Base Erosion and Profit Shifting (BEPS) measures have been under consultation for a very short period of time with the first round of consultation documents released in March 2017.
The proposals in the initial consultation documents were, and remain in line with recommendations from the OECD’s BEPS project which has developed best practice measures for the global response to BEPS.
The initial consultation documents proposed:
- Tackling concerns about multinationals booking profits from their New Zealand sales offshore, even though these sales are driven by New Zealand- based staff;
- Preventing multinationals using interest payments to shift profits offshore;
- Implementing New Zealand’s entrance into a multinational convention to align our double tax agreements with OECD recommendations.
New Zealand Governments decision on BEPS
After release of initial consultation documents, policy reports, cabinet papers and submissions on the proposals the Government has made its final decision.
It is expected that the BEPS measures will be included in a taxation bill to be introduced by the end of the year, for enactment by 1 July 2018. Although this is a very tight timeframe, given the hundreds of pages of consultation that precede the Government’s final decision, it is not unexpected. The final proposals are largely unchanged from the initial consultation documents although there has been some tweaking around the margins.
The following is a snapshot of some of the proposals:
- Initially measures were to be introduced to tighten rules around the Permanent Establishment Article.The original proposal was modelled on the Australian Multinational Anti-Avoidance Law (“MAAL”) and the United Kingdom’s Diverted Profits Tax (“DPT") at large multinationals avoiding a presence in New Zealand via sales support from New Zealand related entities.The final decision is that the measures will proceed however the rule will be more narrowly targeted at avoidance arrangements.Exactly how this will occur will be the subject of further consultation.
- There is further refinement and tightening around interest deductions on cross-border loans which include changing the asset measurement rules, and implementing a range of other smaller reforms to the thin capitalisation rules.Initially an interest rate cap was proposed however
- Further transfer pricing measures will also be introduced.The Government will extend the period Inland Revenue can challenge transfer pricing matters from four to seven Revenue’s powers will also increase to deal with large “uncooperative” multinationals (requires global turnover of EUR750m or more).
- Hybrid instruments (treated as debt in one jurisdiction but equity in the other), which can give rise to a deduction/non-taxable income outcome, hybrid entities, which can give rise to a similar result or potentially a double deduction outcome, and other indirect hybrid arrangements (including reverse hybrids) will be targeted in the final measures decided upon foreign trusts are also considered reverse hybrids in this context.A reverse hybrid is any person that is treated as a separate entity by an investor and as transparent under the laws of the territory in which the person is established (it is questionable whether a foreign trust actually meets this definition).The Government has opted for comprehensive anti-hybrids rules, as opposed to more targeted rules which would have been a preferred outcome.The Government has in its final decision opted for implementing the OECD’s recommendations, which look to make specific improvements to domestic rules, as well as hybrid mismatch rules.These rules look to link the tax outcomes of hybrid arrangements with rules that adjust the tax treatment of an arrangement in one jurisdiction by reference to its treatment in the counterparty jurisdiction.Although there is room for uncertainty, the Government’s implementation of these rules is on the premise that taxpayers will hopefully adopt simpler funding structures.
RSM welcomes BEPS initiatives
As always there is the good, the bad and the downright ugly.
We await the Bill proposed for December release. In our view, the BEPS initiatives are welcome, but the details of the changes being made in certain specific areas (and the haste with which changes could be effected) could result in a detrimental impact for New Zealand on an international scale. As a nation reliant on investment, anything which forces symmetrical tax treatment of hybrid instruments, or denying interest deductions (to a greater extent under the proposals), will be a cost of doing business in New Zealand. Investors may look elsewhere as a result.