about the level of funding for
the aged care sector and the extent to which unaccountable
multi-national and other private providers should be
involved in service delivery.
“The report indirectly
supports the need for more funding for aged care generally
as the population ages and this is yet another example of a
demand for services that only a more progressive tax system
that properly taxes wealth can address,” says Glenn
Barclay.
