Last weekend in Cornwall, England, the G7 Leaders meeting confirmed what had been agreed by the G7’s Finance Ministers and Central Bank Governors over Queen's Birthday weekend, that a minimum corporate tax rate of 15% would be introduced on a country-by-country basis.
What the Finance Ministers and Central Bank Governors have agreed to is what they describe as “an equitable solution on the allocation of taxing rights with market countries, a water taxing rights on at least 20 percent of a profit exceeding a 10 percent margin for the largest and most profitable multinational enterprises.”
Now, what's also part of this deal and has been probably overlooked because of the commitment to the 15% rate, is that the G-7 also agreed to “provide for appropriate coordination between the application of these new international tax rules and the removal of all Digital Services Taxes and other relevant similar measures on all companies.”
And that's where it gets a little interesting, because when you look at the press conference held immediately afterwards by, the US Secretary of the Treasury, Janet Yellen, it becomes apparent that this is a bit of a win for what we call the GAFA, Google, Apple, Facebook and Amazon. When she was questioned about how, for example, the French are targeting Amazon and Facebook, Secretary Yellen replied as follows,
“It is intended to replace an approach that focused on just a few US digital giants, and the agreement is that this new approach will replace an approach that we found objectionable, that targeted large, successful US digital firms. But most of these firms are likely to be included in this new scheme the Pillar One scheme.”
Pillar one and Pillar two are part of this international framework being built to set up how we tax digital economy in the 21st century.
And it's quite interesting that because it comes back to discussions, as we mentioned previously, about the impact of the digital economy and, for example, how much Google tax pays here relative to how much it's actually taking out of the economy. On the basis that New Zealand gets to tax 20% of the residual profit above a 10% margin, it's possible that Google's tax bill may triple to maybe $9 or $10 million. And that would be based on the assumption that about $200 million or so of its estimated $800 million that it takes out in advertising becomes taxable. Is that a big win for New Zealand? I'm not so sure.
The other point that I've noted about Secretary Yellen comments, is that the 15% rate is in the US view, a minimum, with 21% as the target. Questioned, “Well, how are you going to make this work?” Yellen also pointed out that the agreement under Pillar two contains an enforcement mechanism that would come into play and apply to jurisdictions that decide, “No, we're happy to be tax havens and we don't want to sign up to this agreement”. This so-called “under tax payment rule” would essentially put pressure on those countries to abide by the corporate minimum tax, whatever is eventually agreed.
And so that's basically calling time, as the G-7 communique refers to it on this race to the bottom on corporate tax rates which has been going on for about 40 years now.
The next stage is that the agreement will be worked out through the G20/OECD inclusive framework. And there is a July meeting of G20 Finance Ministers and Central Bank Governors, which is hoped will get final agreement on this 15% minimum corporate tax rate and on the agreement on the Pillar One taxing rights,
I suspect, as usual politics will come into play here. And I do wonder how India is going to react to this on that, because it has made significant use of digital services taxes. But we'll have to wait and see. It's certainly a step forward in the right direction. And it is another step on the road towards ending tax havens, whose days, in my view, are numbered.
What was also interesting about the G-7 Finance Ministers and Central Bank Governors communique announcing the global minimum corporate tax rate is that that particular announcement was just one paragraph of 20. It was actually number 16 because the first focus was on, “building a strong, sustainable, balanced and inclusive global economy”. And then the G7 Finance Ministers went on to talk about the transformative effort to tackle climate change and biodiversity loss. And they spent a bit of time on this, as did the G7 leaders when they released their communique.
And of course, coincidentally, in the same week as the G7 Finance Ministers made their announcements, we had the Climate Change Commission releasing its final advice to the Government on how to move forward on climate change.
Climate change and tax
Now, the Climate Change Commission actually had little to say about specific tax measures. It did note that, for example, that reducing oil and gas production in New Zealand would reduce the Government's tax revenue. As is well known, the Emissions Trading Scheme would remain the main pricing tool.
The Commission did note that tax could be used to incentivise investments and choices, although it didn’t say much specifically on this. It talks about maybe using taxes for R&D incentives. We have an R&D tax credit incentive scheme. And you may recall that last year I spoke with John Lohrentz about an interesting idea using R&D tax incentives to reduce methane emissions.
The Commission did suggest that the tax system should be examined for ways to discourage the adoption of internal combustion engine vehicles and encourage low emission options. It noted that some submitters, and I was one of them, raised concerns about how fringe benefit tax is calculated for light vehicles and in particular the question of emissions from utes and trucks.
Most of that went by the by. But then last Sunday the Government announced its feebate proposal for electric vehicles and a debate kicked off on social media, over this question of twin cab utes and their “exemption” from FBT. So I thought today I would have a look at this widely held belief that utes are exempt from FBT under the work-related vehicle exemption
To go back to basics under Section CB 6 of the Income Tax Act 2007, a fringe benefit arises when a motor vehicle is made available to an employee for their private use. However, that provision does not apply when the vehicle is a work-related vehicle.
Now, Inland Revenue’s summary of this is that FBT will not apply to a vehicle if it meets all of the following conditions:
- it is drawn or propelled by mechanical power (this includes trailers);
- it has a gross laden weight of 3,500 kg or less;
- the vehicle is mainly designed to carry goods or goods and passengers equally;
- it has prominent company branding that cannot easily be removed;
- you tell your employees in writing that the vehicle is not available for private use; except for travel between home and work, and for travel related to the business, such as stopping at the bank on the way home from work.
And then Inland Revenue say as part of this, you must give employees a separate letter explaining this restriction rather than mentioning it in their employment agreement.
Now the statutory definition of work-related vehicle is set out in Section CX 38 of the Income Tax Act. And as just recited, there's restriction around the display of branding, for example. And on this, sticking the branding on say the spare tyre, which is on the back of the vehicle, is insufficient because that's fairly easily removable. The sign writing has to be prominent.
The definition of a work-related vehicle in section CX 38 does not include a car. And then there is the bit that I think is causing all the issues around fringe benefit tax. Under section CX 38(3), the motor vehicle is not a work-related vehicle on any day on which the vehicle is available for the employee's private use, except for private use, that is travel to and from their home, that is necessary in, and a condition of their employment or other travel in the course of their employment, during which the travel arises, incidentally, to the business use.
There are a couple things to note here, for example, that it is NOT a work-related vehicle on ANY day when it's used privately. Then on the question of private use travel to and from their home is ok if “it is necessary in, and a condition of their employment.”
Now, in my view all of those conditions are where the gap, in FBT compliance, is happening. The home to work restriction is not being followed through. I would also question, in fact, whether as many companies have the separate letters in place that Inland Revenue expects.
This home office base of business is something Inland Revenue has looked at. Increasing numbers of businesses are working from home digitally whether it's a trade or digital business. So it’s reasonably clear that home is a place of work and therefore travel from there which is for business purposes is covered by the exemption.
But as I've noted beforehand, FBT does seem to be tracking behind in payments. And there are perhaps apocryphal stories of Ministers of Revenue turning up to meetings in the South Island and being greeted “Welcome to the South Island where we don't pay FBT.”
To get across this Inland Revenue will need to devote some resources to finding out exactly what is going on in this space, because as came out through the feebate debate, the twin cab ute has become one of the most popular and best-selling vehicles in New Zealand. And the question arises particularly when you see them in an urban environment, are these really work-related vehicles and what is Inland Revenue going to do about it?
And this comes on to my final point this week as to whether Inland Revenue, in fact, has the capability to investigate the issue. It should have. It has very extensive information gathering powers. I would have thought it was a straightforward matter to obtain details of all companies which own twin cab utes or similar vehicles and then cross-reference that information with FBT returns.
Maybe that is going on, and if so it would Inland Revenue has decided to keep quiet that it is actually working on such a project. Although Inland Revenue has a policy of proactive enforcement on issues by announcing “We are about to look at these areas”. It's just done so about real estate agents. So saying it's looking at FBT would actually be conducive for getting people to look and see if they're actually compliant.
However, I have reservations about whether that's happening and whether, in fact, Inland Revenue does have the capability to do so. I've just been informed that in another round of restructuring, 77 of 138 team leaders are to be made redundant. These are the exact people who have the experience and skills to lead such investigations. Now, that doesn't make a lot of sense to me laying off such a high proportion of your skilled labour.
Unexpected tax bills
And then there was a story this week about pensioners receiving large tax bills. Now, Inland Revenue subsequently issued a press release on this. But a common theme when I spoke to journalists about the story itself was that pensioners had tried to contact Inland Revenue to confirm what PAYE tax code they should be on.
And so the question arose as to whether, in fact, they had got the correct advice from the Inland Revenue call centre. And that leads back to what we discussed a couple of weeks ago about what's going on with Inland Revenue’s use of contractors. Because if the contractors aren't being trained properly, then Inland Revenue is giving incorrect advice and pensioners are left cleaning up the mess, owing tax bills of up to $2,000.
And that is not good for the tax system. Because the fear I have, if I and other tax agents are saying to our clients, “These are the rules, you must comply with them”, but clients have the sense that other people are not complying with the rules and Inland Revenue is not catching those other people, then the whole basis of voluntary compliance on which our tax system is built around is undermined. And that is something that I think we should all be concerned about.
Well, that’s it for today, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next week, ka kite āno.
 FBT is tied to employment. Over the 10 years to 30th June 2020 the amount of PAYE collected by Inland Revenue rose by almost 66% from $20.5 billion to $34 billion. However, over the same period the amount of FBT paid rose 28% from $462 million to $593 million. This gap suggests some level of under-reporting and enforcement.