Looks like IRD are doing their job

James Weir at Stuff reports:

Some wealthy multinationals are thumbing their noses at the taxman and are not paying their fair share of tax, according to Labour.

Not sure what a fair share is. I think the requirement is to pay your legal share.

An example is the Wellington power lines company which appears to take an “optional” approach to paying tax, says the party’s associate finance spokesman David Clark.

Companies Office documents show Inland Revenue is auditing the books of the company, Wellington Electricity, which is linked to Asia’s richest man Li Ka-Shing.

If IRD is auditing them, then they are presumably checking that they are paying the amount of tax they should.

Wellington Electricity has paid no company tax since its sale by Auckland-based Vector in 2008 for $785 million.

The tax losses came despite healthy profits at operating “ebit” level of close to $50m a year in 2012. Clark claimed the lines company looked to be avoiding tax and was an example of “those who are wealthy finding it optional to pay tax in New Zealand”.

EBIT is earnings before interest and tax.  Money doesn’t grow on trees. Of course a company deducts the interest on debt off their profit to decide taxable income. Is Labour proposing that tax be levied on EBIT rather than net profit? I think they once suggested it be based on turnover which was beyond scary.

The electricity lines company may not be doing anything illegal, but getting around the law, “doesn’t make it right”, he said.

So what is the point of this story? Is Labour proposing a law change? The IRD are already auditing. What more does David Clark think should be done?

The debt looked “very aggressive” and it was perhaps no surprise IRD was carrying out an audit of past tax years.

If a company was being “aggressive” it was more likely to face an audit, but that was not to suggest it was doing anything illegal, the tax expert said.

Again, it is good IRD is auditing.

There were tax rules limiting debt to no more than 60 per cent of total assets, down from 75 per cent a few years ago, but even that 60 per cent was high and could make a mess of profits.

The Government is looking at rules around debt ratios. “You can expect some announcement around thin capitalisation rules later in the year, so the settings are appropriate with no incentive for multinationals to structure their affairs to avoid tax in New Zealand,” Revenue Minister Todd McLay said.

Thin cap rules limit the ability of a company to extract profits as interest payments while paying no tax.

So the Government is making changes in this area. So again what is Labour proposing that the Government is not doing. It’s easy to fire off a whining press release. It’s harder to come up with a policy position that one can meaningfully assess for pros and cons.