New Zealand Revenue Minister releases update on taxation of multinationals
December 2014 Tax Alert
In Late November, Revenue Minister, Todd McLay released two Tax Officials’ policy reports which outline the progress to date and an expected timeline for the Base Erosion and Profit Shifting (BEPS) related policy work. It also gives a glimpse of New Zealand’s view of the approaches taken by OECD on the action plan reports and likely domestic law changes as a result.
Inland Revenue reports that it supports the approaches taken in all reports on the basis they are generally consistent with the principles of international taxation and administration that Inland Revenue follow, but that there is considerable work remaining to address the outstanding technical and implementation issues.
Whilst New Zealand’s international tax policy settings are generally robust, there are areas in which New Zealand is actively considering reform to its domestic rules in order to line up with the OECD’s recommendations. These include:
- Neutralise the effects of hybrid mismatch arrangements (Action 2)
- Limit base erosion via interest deductions (Action 4)
Specifically, New Zealand Officials have been very interested in hybrid mismatch work. This relates to the different tax treatment in two countries of hybrid instruments or entities which can result in double deductions or deductions without corresponding income. It is clear New Zealand Officials intend to reform New Zealand’s domestic law in this regard as they consider this is an area which affects New Zealand’s tax base. Inland Revenue use the example of the Australian limited partnership as an example of the mismatch in tax treatment that can be used to result in a double deduction outcome.
Despite the recent tightening of New Zealand’s thin capitalisation rules, New Zealand Officials think there is still more that can be done. Inland Revenue is concerned that there is still “considerable scope” for most (or all) of a firm’s profits to be shifted out of New Zealand through loading debt up to the thin capitalisation limits and that this artificially weakens the local subsidiary's relative financial position. Thus, the work undertaken by the OECD on best practice domestic law measures in relation to thin capitalisation and the pricing of debt will also be an area that will result in further tax measures in New Zealand. New Zealand may also review other aspects of our domestic thin capitalisation rules such as the use of safe harbour thresholds once the OECD finalises its work.
New Zealand can also expect changes to be made to the non-resident withholding tax (NRWT) regime. The NRWT rules are not specifically being looked at by OECD, but New Zealand Officials have identified aspects which are not working as intended and therefore align with the “general concern regarding tax deductions in international tax planning”. For example, Inland Revenue considers that:
- the rules which trigger when NRWT is deducted are deficient;
- the associated person test for NRWT may not be sufficient; and
- payments made to non-residents operating through a New Zealand branch are not subject to the rules (which is inappropriate in Inland Revenue’s view).
Further, Inland Revenue are seeking to include three domestic administrative proposals which have nothing to do with BEPS, but nonetheless are being justified under the BEPS banner because “they improve transparency between Inland Revenue and large corporates”. These measures include:
- Developing an automated risk assessment tool to replace the existing manual Basic Compliance Package which will be able to take key points from a standardised electronic form and apply a range of tests and criteria to identify areas of concern.
- Requiring large corporates to file their tax returns within six months of the end of their income year on the basis that the current extension of time arrangements for filing (in some cases up to 18 months) is out of step with international norms and can prevent the detection of tax avoidance because of the delay of information to Inland Revenue.
- Introducing a business led code of practice for large corporates (based on the UK version for banks).
Officials are also presently reviewing the tax treatment of foreign trusts and will report to the Minister in December 2014. Also of interest is that the report notes that 2015 negotiations on DTAs/protocols are likely for Korea, Australia, Norway, Slovak Republic, China, Portugal and Samoa.
The proposals which will result in domestic law changes will be subject to public consultation and it will be important for corporates to actively participate in this consultation.
New Zealand will release discussion documents on hybrid mis-match arrangements and limiting base erosion via interest deductions in late 2015, once OECD final recommendations are complete. The discussion documents on strengthening the NRWT rules and the administration proposals are scheduled for released in Mid-2015. Officials can start to action these earlier as these measures are not related to the BEPS action plan.
For more information, please contact your usual Deloitte tax advisor.
December 2014 Tax Alert contents
- Inland Revenue’s 2014 Annual Report: some reading between the lines
- Briefing for the Incoming Minister of Revenue
- New Zealand Revenue Minister releases update on taxation of multinationals
- The Commissioner’s power of reconstruction: No day at the beach for taxpayers
- What are the tax compliance issues that Inland Revenue is focusing on?
- VAT on Supplies of Services to the EU