On 3 August 2017, New Zealand's Finance Ministry announced that it had decided to take forward new measures to address base erosion and profit shifting (BEPS). In today's post we will summarise those measures.
BEPS – A Recap
The BEPS project was launched by the OECD on behalf of the G-20 countries and OECD member states in 2013 to tackle the deficiencies of the international tax framework and to modernize rules to keep pace with the evolution of the digital economy. It is designed to provide governments with "comprehensive, coherent, and coordinated" solutions for closing gaps that allow corporate profits to "disappear" or be artificially shifted to low- or no-tax jurisdictions.
With New Zealand’s coalition government striving to achieve more fairness in the tax system, and having accorded a high priority to tackling tax avoidance, new measures to combat BEPS come as no surprise.
Indeed, in November 2017, the Government agreed to the formation of a Tax Working Group tasked with considering changes to the structure, fairness, and balance of the country's tax system.
In fact, the previous government had already begun to lay the groundwork for new defences against BEPS, and on August 9, 2017, it tabled in parliament legislation to implement the BEPS multilateral convention enabling New Zealand to update tax treaties in line with the OECD's recommendations on BEPS.
The new government built on this measure in December, when the Taxation (Neutralising Base Erosion and Profit Shifting) Bill was introduced into parliament. The legislation is intended to prevent multinationals from using:
- Artificially high interest rates on loans from related parties to shift profits out of New Zealand;
- Hybrid mismatch arrangements, which exploit differences between countries' tax rules to achieve an advantageous tax position;
- Artificial arrangements to avoid having a taxable presence in New Zealand; and
- Related-party transactions to shift profits into offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore.
What the Government Has Said
According to Finance Minister Steven Joyce, the new measures will not only strengthen New Zealand’s armoury against corporate tax avoidance, but also raise substantial amounts of revenue annually.
"The new measures will significantly strengthen our tax rules and our ability to ensure that multinationals are taxed fairly and on the basis of their actual level of economic activity in New Zealand," he said. "These changes will result in an estimated NZD200m (EUR120m) a year in additional tax being paid by multinational companies."
On the neutralising BEPS bill, Revenue Minister Stuart Nash said that these measures would “introduce fairness and equity back into the tax system.”
“New Zealanders expect every company to pay its share of tax, no matter how big or powerful that company may be.”
More to Come?
New Zealand is far from alone in its determination to tackle tax avoidance; BEPS-related measures are being introduced across the globe. And with this issue continuing to receive much media attention, taxpayers should expect regular changes to tax legislation and a much tougher compliance culture in general, both in New Zealand and overseas.
As Nash has said, “the proposed new rules will be an effective response to current avoidance techniques, but are not the end of the story.”
“The government will continue to investigate further options, both legislative and administrative, to counter aggressive tax practices,” he said.