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Tech firms won concession after claiming NZ tax proposal 'most extreme in the world'

Apple, Amazon and Alphabet (Google) are among the companies that reportedly choose to lobby through the secretive Digital Economy Group.

A shadowy multinational lobby group appears to have achieved a big win lobbying the Government behind closed doors over a proposed tax clampdown.

The United States-based Digital Economy Group said a proposal put forward in March to tighten the rules that determine whether multinationals are deemed to have a taxable presence in New Zealand were the "most extreme in the world".     

But the lobby group has gone silent on the claim after winning a key concession when the final rules were outlined by the Government this month.

It has not responded to calls for comment on whether its concern remain.

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The Digital Economy Group (DEG) described itself in its April submission to Inland Revenue as an "informal coalition" of software, social networking and e-commerce companies.

It did not identify its members in its submission, which was filed through law firm Bell Gully, and has not responded this week or in 2015 to requests from Stuff for clarification on which businesses it represents.

Britain's Guardian newspaper has speculated Apple, Google and Amazon may be members.

At issue in its April submission was the tax treatment of foreign companies that pay subsidiaries or other agents a fee to market their products in New Zealand but which book their sales overseas.

Examples have included Apple Computer, Microsoft and Dell Computer.

Critics said IRD's original plan was out of step with the moves being finalised by the OECD in its tax clampdown, spearheaded by tax policy director Pascal Saint-Amans.

Inland Revenue said in March that the fee paid to the New Zealand subsidiaries by their parents "generally only exceeds its costs by a small margin".

That usually shifted most of the profit from New Zealand sales overseas, it said.

Inland Revenue said it knew of cases where multinationals claimed their local subsidiaries or agents only carried out "support activities such as marketing" but in reality were heavily involved in negotiating sales.

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"However these cases are very resource-intensive to prosecute in practice, especially obtaining the requisite evidence to demonstrate the true extent of the related party's activities," it warned.

Inland Revenue's original solution was that multinationals with a global turnover of more than €750 million (NZ$1.2b) should be deemed to have a taxable presence in New Zealand if "a related entity" carried out sales-related activities for them here.

But the Digital Economy Group said that so-called "permanent establishment (PE) anti-avoidance rule" would be out of step with plans being drawn up by the OECD under its Beps tax clampdown and would represent "the most extreme unilateral PE measure in the world".

There were commercial reasons for multinationals structuring their operations the way they did, which were not to do with tax, it argued its submission.

The Government partially backed-down in August, with Finance Minister Steven Joyce and Revenue Minister Judith Collins agreeing in a Cabinet paper that the changes to permanent establishment rules should be "more narrowly targeted at avoidance arrangements", and committing to further consultations.

That may mean the foreign parents of New Zealand subsidiaries would only have a separate taxable presence in New Zealand if Inland Revenue could show they had structured their local activities intentionally to avoid tax.

Deloitte tax partner Bruce Wallace said Inland Revenue's original proposals had caused "a significant amount of uncertainty" and other submitters shared the DEG's concerns.

The new approach probably better reflected Inland Revenue's original intent, be believed. Even if foreign firms were deemed to have a taxable presence here, it was only activities that were carried out in New Zealand that should be taxed by Inland Revenue, he said.

That meant the same amount of tax paid should be paid in New Zealand regardless of whether foreign firms were deemed to have a local tax presence – assuming transfer pricing rules on their local subsidiaries were applied appropriately, Wallace said.

Inland Revenue refused to release the submissions on the tax proposals until after ministers had made their decisions, prompting an investigation from Chief Ombudsman Leo Donnelly. Donnelly said Inland Revenue had agreed to provide an explanation by August 30.   

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