Permanent Establishment anti-avoidance guidance finalised – Where to from here?
Tax Alert - May 2019
By Bart de Gouw and Young Jin Kim
Inland Revenue has recently released their finalised guidance on Permanent Establishment (PE) anti-avoidance rules in the April issue of Tax Information Bulletin (TIB). The Permanent Establishment anti-avoidance provisions were introduced last year in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 and take effect for income years starting on or after 1 July 2018.
These rules broadly apply to groups with a consolidated global turnover of more than €750m, and deem a non-resident to have a PE in New Zealand if a related entity carries out sales activities on behalf of that non-resident in New Zealand under an arrangement with a more than incidental purpose of tax avoidance. Where applicable, a PE is deemed to exist for the purpose of any applicable DTA (and therefore effectively overrides the PE definition in the relevant DTA).
The rules can apply to a multinational group where a non-resident group member has the contractual relationship with the New Zealand customers and a facilitator (being a New Zealand subsidiary, employees of a non-resident group member or an otherwise economically dependent person) helps bring about the particular supply for the non-resident group member. Once the PE anti-avoidance rules apply, the revenue derived by the non-resident group member from New Zealand customers is deemed to have a New Zealand source.
Given the adverse consequences that may result, taxpayers may wish to review the finalised guidance on PE anti-avoidance rules included in the recent TIB and compare this against the group’s operating model in New Zealand to form a view on whether there is a risk of a deemed PE.
For taxpayers who desire greater certainty in respect of these new rules, the next step may be to obtain an indicative view or a private binding ruling from the Commissioner. Recent amendments to the Tax Administration Act 1994 explicitly give the Commissioner authority to make a private binding ruling on whether a person carries on business though a PE or a fixed establishment. While we have sought private formal rulings from Inland Revenue in the past on the application of the Income Tax rules (which would inherently include PE issues), these changes have confirmed that Inland Revenue are open to having specific discussions with taxpayers on PE issues and providing a ruling where appropriate.