Why New Zealand is unlikely to introduce a diverted profits tax (as such)
Tax Alert - February 2017
On 14 December 2016, Inland Revenue released a Cabinet Paper which had been prepared by the Ministers of Finance and Revenue, for the purpose of seeking the agreement of the Economic Growth and Infrastructure Committee to prepare and issue a Government discussion document primarily on measures to strengthen New Zealand’s transfer pricing rules and prevent overseas companies from avoiding having a permanent establishment.
This is likely in response to growing political and media pressure for the New Zealand Government to follow Australia and the United Kingdom and introduce a diverted profits tax which would tax profits of multinationals that divert profits offshore (rather than allocate them to their New Zealand operations).
The cabinet paper does not contain any firm proposals; rather it outlines a planned approach of releasing a comprehensive discussion document in early 2017 for public consultation. The document also states that “while the majority of multinationals operating here are compliant there is a minority that engage in aggressive tax practices”. Thus the discussion document and these proposals are targeted at this minority.
The cabinet paper outlines possible responses to addressing transfer pricing (TP) and permanent establishment (PE) avoidance setting out possible actions, namely:
- To adopt the OECD recommendations associated with TP and PE avoidance that were set out in the Base Erosion and Profit Shifting (BEPS) Action Plan, or
- To go beyond the OECD recommendations and introduce a unilateral measure to address diverted profits from TP and PE avoidance in the form of a diverted profits tax (DPT).
In considering whether a DPT would be good for New Zealand or not, the cabinet paper states (at para 18):
“A DPT would counter non-residents who try to avoid having a taxable presence in New Zealand or who use transfer pricing strategies to reduce the tax payable. Its assessment and collection features would also address some of the practical difficulties of taxing multinationals.
Introducing a DPT would mean that there would be a new type of tax, separate to income tax, to deal with a minority of aggressive multinationals. It could impact on foreign investor’s perceptions of the predictability and fairness of New Zealand’s tax system for foreign investment. As a separate tax from our general income tax it may produce unintended adverse consequences for taxpayers – especially with regard to normal grouping of tax attributes (for example income tax losses would not be able to be set off against diverted profits). A DPT may also have an unintentional negative impact on compliant taxpayers. The more we get into imposing arbitrary taxes the greater the risk of other countries doing the same to our exporters. Overall a DPT chips away at the consistency, neutrality and relative simplicity of our tax system from a global perspective.
Finally, the DPTs that have been proposed in Australia and enacted in the UK respond to particular problems with the application of their own income tax rules to multinationals. While a DPT may be appropriate for the issues Australia and the UK face, it seems more straightforward for us to fix New Zealand’s problems with our income tax rules rather than implement a new tax.”
While a DPT has not been ruled out, the Ministers’ preference at this stage is to recommend that New Zealand not introduce a DPT as such, but instead develop a package of anti-avoidance measures to counter TP and PE avoidance. This approach would likely take certain features of a DPT, combine them with the OECD’s BEPS measures and make further amendments to domestic tax legislation, particularly to the transfer pricing rules. It is noted that the package would not change the fundamental basis on which non-residents are taxed and like the Australian and UK DPTs would not tax non-resident suppliers without a material presence in New Zealand. We will have to wait for the discussion document on this package of reforms in early 2017 for more detail.
February 2017 Tax Alert contents