Amongst other things, protecting our clients’ business means, to us, ensuring that they are aware of the compliance and risk review focus of the Inland Revenue Department, and all necessary steps are taken to minimize the clients’ risks and exposure. One of the major concerns for Inland Revenue is taxation of multinational corporations operating in New Zealand. This is the concern from both the New Zealand tax base protection perspective, as well as New Zealand being a party to the OECD Base Erosion and Profit Shifting (BEPS) project.
In November 2014 the Government released two Officials’ reports which outline New Zealand Officials’ action plan for combating BEPS by large multinational companies and time frames for New Zealand’s consideration of the OECD’s finals BEPS recommendations and consultation on possible domestic law changes.
While New Zealand’s international tax rules are considered by Inland Revenue as generally robust, the reports highlight areas in which New Zealand’s domestic rules can be improved to counter BEPS and to line up with the OECD’s recommendations under the Action Plan. BEPS issues of specific concern to New Zealand include:
- Neutralising the effects of hybrid mismatch arrangements;
- Limiting base erosion via interest deductions;
- Addressing deficiencies in New Zealand’s non-resident withholding tax (NRWT) rules;
- Reviewing New Zealand’s foreign trust tax regime; and
- GST on online shopping.
Also, the reports provide an update on current work to increase tax transparency of large corporates.
Different countries may apply different tax treatments to either hybrid instruments or hybrid entities differently. This may lead to tax mismatches resulting in deductions in both countries (double deductions) or deductions in one country without corresponding income in another country. Given the proximity between New Zealand and Australia, the officials are particularly concerned with Australian limited partnerships which are treated as companies for Australian tax purposes but treated as partnerships (i.e. flow-through entities) for New Zealand income tax purposes. The reports signal that Inland Revenue is monitoring these structures, and, possibly, is considering a change to the domestic tax rules.
It is not uncommon for multinationals to use related party interest deductions to shift profits to another country. The reports acknowledge that although the thin capitalisation rules have recently been amended to strengthen its robustness, a more fundamental review of these rules (including the appropriateness of the current safe harbour thresholds) might be “on the horizon”.
Although the timing of NRWT is not a direct BEPS issue, Inland Revenue views this issue as part of the wide interest deductions area. It is possible, under current rules, for interest deductions to be claimed under the financial arrangements rules; however NRWT is not payable to Inland Revenue until interest is actually paid to a non-resident. In addition, the NRWT exemption applies where a non-resident operates through a branch in New Zealand. Subsequently, although the NRWT rules are a legitimate and deliberate policy, it may result in the delay, or avoidance of NRWT and, not surprisingly, Inland Revenue is not happy about this.
It does not come as a surprise that foreign trusts get a separate mention in the reports. In the past few months a number of concerns have been raised in New Zealand and overseas by both media and academia about the general lack of disclosure requirements for settlers and beneficiaries of foreign trusts. Some publications referred to New Zealand foreign trusts as “tax havens”. The reports discuss the review of the regime; however do not provide any insight on what the review of foreign trusts will cover.
Officials note that the OECD’s approach is likely to suggest that foreign suppliers will be required to register for VAT/GST in the customers’ country. There is a general consensus within the profession that applying GST to cross-border transactions remains a difficult issue. However a number of countries have already put similar mechanisms in place.
Corporate tax compliance measures may not necessarily be BEPS-related however these are heralded in the reports as part of the BEPS work stream.
The discussed administrative measures relating to large corporates include:
- Developing an automated risk assessment tool for large corporates to replace Inland Revenue’s annual Basic Compliance Package which “will be able to take key points of data from a standardised electronic form and quickly apply a range of tests and criteria to identify areas of concern”
- Filing income tax returns within six months of year end (so that information can be analysed and issues identified earlier)
- Consideration of a voluntary code of practice for large corporates, which would include a requirement for good tax governance, a transparent relationship with Inland Revenue and to avoid aggressive tax planning.
These reports are once again a reminder of the dynamic environment in which modern businesses operate. Engaging services of a professional firm will not only provide you with timely and quality advice but also with a peace of mind that “all the i’s are dotted and all the t’s are crossed”.