‘BEPS 2.0’ will not be a windfall for New Zealand

BEPS 2.0 will not be a windfall for New Zealand. The OECD estimate that their latest international tax proposals will reap US$100b additional tax in aggregate for all countries. These initiatives arise from a reallocation of some group profits away from low tax jurisdictions into higher taxing countries, like New Zealand.

OECD estimate that high-income countries, like NZ, would benefit from an increase in tax revenues of over 4%, which suggests $600m more tax revenue for NZ.^[1] We believe the reality is that any benefit to NZ is likely a fraction of that amount.

We previously outlined an overview of how OECD’s ‘Pillar 1’ and ‘Pillar 2’ initiatives (also together referred to as BEPS 2.0) would work (see our 11/2019 article and our 03/2020 article). 

A summary of OECD’s modelling of estimate tax revenue gains from both Pillar 1 and Pillar 2 is shown in the graph below:

OECD’s modelling suggests that high income countries might expect a company tax revenue increase of 0.4% from Pillar 1. For NZ, that would represent around $60m more tax revenue increase. Certainly, NZ coffers would benefit to the extent in-scope foreign companies are forced to share some of their offshore residual profits with market countries, like NZ. Few NZ headquartered companies meet the €750m de minimis turnover threshold and are in-scope companies. Therefore, NZ is likely to lose little tax revenue from its own companies.

OECD has modelled that most of the tax revenue gain (around 2.1% increase) will come from Pillar 2 initiatives. Also, if multinationals take action to shift activities out of low tax countries, a further 1.7% increase has been modelled. For NZ, that represents a further $570m of tax revenue if Pillar 2 rules are introduced.^[1]

We do not consider NZ is likely to see any significant lift in tax revenues from Pillar 2 as modelled by OECD, for the following reasons:

• In our experience, most NZ companies do not operate businesses or have subsidiaries conducting substantive business in low tax countries (at least countries taxing with a tax rate less than 12.5%). Most NZ companies with offshore investment tend to have operations in higher taxing countries, such as Australia, United States, China, Japan and various European countries. 
• The CFC rules, transfer pricing rules and tax avoidance rules tend to deter NZ companies from locating intangible assets in low tax jurisdictions.
• The OECD modelling is likely to reflect the larger corporate groups in US and Europe where substantive activities may well sit in low taxing countries.
• Some NZ companies would be a payer in some transactions with countries that do not tax foreign-sourced income (e.g. Hong Kong and Singapore), but our experience is that these are not significant.
• There is likely to be some de minimis thresholds (possibly a €750m revenue threshold) that would carve out most NZ companies.

TPTS will keep you informed of the details of BEPS 2.0 as the work progresses.

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^[1] The modelling does rely on many assumptions at present given that the architecture of GloBE is still a work in progress.

^[1] The total company tax revenue is around $15b pa