It’s a line that Foreign Affairs Minister Hon Murray McCully is keen to highlight right now, as opposition MPs cry “bribe” in the face of his $11.5m deal with a Saudi Arabian businessman who lost millions during a New Zealand ban on live sheep exports.
McCully’s office argues the exchange is on the right side of the law. It has welcomed an inquiry from the Auditor-General.
The key difference between the two types of exchanges is that a bribe influences an outcome, whereas a facilitation payment speeds up a predetermined outcome.
According to the Income Tax Act 2007, a facilitation payment is legal when it is “given wholly or mainly to ensure or expedite the performance by a foreign public official”. The law also stipulates that the payment must be “small”, made offshore, and in a country where facilitation payments are legal.
The main argument in support of facilitation payments is that they keep New Zealand businesses on a level playing field with competitors in countries where such payments are also legal.
That sounds fair enough. But our legal definition brings facilitation payments worryingly close to bribery. Consider the phrasing of “ensure or expedite”. To expedite is to hasten, to speed up, which is in line with the legal definition of a facilitation payment. To ensure is to guarantee an outcome, and this is more in line with a bribe.
There are arguments for and against the legal status of facilitation payments. But from a tax law perspective, what is more concerning is the sheer lack of checks and balances within the tax system, something that essentially opens the door to corruption.
Firstly, facilitation payments are tax deductible. The reason for this tax benefit is that these payments should not disadvantage businesses that are competing with organisations in countries where facilitation payments (or bribes) are also tax deductible.
Again, the main driver is to create a level playing field for businesses.
But then consider the fact that there are only four other countries besides us where facilitation payments are provided tax deductible status: Australia, Canada, the Republic of Korea and the United States.
Clearly we are in a minority group, thus weakening the argument that by retaining tax deductible facilitation payments, we reduce barriers to trading overseas.
Secondly, the Income Tax Act does not elucidate what constitutes a “small” payment. And even if it did, Inland Revenue doesn’t hold figures on the size of the facilitation payments or how frequently facilitation payments are claimed as deductible expenses. There is, quite simply, no system in place to check what constitutes a “small” facilitation payment and hence there is no specific monetary limit on how far a business may go to “ensure or expedite” an outcome.
A further issue, and perhaps the most important one, is that under our tax law, unlike most expenditures, there is no need for the facilitation payment to be connected with the income earning process to claim a tax deduction.
In essence, it could cover anything, and we find more and more such payments are moving towards the shadier territory of bribes.
Internationally, there is a general movement towards classifying all bribes and facilitation payments as criminal activity. The United Nations and OECD already take this view.
But legal or not, there appear to be few arguments to support a tax deductible status.
If New Zealand wishes to be taken seriously as a country free of bribery and corruption, to live up to its ranking as the world’s second least corrupt country, then we need to ask the question: Is our tax system opening the doors to corruption?
In my view, the answer is yes.
Associate Professor Lisa Marriott is a specialist in tax law. Her argument comes from her forthcoming research in the quarterly journal Australian Tax Forum.