Large chunks of the tax base resemble icebergs, drifting north into the warm waters of the global and digital economy.
Policymakers have a term for this: “base erosion and profit shifting” – BEPS for short.
They are grappling with the changing nature of international commerce, where the eternal desire to minimise the tax you pay is assisted by the rapid growth of e-commerce, and by the opportunities presented by countries’ different tax laws and the ability of multinational firms to locate debt funding and intellectual property wherever will maximise the bottom line.
As part of that effort, finance ministers from 20 major economies, meeting in Sydney last Sunday, agreed to adopt a regime for automatic information sharing among tax authorities.
The Organisation for Economic Co-operation and Development (OECD) calls it the Common Reporting and Due Diligence Standard. You can translate that as: “We are going to make your banks tell on you.”
The erosion of the tax base globally is a problem, but so is erosion at home.
Let me give you an example of how you can erode the tax base locally, and legally.
- Set up an incorporated society. It can be any sort of incorporated society.
- The society doesn’t have to pay income tax but it does have to deduct tax from its employees and pay GST.
- Now if you don’t pay that tax, then the IRD can come and liquidate you, which means the society gets wound up.
- So set up a limited liability company, and have some of your transactions go through that company instead of the society. You can have the lease assigned to it, and charge management fees. You can also charge your salary through it also, as that then allows you to deduct stuff off tax.
- Have the limited liability company spend all its money on behalf of the society, and not pay any tax to the IRD. This means you have more money to spend.
- IRD liquidates the company, leaving the society untouched and the IRD ends up out of pocket by say $150,000 – while the society carries on unscathed.
This is all totally legal, using a crafty mixture of corporate tax structures and non payments.
I look forward to political parties putting forward policies on how to stop the erosion of the tax base in this way.