Proposed International Tax anti-avoidance measures

Proposed International Tax anti-avoidance measures

Finance Minister Steven Joyce and Revenue Minister Judith Collins have released three consultation papers proposing new measures to strengthen New Zealand’s rules for taxing large multinationals.  Unfortunately, we only have a two-sheep picture.  But you’ll soon get the picture… 

Where other countries go, New Zealand must also go.  Why?  Because to not co-operate will create difficulties and potential sanctions against New Zealand, and because New Zealand cannot afford to miss out on the ability for it to claim its fair share of taxes.  Yet New Zealand cannot afford to be ahead of the herd in case we antagonise other countries, go too far, or go in the wrong direction.  Hence we follow Australia and the United Kingdom (referred to in the consultation documents) as well as working with the OECD and G20 to develop a co-ordinated global solution to address BEPS through the 15-point G20/OECD BEPS Action Plan (that’s a lot of letters).

The consultation documents contain proposals for:

  • Tackling concerns about multinationals booking profits from their New Zealand sales offshore, even though these sales are driven by New Zealand- based staff,
  • Preventing multinationals using interest payments to shift profits offshore, and
  • Implementing New Zealand’s entrance into international conventions for aligning our double tax agreements with OECD recommendations.

While New Zealand welcomes Multinationals to trade in New Zealand, the Government has made it clear that they have to pay their fair share of tax, rather than using legitimate but arguably contrary to the spirit of our tax rules.  Multinationals have an obligation to pay for the privilege of being allowed access to the New Zealand market, not just access to our consumers, but also access to the legitimacy and stability of our legal and commercial environment.

New Zealand international tax rules are reasonably comprehensive – we have a “transfer pricing “ policy that requires taxpayers to not load expenses in New Zealand; “thin capitalisation” which aims to prevent debt load in New Zealand; and a definition that captures enterprises that have a “permanent establishment” in New Zealand or source their income in New Zealand.

If you are reading this, then almost certainly you and your clients do not fall into the target group of multinational enterprises that don’t comply with the spirit of the existing rules.  Rather the rules are targeted at those entities with global turnover of more than €750m pa.  While our blog is wildly popular, and widely read throughout the world (it’s true according to my website stats, and that’s excluding the “bots” and “spiders”), I’m taking a punt that our average reader is not in this league.

So in a few paragraphs we shall provide the lowdown on the proposed changes so you can talk the lingo without having to understand it in depth.

First, you need to understand that all of these proposals come under the collective term to prevent Base Erosion and Profit Shifting (“BEPS”).

 

  • Multilateral Instruments (“MLI’s”) are about entering into agreements with other countries to curb BEPS.  These MLI’s are different to the existing Double Taxation Agreements, and may end up overriding them.
  • Permanent Establishment (“PE”) avoidance adjustments are where the non-resident’s economic activities in New Zealand should result in a PE here, but the non-resident has been able to structure its legal arrangements to avoid one arising.  While not trying to change the accepted international rules on when a PE is created, it will widen the definition to encapsulate those that current fall outside the rules.
  • Transfer Pricing (“TP”) adjustments propose that New Zealand’s transfer pricing legislation should include an explicit reference to the OECD Transfer Pricing guidelines to be used to guide the New Zealand courts when interpreting the TP rules.  The Inland Revenue will be given wider powers, including the ability to go back 7 years in an audit and placing greater burden on the taxpayer to show the arrangements are justified.  In addition the Revenue will have the ability to reconstruct an organisations tax position based on a financial analysis of economic substance – looking at whether there has been a “creation” of imbalances in the transactions whereby the parent charges a higher fee for services provided or risks assumed against the New Zealand entity.  The proposal will have the Revenue look at the arrangements based on those that an arms-length entity would enter into in similar circumstances.
  • Finally in the transfer pricing area there will be reference to the borrowing ability and costs of the group, linking deductible debt to the parent entity’s credit rating and requiring the value of assets to be calculated net of non-debt liabilities.

 

If you are interested in making submissions to the Government’s proposals you need to move fast, submissions close on 10 April 2017 for implementation of the MLI’s and 18 April 2017 (for PE avoidance, transfer pricing and interest).

If you want to read more click here.   http://taxpolicy.ird.govt.nz/

Posted: Monday 6 March 2017