Can the OECD’S Base Erosion and Profit Shifting Project Effectively Deal with Multinational Tax Avoidance? A Small Country Perspective

Tax avoidance by major multinational enterprises (MNEs) has been extremely topical after the great financial crisis of 2008. As a result, the Organisation for Economic Cooperation and Development (OECD) in 2013 commenced a project known as the “base erosion and profit shifting” (BEPS) project to develop a multilateral solution to this problem. The key part of the BEPS solution has been the drafting of a multilateral convention (known as the “multilateral instrument” or MLI) which designed to modify many of the world's existing double tax agreements so that they are more robust to deal with multinational tax avoidance.This paper examines how effective the BEPS project, and in particular the MLI, will be in dealing with such tax avoidance from the perspective of a small country such as New Zealand. It does so by examining in detail how a major US multinational Google has been able to avoid paying New Zealand tax on orders obtained from New Zealand based advertisers (by doing business in a way that does not create a “permanent establishment” (PE) in New Zealand), and how the BEPS project and MLI aim to deal with such PE avoidance techniques.The analysis in the paper concludes that the BEPS project and the MLI are unlikely to be sufficient on their own to deal with such tax avoidance techniques. While Google has changed as a result of the BEPS project how they will conduct future business in New Zealand, this is more likely for PR reasons rather than the strength of the BEPS initiatives. Countries such as New Zealand are likely to be force to enact further unilateral measures to deal with multinational tax avoidance with risks that DTA overrides may result and retaliation by trading partners