Tax Alert


Government releases significant and complex proposals to tackle hybrid mismatch arrangements 

Tax Alert - October 2016

On 6 September 2016, the New Zealand Government announced the release of a discussion document ("Paper") that contains proposals for addressing hybrid mismatch arrangements.

A hybrid mismatch arrangement is an arrangement which exploits the differences in the tax treatment of a legal entity or a financial instrument by two or more countries.  Such arrangements would provide a “mismatch” in tax outcomes with the effect of reducing the total worldwide tax that should have been paid by the parties involved. 

Hybrid mismatches include situations where there is a double deduction in two different countries for the same expense, or a deduction is allowed in one country without income being recognised in another country.  Inland Revenue cite the recent case of Alesco New Zealand v Commissioner of Inland Revenue [2013] NZCA 40 as an example on point, whereby the New Zealand taxpayer had issued optional convertible notes to its Australian parent, which were treated as part debt and part equity in New Zealand, but exclusively equity in Australia.  The tax outcome meant expenditure in relation to the instrument was deductible in New Zealand; however, the income was not assessable in Australia.

The Paper proposes that New Zealand should adopt the OECD recommendations on hybrid mismatch arrangements, as proposed under action 2 of the BEPS action plan, and seeks input on how the OECD recommendations could be implemented in New Zealand.  

The recommendations seek to prevent the misalignment of domestic rules resulting in unintended tax advantages, which is primarily achieved through the use of “linking rules” that change the usual tax treatment of cross-border transactions to ensure that there is no hybrid mismatch in such cases.

The Paper is divided into two parts.  Part I describes the problem of hybrid mismatch arrangements, the case for responding to the problem and a summary of the OECD recommendations.  Part II explains the OECD recommendations in greater detail and discusses how they could be incorporated into New Zealand tax law.

The Paper considers each of the OECD’s recommendations and proposes a number of changes to New Zealand’s tax law to implement them.  There are a significant number of proposals included in the Paper, many of which are complex. The proposals appear ominous with the following statement made in page 1: “It is expected that most hybrid arrangements would be replaced by more straightforward (non-BEPS) cross-border financing instruments and arrangements following the implementation of the OECD recommendations in New Zealand.”

There is recognition that the rules will result in complexity for foreign branches of New Zealand companies, so submissions are requested on whether there should be an active branch income exemption.

There is also a proposal to treat companies that are resident in another country under a Double Tax Agreement as non-resident for New Zealand tax purposes.

The proposals are expected to apply to payments made after a taxpayer’s first tax balance date following enactment.

The Paper makes it clear that the final decision in relation to the proposed implementation of the OECD’s recommendations in New Zealand will be made after the consultation phase.  The date for submissions has been extended from 17 October to 28 October 2016. 

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