OECD Pillar Two: Global Anti-Erosion Model rules for New Zealand
Tax alerts - June 2022
By Annamaria Maclean & Neesha Morar
On 5 May 2022, Inland Revenue released a public consultation paper on OECD Pillar Two: GloBE rules for New Zealand. The issues paper asks for submissions on whether and how New Zealand might implement the Global Anti-Base Erosion (GloBE) model rules for a 15% global minimum tax, which were released in December 2021 by the OECD/G20 Inclusive Framework on BEPS.
The issues paper does not seek feedback on the technical detail of the rules on the basis that New Zealand is part of the Inclusive Framework and has therefore already approved the OECD model rules. However, it does ask questions like - should New Zealand adopt the rules, when should the rules be effective from and New Zealand specific tax questions such as whether tax paid by a New Zealand company under the GloBE rules should give rise to an imputation credit?
Recap of proposals
In October 2021, the GloBE model rules (Pillar Two) were endorsed by over 130 countries in the OECD Inclusive Framework, including New Zealand. However, this endorsement did not bind any country to adopt the rules. By approving the Model Rules, Inclusive Framework countries have not agreed to implement the GloBE rules, but rather have agreed that if they implement them, that will be in accordance with the Model Rules.
Broadly, the GloBE model rules apply to large multinational businesses with an annual consolidated revenue of over €750 million.
The income inclusion rule (IIR) is the primary rule and applies on a top-down basis so tax due for foreign subsidiaries and branches is calculated and paid by the ultimate parent company to the tax authority in its own country. The tax due is the “top up” amount required to bring the overall tax on the net income in each country where the group operates up to the minimum effective tax rate (ETR) of 15%.
The undertaxed profits rule (UTPR) is a secondary rule in cases where the ETR in a country is below the minimum rate of 15%, but the IIR has not been fully applied. The top up tax is allocated based on a formula to countries which have adopted the UTPR.
Multinational groups that are within scope will need to perform a ETR calculation for each jurisdiction they operate in to identify whether a top up tax is due.
Suffice to say, the calculation of the ETR is complex! The ETR is largely computed using accounting concepts – comparing tax expense to accounting net profit, with numerous adjustments.
New Zealand-specific issues
The issues paper seeks feedback specifically on the following:
- Whether New Zealand should adopt the GloBE rules, assuming that a critical mass of other countries also does so;
- Whether New Zealand should apply a domestic minimum top-up tax to New Zealand headquartered in-scope multinationals and foreign headquartered in-scope multinationals operating in New Zealand;
- When any adoption should be effective, particularly in relation to the IIR;
- How best to translate the rules into New Zealand law;
- What areas of uncertainty there may be in applying the rules to New Zealand tax law, and how to resolve these;
- Whether tax paid to the New Zealand government under the rules should give rise to imputation credits;
- Feedback on how safe harbours could be designed (which if met would not require the full ETR calculation to be prepared) to simplify compliance; and
- Administrative aspects, for instance return filing and timing of payments.
Will a critical mass be reached?
While there appears to be sustained consensus amongst OECD countries and support from the current US administration for the Pillar Two proposals, the publicly announced implementation timeframes are ambitious and it currently seems unlikely that countries will be able to adopt the rules to be effective from 2023 as originally proposed.
It is unclear whether EU will reach political agreement on the draft text for an EU Minimum Tax Directive intended to incorporate the Pillar Two rules into EU law.
It is also uncertain whether domestic implementation will pass through the US Congress. On the other hand, the prospect of a proliferation of unilateral digital service taxes being implemented by individual countries may provide sufficient impetus to reach an international consensus, particularly for the US which has a number of tech companies that would be impacted.
Impact for New Zealand
Inland Revenue estimates that out of approximately 1,500 multinational groups that will be within scope of the proposed rules, only 20 to 25 are headquartered in New Zealand.
Practically, we expect that implementing Pillar Two is unlikely to raise significant extra tax revenue for the Government; but it will impose significant compliance costs and added complexity to the international tax rules. However, a key reason for New Zealand to implement the rules is to ensure no New Zealand tax is left on the table i.e. to prevent other countries from taxing New Zealand headquartered multinationals under their own GloBE rules. Further, the Government may see that adopting the rules will signal New Zealand is serious about its role as a “good global citizen” and is addressing concerns that multinationals are not paying a “fair share” of tax.
The New Zealand Government has clearly signalled its preference is to work with the OECD to reach a global solution to concerns about the taxation of multinationals. However, officials have noted that a digital services tax may be back on the agenda if consensus cannot ultimately be reached on the implementation of Pillars One and Two.
For multinationals operating in New Zealand, while the proposed 15% minimum rate may seem low relative to New Zealand’s 28% corporate tax rate, the income on which the tax is calculated differs from the taxable income determined for domestic purposes. This may lead to some unexpected results. Further, if other countries decide to adopt a domestic minimum top-up tax, this may mean New Zealand headquartered multinationals doing business in those countries may end up paying more tax in those countries.
Given the ambitious timeframes and the complexity of the proposed rules, we recommend that in-scope multinational groups operating in New Zealand consider how these rules could impact them. If you would like to discuss this further, please reach out to your usual tax advisor.