Tax Tips Alert: March 2017

Next steps in the BEPS journey for New Zealand

The New Zealand Government is proposing to make it harder for foreign multinationals to shift profits overseas without economic justification, with the Revenue Minister Judith Collins announcing the release of three consultation documents at the International Fiscal Association Conference in Queenstown on 3 March 2017.

The latest announcements are broadly orthodox in line with the objectives of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. While the Government has not ruled out a Diverted Profits Tax (DPT), it has indicated its preference to explore an alternative package of measures. We are pleased to hear that the Government is not proposing an EBITDA-based rule for thin capitalisation purposes, and will instead retain the existing debt-to-asset test.

Stricter administrative measures have also been proposed to give Inland Revenue extensive new powers when collecting information from multinational taxpayers who they consider to be non-cooperative. This is a significant development that will require further consideration to ensure there is an appropriate balance between tax collection and preserving the fundamental principles of a self-assessment tax regime.

The three consultation documents released today propose the following measures:

Permanent establishment

• A new anti-avoidance rule will be introduced to apply to large multinationals (with global turnover exceeding €750m) that structure their sales to avoid a taxable presence in New Zealand.
• The rule seeks to align New Zealand tax law with the economic substance of foreign multinationals and deem a permanent establishment to exist. Profits from New Zealand sales could be taxed locally if a large multinational is part of an arrangement which seeks to avoid a New Zealand permanent establishment.
• Interestingly, the Revenue Minister has openly stated that the proposed anti-avoidance rule is not intended to target multinationals who are simply shipping goods or supplying services over the internet, provided no one is working for it in New Zealand.
• A new source rule is proposed to treat income as New Zealand sourced if it can be attributed to a New Zealand permanent establishment as defined in any tax treaty. The permanent establishment article in the model treaty will also be incorporated into domestic law to ensure that the source rule is consistently applied even if there is no applicable tax treaty.

Interest limitation rules

• The thin capitalisation regime will be strengthened with new rules limiting the interest rate that can be applied to related-party loans from a non-resident to a New Zealand borrower. Going forward, the interest rate on loans exceeding $10 million will be capped at a level calculated with reference to the credit rating of the New Zealand borrower’s ultimate parent company, rather than using ordinary transfer pricing rules. The interest rate cap for a related party loan with a term of longer than five years will be calculated as if it is a five-year loan.
• The calculation of “total assets” for thin capitalisation purposes has been amended to ensure that non-debt liabilities are deducted from the gross asset value. The availability of the net current value method will be removed. Taxpayers will need to consider the impact of including non-debt liabilities in their thin capitalisation calculations, especially as industry-specific concessions are currently off the table.
• Taxpayers will no longer be able to calculate their thin capitalisation position using their financial position at year-end. Instead, taxpayers will be expected to value their assets and liabilities either on a daily or quarterly basis. This could add significant compliance cost and put pressure on taxpayers to monitor fluctuations in their financial position for thin capitalisation purposes.
• A de minimis threshold of $1-2 million interest expense could be introduced to the inbound thin capitalisation rules, operating as it currently does for outbound entities. Taxpayers should welcome this move to reduce compliance costs.
• A special rule similar to the Australian Arm’s Length Debt Test is expected for certain infrastructure projects controlled by a single non-resident, allowing qualifying taxpayers to exceed the existing safe harbour thresholds where third-party non-recourse loans are obtained on commercial terms.

Transfer pricing

• Proposed transfer pricing rules will introduce the need to demonstrate alignment of substance and legal form. This will allow Inland Revenue to disregard and/or reconstruct a transaction if they view its legal form as not aligning with the economic substance or if they argue that the arrangement would not have been entered into by wholly independent entities.
• Transfer pricing rules will be broadened to not only apply to associated persons, but to investors that “act in concert” as well. The result of this is far reaching and could potentially pull the likes of private equity investors into New Zealand’s transfer pricing rules.
• The statute bar in respect of transfer pricing matters for large multinationals will be extended to seven years, similar to the regimes in Australia and Canada.
• The burden of proof could be shifted to the taxpayer, but with no mandatory documentation requirement. In practice, shifting the burden of proof, but maintaining the current approach to documentation, is unlikely to significantly impact taxpayers.

Administrative measures

• New administrative measures will ensure large multinationals cooperate with Inland Revenue on providing information. Although the threshold at which a multinational is treated as non-cooperative has not been set, the Government has indicated its expectation for Inland Revenue to put in place internal procedures to ensure appropriate decisions are made at a sufficiently high level within the organisation.
• Inland Revenue will have the ability to issue notices of proposed adjustment (NOPA) or amend tax assessments based on best endeavours if a large multinational is considered non-cooperative. The payment date for tax could also be brought forward to either 90 days after the issue of an assessment for the tax or within 12 months of Inland Revenue issuing a NOPA.
• Failure to provide information could potentially result in employees of large multinationals being convicted of a civil offence and penalties of up to $100,000 may apply.

Multilateral instrument

• As expected, the Government intends to sign the draft Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS and has made preliminary decisions on which tax treaties to cover and provisions to adopt. Although countries can choose which articles of the Multilateral Instrument to incorporate into their tax treaties, we understand the Government intends to adopt all the proposed articles.
• The Multilateral Instrument will introduce a principal purpose test into treaties to deny treaty benefits to taxpayers with abusive tax arrangements. It will also strengthen the existing treaty definition of permanent establishment and establish new rules to prevent taxpayers from using hybrid entities to obtain inappropriate treaty benefits.
• Unless significant concerns are raised as part of the consultation process, which we do not expect, the Multilateral Instrument is expected to be signed by a number of participating jurisdictions including New Zealand in June 2017. It will then need to be ratified by the New Zealand Parliament in the usual treaty-making process.

Submissions on the Multilateral Instrument discussion document are open until 7 April 2017. Submissions on the other two discussion documents are due on 18 April 2017.

Additionally, the Revenue Minister has confirmed that officials are still working on potential legislative amendments to address hybrid mismatch arrangements. We expect a second discussion document will be released for public consultation in the foreseeable future.

Please contact us if you would like to discuss how the above measures could impact your business.