Inland Revenue clawed back millions in wage subsidy from multinationals, but the 2021 tax year looks like a battle

Inland Revenue collected an extra $33 million from international firms as part of a campaign to keep COVID-19 wage subsidy money in New Zealand, but a battle may be brewing over 2021 tax returns as some multinationals seek to dispute the tax department's interpretation of the rules.

The tax department monitors 750 foreign-owned multinational firms that operate in New Zealand. For the 2020 financial year Inland Revenue’s (IR) international revenue manager, John Nash, says international firms made $33m in voluntary tax disclosures after IR identified a risk these companies might move wage subsidy funds out of New Zealand.

A tax note by Nash published in 2021 said at the end of 2020, 376 foreign-owned multinational entities with an annual turnover in excess of $30m had received $830m in wage subsidies.

Nash says the international corporations that made voluntary tax payments for the 2020 financial year had used regular transfer pricing (transactions between related parties of the same company) rather than treating these transactions as “abnormal” and specifically addressing wage subsidy funds.

Nash (pictured below) says transfer pricing came to IR’s attention very early on as the wage subsidy was put in place and it saw that there was a possibility, although the wage subsidy was geared to underpin employment in New Zealand, that the benefits could be transferred out.

“It’s relatively small, but we're happy to take that money.”

For the 2021 financial year, Nash says IR looked at 430 multinational companies which were identified as being at risk. 

IR held stakeholder meetings with advisors from the big four advisory firms and subsequently wrote letters to 436 multinationals “setting out the expectation that all of the government’s wage subsidy assistance should remain within the New Zealand economy”.

“This early detection, followed by specific education and close liaison with impacted advisers and taxpayers, should result in very few cases requiring audit enforcement resources being applied in due course,” Nash says.

He says he expects 100% compliance on transfer pricing and the wage subsidy in 2021.

Nash says IR contacted tax authorities including the Australian Tax Office and worked with the Organisation for Economic Co-operation and Development (OECD) secretariat to make sure New Zealand’s approach to transfer pricing was consistent. 

He says other OECD member countries were in agreement with the tax position IR took, and that NZ’s position “found its way as well into OECD guidance.”

But an accountant working for a number of international firms says not all of them are going along with IR’s interpretation.

The accountant, who Interest.co.nz has agreed not to name, says a “few will dispute it”. He says IR are saying COVID funds shouldn’t be taken out of New Zealand which “we all agree with”, but some multinationals have technical issues with IR’s interpretation of transfer pricing rules. 

'A shot across the bow'

Auckland University tax professor Craig Elliffe says it's a serious issue.

“This is a shot across the bow for those multinationals that were seeking, or that are seeking, to repatriate profits.”

He says multinational businesses may not be using dividend payments to send wage subsidy money offshore, but could use transfer pricing mechanisms like paying excessively for goods and services, royalties, or other deductible expenses to shift money to other parts of the business.

“It’s a hugely sensitive matter,” Elliffe says. “You feel as a New Zealander there is no moral justification for multinationals taking a difficult approach here.”

Elliffe says there is a mismatch between international tax rules, which are fairly uniform around the world, and the domestic purpose of the wage subsidy.

“I can see there is potential for quite a significant dispute, given that the amount is $830m, the thick end of a billion dollars."

IR outreach

Nash says IR’s ongoing data campaigns to “dive deeper” into issues has enhanced the tax department’s risk profile of those 750 multinational companies operating in New Zealand.

Each year IR puts out a survey to international firms that includes risk questions which can vary from year to year, he says.

In 2022’s survey, which was released in February, Nash says IR introduced two new COVID questions about the impact of the pandemic on multinationals. It also had questions about “the intensity and extent” of related party transactions, “to refine its risk profile on firms with cross border arrangements.”

Nash says collecting good data and information helps IR to “give the love and attention to those that deserve it”.

For example, IR now receives data from the Overseas Investment Office when new businesses register in New Zealand they have to fill out a tax form which gives it early intelligence on finances and transfer pricing.

He says IR takes a “front foot” approach to tax compliance.

“There's always a concern on the part of the multinational that they'll end up paying double tax. So what we've found from our experience now is that the more you can front foot and be proactive on issues, the more likelihood you will succeed in terms of getting compliance, because once a view is entrenched, a multinational takes quite a bit of moving from there.”

Wage subsidy and competition

IR’s move to recover tax from firms related to the wage subsidy highlights the possibility not all wage subsidy money was used how it was intended.

The 2021 note authored by Nash says the wage subsidy must be repaid in a number of circumstances, including if eligibility criteria were not met or funds were not used to pay wages and salaries of employees, which meant the wage subsidy provided “no competitive or market advantage”.

This broad position has been criticised by some, although not directed at Nash or his note specifically, including Auckland University macroeconomic professor Robert MacCulloch. He points to construction giant Fletcher Building, which holds 90% of the plasterboard market, and got $68m in wage subsidy payments.

"I think it's obvious it crushed competition," MacCulloch says.

MacCulloch says anti-competitive practices and dominant firms like Fletcher were supported and even enhanced by government policies, including the wage subsidy, through the pandemic. He wrote in 2021 that the wage subsidy scheme unfairly advantaged big business and the professional elite.

The Council of Trade Unions economist Craig Renney told Newsroom in November there were a number of questions that could be asked about the wage subsidy, including whether some firms banked a significant portion of wage subsidy money.

Sources have told Interest.co.nz that there are some big firms, cashed up with wage subsidy funds, who are looking to buy up rivals.

But other than IR’s campaign, there doesn’t appear to be any work or analysis into whether the wage subsidy has had, or will have, an effect on competition.

The Commerce Commission, which issues competition guidelines for the public sector so it can take competition into account when developing policy initiatives, says it isn't going to look into it, but the Ministry of Business, Innovation and Employment (MBIE) might.

MBIE, which has primary responsibility for maintaining, monitoring and improving the competition system, confirmed it isn’t doing any work in this area, and neither is the Treasury.

MacCulloch says it's the job of the government and ministries to work out these impacts, and "they're just not doing their job".

The wage subsidy was rolled out quickly and widely and has been considered successful at keeping New Zealanders employed in the months of uncertainty when government COVID-19 restrictions shut down many businesses.

The government adopted a “high trust” approach to the wage subsidy, but the Auditor-General has detailed in a report into the scheme that this approach had greater risk of fraud and error and said the Ministry of Social Development’s “audits” of the scheme were not audits at all.

Big businesses were originally planned to be excluded from the subsidy, which has paid out about $18 billion, but Finance Minister Grant Robertson said he didn’t think large multinationals would bother with the paperwork to claim $21,500, which was the first wage subsidy payment for 50 full-time employees.

NZ Initiative chief economist Eric Crampton says he doesn't see how the wage subsidy would have affected competition but some firms may have got more money than they needed.

He says the wage subsidy allowed New Zealand to have a v-shaped recovery with a quick rebound, and the team who put it in place can’t be faulted for the “meatball” surgery done to keep New Zealand’s economy going during such an uncertain period.