Although initially introduced via the previous National Government via variety of consultation documents the Labour Government has sought to keep up the momentum with the introduction of the Taxation (Neutralising Base Erosion and Profit Shifting) Bill in a bid to ensure multinational companies pay their fair share of tax.
For most provisions the proposals will come into force for income years commencing on or after 1 July 2018. This is timely given a recent NBR article of 11 December 2017 which stated the Inland Revenue Department were auditing 16 multinationals over their use of transfer pricing to trim their annual collective tax bill by about $100 million. The targeted legislation is part of a global effort to clamp down on such strategies. The Tax Bill aims to prevent this through:
- Further tightening of interest limitation rules. This includes the use of a restricted transfer pricing approach in relation to related party loans between a non-resident lender and a New Zealand resident borrower. This is a substantial change and will apply to all borrowings in excess of $10m. Such debt must be priced using a credit rating which is one notch below the ultimate parent’s credit rating or if you have no identifiable parent, a credit rating of BBB- (with certain exceptions). Affected taxpayers should start considering how these proposals will impact them going forward;
- Addressing tax advantages obtained via hybrid and branch mismatches. If any such advantage is obtained because for tax purposes the entity or arrangement is treated differently by different countries (whether New Zealand or elsewhere), this benefit is likely to be counteracted under the proposed hybrid mismatch tax rules. These appear very difficult to interpret and uncertainty may arise in whether these rules apply;
- Permanent Establishment rules are changing around when a physical presence in New Zealand is taxable. These measures address concerns around the avoidance of a permanent establishment and the domestic law measure will override existing treaties unless those treaties incorporate the OECD’s new permanent establishment definition under the Multilateral Instrument. The Bill contains some guidance on the scope of the activities that will fall under this avoidance rule. What is still unclear is where such a deemed establishment exists, how will the profits be attributed to New Zealand?
- A number of measures are introduced to tighten the transfer pricing rules and the Inland Revenue will be able to adopt a more stringent approach to compliance. Taxpayers will need to meet a much higher standard to be eligible for penalty protection if they are audited.
- Inland Revenue will obtain further powers to investigate multinational groups with consolidated turnover in excess of EUR750m. Local subsidiaries will be required to provide information held by any member of the group and the Commissioner can impose both civil and criminal penalties where information is not provided.
Overall the changes are welcomed to ensure the New Zealand tax base is protected however there is a large degree of uncertainty as to how some of these changes apply. The commentary to the Bill is some 120 pages which has made for some light reading over the Christmas break.