APAC Tax Matters: 12th edition

New Zealand

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At a glance

  • New Zealand’s approach to taxing multinationals
  • Proposed changes to thin capitalisation rules
  • New and amended double tax agreements

New Zealand’s approach to taxing multinationals

New Zealand’s Minister of Revenue released an officials’ issue paper on 19 December 2012 (“the issues paper”) which details concerns about the amount of tax paid by large multinational companies and explains how New Zealand, and other countries, are responding to these concerns.

The issues paper provides a useful insight into the New Zealand Inland Revenue’s focus going forward, including some commentary on avoidance in a double tax agreement context.  The premise of a double tax agreement is often that one jurisdiction forgoes tax on an occasion where the tax is collected in another jurisdiction.  However, multinational entities that are not confined to a physical location currently appear to take advantage of perceived loopholes resulting in less tax being collected globally from entities of this type.

The issues paper discusses the OECD’s BEPS (tax base erosion and profit shifting) initiative which addresses tax base erosion and profit shifting issues and is backed by several countries such as Germany, the United Kingdom, France and Australia.

At a conceptual level, New Zealand will seek the following broad options for addressing the relevant issues:

  • Identify and address gaps in the base protection rules in relation to foreign investment into New Zealand. In this regard:
    • New Zealand considers it is important to give priority to projects which protect source base taxation. For instance, New Zealand has recently released an issues paper to address gaps in its thin capitalisation rules (discussed further below).
    • Although the paper states that, thus far, New Zealand has not encountered any particular difficulties in applying its transfer pricing and general anti-avoidance rules, New Zealand acknowledges the importance of ensuring that these rules are up to date with international developments.
  • Promote best practice for residence taxation by all countries pursuant to their domestic law. New Zealand would promote this through involvement in the OECD BEPS initiative and would continue efforts to enhance information exchange between tax authorities.
  • Participate in the improvement and update of international tax frameworks, particularly the OECD model double tax agreement. In this regard, New Zealand may address the allocation of taxing rights under double tax agreements (e.g., should the source country still be required to forego taxation if the residence country is not taxing the relevant income?)
  • Actively participate in the work of the OECD on BEPS.

The New Zealand Tax Policy Advice Division will report further on this issue in March 2013.

Proposed changes to thin capitalisation rules

An officials’ issues paper proposing changes to New Zealand’s thin capitalisation rules was released on 14 January 2013.  The purpose of the proposed changes is to improve New Zealand’s collection of tax from investments made in New Zealand by foreign investors, particularly private equity investments.

The thin capitalisation rules seek to restrict the ability of non-residents to utilise excessive interest costs to reduce their New Zealand tax liabilities. Since the introduction of these rules, the issues paper recognises that the rules have, for the most part, been effective. However, the rules seem deficient in the case of private equity investment. 

In this regard, the issues paper proposes several changes including:

  • Extending the thin capitalisation rules to apply when an investment is controlled by a number of people who “act together” to operate businesses in New Zealand (as is commonly the case for private equity investors) in a way that mimics control by a single non-resident
  • Excluding related party debt from the worldwide ratio for the purposes of the thin capitalisation calculation. This amendment seeks to ensure that only genuine third-party borrowing can be used to justify high debt levels in New Zealand

If the changes proceed, it is envisaged that they will be introduced in the income year commencing after the enactment of any legislation.

New Zealand/Papua New Guinea double tax agreement

With the intention of reducing tax impediments for businesses operating in both countries, a new double tax agreement was signed on 30 October 2012 between New Zealand and Papua New Guinea. The agreement will come into effect once both countries give legal effect to it.

For New Zealand, legal effect will occur through an Order in Council. This is the first double tax agreement New Zealand has made with Papua New Guinea.

New Zealand/Malaysia double tax agreement

On 6 November 2012, New Zealand and Malaysia signed a protocol to amend their existing double tax agreement. The updated double tax agreement is intended to better equip both countries to exchange tax information to combat tax evasion. The updated agreement will come into effect once both countries give legal effect to it.
For New Zealand, legal effect will occur through an Order in Council.

New Zealand/Japan double tax agreement

On 11 December 2012, the New Zealand Inland Revenue announced that a new double tax agreement had been signed in Tokyo by New Zealand’s ambassador to Japan and Japan’s Parliamentary Senior Vice Minister of Foreign Affairs.  The agreement is projected to assist New Zealand-based businesses compete in Japan, attract investment from Japan and combat tax avoidance through the reduction of tax impediments.

The updated agreement will come into effect once both countries give legal effect to it. For New Zealand, legal effect will occur through an Order in Council.