New Zealand makes BEPS announcements
Tax Alert - September 2017
By Robyn Walker
On the 5 month anniversary of the release of 3 Base Erosion and Profit Shifting (BEPS) consultation papers in March this year, the New Zealand Government has announced its considered position on what initiatives will go forward to become legislation.
Taxpayers may be disheartened by reading the media statement from the Ministers of Finance and Revenue which stated: “For the most part, the proposals will proceed as originally devised…”; however due to the consultation process there have been some pleasing refinements to the proposals, particularly around interest limitation rules.
The final proposals
Between now and the end of the year when legislation will be introduced into Parliament there will be some further consultation on some of the finer details of these proposals which are generally intended to apply to income years beginning on or after 1 July 2018.
Interest limitation rules
- A new “restricted transfer pricing rule” will apply to set the level of interest rate applying to inbound related-party loans. This rule will follow transfer pricing principles, while ignoring all surrounding circumstances, terms and conditions that could result in an excessive interest rate, and includes a rebuttable presumption that the borrower would be supported by its foreign parent. This announcement replaces the previously proposed “interest rate cap” approach; albeit a taxpayer will be able to use its parent’s credit rating as a safe harbour under the restricted transfer pricing rule. Disputes about interest rates would be subject to the Mutual Agreement Procedure under New Zealand’s Double Tax Agreements (DTAs).
- When undertaking thin capitalisation calculations, non-debt liabilities (e.g. trade creditors etc) will be subtracted from the asset value. Further consultation will be undertaken on whether deferred tax liabilities should be included in this adjustment amount.
- Taxpayers with less than $1million of interest deductions may be eligible to be carved out of the thin capitalisation rules.
- Certain infrastructure projects funded entirely with third party limited recourse loans will be exempted from the thin capitalisation rules.
- Prescriptive rules will be developed allowing taxpayers to value assets for thin capitalisation purposes in a manner different from the basis used in their financial accounts (i.e. assets can be independently valued).
- Taxpayers will be able to continue to perform thin capitalisation calculations on the basis of year end positions (rather than undertaking daily or quarterly calculations), but a new avoidance rule will target taxpayers repaying loans just before year end.
The above changes are expected to net $80-$90million in additional tax per year on an ongoing basis.
An application date of income years beginning on or after 1 July 2018 is considered appropriate as it is believed that related party transactions are “more easily altered compared with transactions with third parties”, and as thin capitalisation calculations are undertaken at the end of the year, taxpayers will have until at least 30 June 2019 to alter debt and asset levels.
Taxpayers who have entered into Advance Pricing Agreements (APAs) with Inland Revenue before 1 July 2018 will have those agreements honoured for the full agreed term.
Transfer pricing and permanent establishment (PE) avoidance
- There will be a new PE avoidance rule that will apply to large multinationals that structure their businesses to avoid having a PE in New Zealand. There will be further consultation on how to best achieve this.
- Deem certain amounts to have a New Zealand source if New Zealand has the right to tax that income under any applicable DTA.
- Introduce an anti-avoidance source rule.
- Amending the life insurance source rules.
- Amending the transfer pricing rules so that:
- Legal form is disregarded if it does not align with the economic substance of a transaction.
- Allow Inland Revenue to reconstruct transfer pricing arrangements which are not commercially rational because they involve terms that third parties would not be willing to agree to.
- Specifically refer to arm’s length conditions and the OECD guidelines.
- They codify the need to comply with the OECD’s country-by-country reporting requirements.
- The time bar is increased from four years to seven years.
- The burden of proof for demonstrating that a taxpayer’s transfer pricing position aligns with arm’s length conditions is shifted from Inland Revenue to the taxpayer.
- The rules also apply when non-resident investors are “acting in concert” to effectively control a New Zealand entity, such as through a private equity manager.
- Strengthen Inland Revenue’s investigation powers when it comes to multinationals with global revenues of at least €750million (NZ$1.1billion) if they do not cooperate with Inland Revenue. Initiatives include: more readily being able to assess taxpayers based on information held; collecting any tax held from any wholly-owned group member; being able to issue information requests to offshore entities; being able to deem income to be allocated to a New Zealand group member if information requests are not adequately responded to; and imposing a civil penalty of up to $100,000 for failing to provide requested information.
The above changes are expected to net $50million per year in additional tax on an ongoing basis.
It is worth noting that a Diverted Profit Tax was considered but not recommended.
As with the interest limitation rules, these new rules will apply to income years beginning on or after 1 July 2018, with grandparenting applying to APAs in place before this date. The Regulatory Impact Assessment document accompanying these announcements states that “We consider the planned application date of 1 July 2018 (for most of the measures) to be sufficiently prospective when compared with the date of the discussion document release, which is when taxpayers should be regarded to [sic] have been notified of the Government’s intention in this area, and the scheduled date of introduction of the relevant tax bill.”
Hybrid mismatch arrangements
- Rather than tackling only hybrid arrangements which have been observed in New Zealand, it has been announced that New Zealand will have a comprehensive adoption of the OECD recommendations related to hybrid mismatch arrangements. It is acknowledged that this will involve considerable complexity, but the intended outcome of this complexity is taxpayers choosing simpler debt and equity funding structures.
- Some concessions will be made to the OECD recommendations where is appropriate in a New Zealand context. For example, simple foreign branch structures will not be caught.
- Foreign trusts will be caught within the rules in circumstances where their treatment outside of New Zealand means income of the trust is not included in a tax calculation anywhere in the world.
The rules are generally intended to apply from 1 July 2018, with some aspects slightly delayed.
The above changes are expected to net $50million per year in additional tax on an ongoing basis, subject to taxpayer behaviour modifying after the implementation of the rules.
Between now and October 2017 there will be further consultation on aspects of the proposals. This is expected to be in the form of exposure drafts containing draft legislation. This will provide an initial opportunity to consider the workability of the announcements and to identify any major issues.
Following this process, it is intended to introduce legislation into Parliament and to start the Parliamentary process before the end of the year. The last parliamentary sitting date in 2017 is 14 December. The legislation will need to be enacted by 30 June 2018.
New Zealand has a General Election on 23 September 2017. There is general cross-party support to take action against BEPS and therefore these proposals are likely to proceed regardless of the make-up of the next New Zealand Government, albeit depending on the outcome of the election there may be more BEPS measures to come.
September 2017 Tax Alert contents
- New Zealand makes BEPS announcements
- Deloitte 2017 BEPS Global Survey
- Election 2017
- Do your contracts comply with the new Transfer Pricing Guidelines
- Inland Revenue targeting FBT – Are you ready?
- Get your GST matters right before settlement
- Survey shows room for improvement in the way New Zealand taxes business
- A snapshot of recent developments