In line with many other jurisdictions, New Zealand has legislated to align its anti-tax avoidance rules with the recommendations of the OECD’s base erosion and profit shifting project. On 27 August, New Zealand’s Inland Revenue released guidance on several BEPS-related legislative changes that were included in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018, which we have summarised in today's post.
In essence, the legislation, which received Royal Assent on 27 June 2018, aims to prevent multinational companies from using:
• artificially high interest rates on loans from related parties to shift profits out of New Zealand (interest limitation rules);
• artificial arrangements to avoid having a taxable presence (a permanent establishment) in New Zealand;
• transfer pricing payments to shift profits into their offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore; and
• hybrid and branch mismatches that exploit differences between countries' tax rules to achieve either double non-taxation or a double deduction for the same income.
Interest Limitation Rules
The new rules require related-party loans between a non-resident lender and a New Zealand-resident borrower to be priced using a "restricted transfer pricing approach". Specifically, rules and parameters are applied to certain inbound related-party loans to determine the credit rating of New Zealand borrowers "at a high risk of BEPS" typically at either one or two notches below the ultimate parent’s credit rating.
The rules also remove any features not typically found in third party debt in order to calculate (in combination with the credit rating rule) the appropriate amount of interest that is deductible on the debt.
These measures apply to income years starting on or after 1 July 2018.
- New Zealand's Tax System Beats Competition On Simplicity
- BEPS - An Irish Perspective [Webinar]
- BEPS - A UK Perspective [Webinar]
Changes concerning hybrid mismatches are intended to eliminate opportunities for double non-taxation benefits arising from hybrid mismatch arrangements, which exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions. Hybrid mismatches can otherwise enable a taxpayer to inappropriately claim double deductions for the same income. The majority of the hybrid and branch mismatch rules apply for income years beginning on or after 1 July 2018.
In summary, these changes are intended to strengthen the transfer pricing rules so they align with the OECD's transfer pricing guidelines and Australia's transfer pricing rules.
Permanent Establishment Anti-Avoidance
Provisions in this area are intended to address the ability of some multinationals to structure their affairs so they do not trigger New Zealand’s permanent establishment rules, enabling them to derive income from economic activities in New Zealand without being subject to the country’s income tax rules. Often this involves a non-resident entity establishing a New Zealand subsidiary to carry out local sales-related activities.
Several changes are required to ensure that those groups that undertake activity in New Zealand are taxed appropriately. Among other things, the change provides that a non-resident will have a permanent establishment 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", subject to other requirements set out in the law being met.
Under the provisions, income will be deemed to have been sourced in New Zealand if that income can be attributed to a permanent establishment in New Zealand.