Government sets out framework for taxing inbound investment
Tax Alert - July 2016
On 27 June 2016, the Government released a draft paper setting out New Zealand’s framework for taxing income earned on inbound investment. The paper notes that over the past 15 years there have been various reviews that have examined the issues from a variety of points of view, however this paper sets out the accumulated thinking and the present framework.
The paper has been developed for use as the basis for targeted consultation with private sector representatives and to facilitate a wide understanding of the trade-offs the Government faces in responding to base erosion and profit shifting (“BEPS”). A report describing the work already undertaken to implement BEPS measures and the planned work programme for the next 12 months was also released with this paper (see Taxing multinationals – What exactly is New Zealand doing about it?).
The report notes that there are many factors, some of which are inherently unquantifiable, that are relevant in choosing the best tax system. Overall New Zealand has a coherent and stable tax system which adds to business certainty.
The paper addresses a range of topics, including: company taxation; non-resident withholding tax (NRWT) on interest on related-party debt; thin capitalisation and the provision of debt/equity by foreign parent companies; BEPS; and NRWT and the approved issuer levy in relation to unrelated-party debt. The principal conclusions reached are:
- It is in New Zealand’s interest to levy company income tax and NRWT on income from activities carried on within New Zealand’s borders. These taxes are broadly consistent with international norms and provide significant funding for Government priorities and programmes that would otherwise be needed to be raised elsewhere;
- Base-protection measures, such as thin capitalisation and transfer pricing rules, are sensible to protect the tax base and ensure that New Zealand gets its fair share of revenues;
- There is a continuing case for NRWT on interest from related-party debt to supplement the company tax and to play a role in determining New Zealand’s share of taxes on activities within its borders;
- Deviations from normal tax rules, intended or otherwise, can lead to substitution of low-taxed investors for tax-paying investors, reducing national income without necessarily lowering the overall pre-tax cost of capital to New Zealand or increasing investment. Accordingly, base-maintenance provisions that ensure the intended level of tax is collected will often be in New Zealand’s best interest; and
- NRWT on portfolio debt has been modified by the approved issuer levy (AIL) to provide relief from taxation in circumstances where it is in New Zealand’s interest to do so. On balance, continuing with New Zealand’s AIL/NRWT system for third-party debt is likely to be in New Zealand’s best interest.