On May 15, 2018, New Zealand published the Finance and Expenditure Committee’s (the “Committee’s”) amendments to the Taxation (Neutralising Base Erosion and Profit Shifting) Bill (the “Bill”).
Part 1 of the Bill (i.e., hybrid and branch mismatches, interest limitation, permanent establishment (“PE”), transfer pricing) would amend the Income Tax Act 2007 (“Act”), and Part 2 of the Bill (i.e., investigation of large multinationals) would amend the Tax Administration Act 1994 (“TAA”).
Hybrid and branch mismatches arise from the use of cross-border arrangements that
exploit differences in the tax treatment of an entity, branch, or instrument under the laws of two or more countries to create a tax advantage. The Committee recommends technical amendments to the proposed hybrid and branch mismatch rules.
Base erosion and profits shifting (BEPS) occurs where borrowers deduct interest expense on loans granted from foreign related parties. The draft bill recommends a new transfer pricing approach to price related-party loans between non-resident lenders and New Zealand-based borrowers. The bill proposes restricting the credit rating, which would help determine the appropriate amount of interest that should be paid, of New Zealand borrowers that were determined to be at high risk of BEPS.
A New Zealand borrower with an identifiable parent that failed to prove it was not a high BEPS risk would have its credit rating restricted to one notch below its worldwide group credit rating. The Committee recommends increasing the spread to two notches, provided the New Zealand borrower’s credit rating is BBB- or higher. It also proposes that the relevant credit rating of the multinational would be the rating of the member of the group with the highest level of unsecured third-party debt.
The draft bill also includes an income-interest ratio test that must be passed to prove that a taxpayer was not at a high risk of BEPS. This would determine a New Zealand borrower to be at risk of BEPS if its earnings before interest, tax, depreciation, and amortization (EBITDA) were less than 3.3 times its interest expense. The Committee recommends removing certain provisions of the income-interest test, which may unfairly burden companies that were in a loss position, or which had recently started trading. The test would also be difficult for companies to manage due to the volatility of earnings, and would result in higher compliance costs.
The draft bill has a new anti-avoidance rule for large multinationals (those with over €750M of consolidated global turnover) that structure their affairs to avoid having a PE in New Zealand. The Bill would deem a non-resident entity to have a PE in New Zealand if a related entity carries out sales-related activities for it in New Zealand under an arrangement with a “more than merely incidental purpose of tax avoidance.” The Committee recommends minor changes to clarify this provision.
Some foreign investors that act together to control a New Zealand business use non-arm’s-length pricing of debt, management fees, and royalty arrangements to shift profits out of New Zealand. The Bill would extend the transfer pricing rules to overseas investors who act in concert to control a New Zealand business. The Committee recommends amendments to provide that all members of the controlling group of investors must be non-residents, and that the transfer pricing rules would not apply only because two companies were consolidated for accounting purposes.
Advance pricing agreements (APAs) are agreements entered into between Inland Revenue (“Revenue”) and a taxpayer with respect to transfer pricing issues. The Committee recommends amendments to allow taxpayers with inbound related party debt to continue with the agreed pricing until the end of the APA period. This would apply for existing APAs issued before July 1, 2018.
When a taxpayer files an income tax return, Revenue has four years from the end of the relevant tax year to investigate and amend the tax position taken by the taxpayer. The Bill provides for extending the time bar to seven years for transfer pricing issues. The Committee recommends amending this provision to extend the time bar to seven years only in cases where Revenue has begun a transfer pricing tax investigation within four years of the relevant tax return being filed, and has notified the taxpayer of this investigation.
Revenue’s administrative powers to investigate large multinationals (Sections 17, 143, and 143A of the TAA)
Revenue has the power to require New Zealand taxpayers to provide any requested information or documents that are in their knowledge, possession, or control. This power extends to the ability to request information from an offshore company that is controlled by a New Zealand taxpayer.
In response to privacy concerns, and to ensure that the information requested from multinationals would target its tax affairs, the Committee recommends amendments to the Bill to provide that information requested from a multinational must relate to an investigation of the multinational group’s tax position.
The Bill would establish criminal and civil penalties for a New Zealand taxpayer who failed to provide information that was held by an offshore member of a large multinational group. The Committee recommends retaining the proposed civil penalty, but removing the provision for criminal penalties.
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