APAC Tax Matters: 13th edition

New Zealand

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At a glance

  • Update on New Zealand’s approach to taxing multinationals
  • Update on proposed changes to thin capitalization rules

Update on New Zealand’s approach to taxing multinationals

The previous issue of APAC Tax Matters outlined the New Zealand Government’s thoughts on the issue of taxing large multinational companies and the OECD base erosion and profit shifting project (“BEPS”).

In a further report released on 10 April 2013 (“the Report”), the New Zealand Inland Revenue and Treasury Departments (“the Departments”) have provided an update on the progress in this area.
To recap, the actions being undertaken in New Zealand to address multinational tax concerns are three-fold:

  • Contributing to the OECD BEPS project
  • Reviewing domestic law
  • Co-ordinating with Australia

We address each in turn.

OECD BEPS project

The Departments advise that New Zealand contributed toward the action plan delivered to the July 2013 G20 Finance Ministers meeting and will be contributing to discussions about the implementation of the plan.

Reviewing domestic law

In relation to the current review of New Zealand’s domestic law, the Departments advise that:

  • They are consulting on a package of proposals to increase the effectiveness of the thin capitalization rules. These rules will be included in an August 2013 tax bill.
  • They have identified several issues that can affect New Zealand’s ability to collect withholding tax, particularly on interest payments. These issues are currently being researched and a further report will be issued once options have been developed.
  • The continuing involvement in the OECD BEPS project will assist in identifying other areas where New Zealand could improve its domestic laws, with rules addressing arbitrage caused by hybrid mismatches cited as an example.

Co-ordinating with Australia

Unlike Australia, New Zealand has not formally considered the issue of requiring certain companies to publish tax information.  However, this issue will be discussed with relevant Ministers in the context of the Financial Reporting Bill which is currently being considered.

The Financial Reporting Bill will require companies with more than $30m of revenue or $60m of assets (in each of the previous two years) to file their financial statements with the New Zealand Companies Office which will publish these statements on its website.  

Update on proposed changes to thin capitalization rules

Following on from an officials’ issues paper of 14 January 2013, which proposed changes to New Zealand’s thin capitalization rules, the Government has now agreed to two key changes; extending the thin capitalization rules to groups of non-residents who “act together” and excluding some shareholder debt from a company’s worldwide group debt ratio.

While the Government has agreed in principle to make these changes, the technical details have yet to be settled (e.g. the definition of “acting together” has yet to be agreed upon).

The Departments released a note on 6 June 2013 outlining their views on these unresolved technical issues. In relation to “acting together”, the current view is that a test based on three alternatives will apply:

  • The first is a proportionality based test where non-residents will be “acting together” if a group of non-residents own 50% or more of an entity’s shares and that group also (directly or indirectly) holds debt in the entity proportionate to their equity. The view is that when debt is held in proportion to equity, the level of debt does not change shareholders’ exposure to the equity risk of the company.
  • The second is where an entity has fewer than 25 shareholders, there is a shareholders’ agreement that sets out how the entity should be funded and 50% or more of the shares are owned by non-residents. This is designed to align with the stapled stock rules.
  • Lastly, where 50% or more of the entity’s shares are held by non-residents that are effectively co-ordinated by a person or a group of people such as a private equity manager(s). The purpose of this is to prevent structuring around such a person so as to circumvent the application of the thin capitalization rules.

It is also suggested that a separate “acting together” test would apply in the case of trusts.

Feedback is sought on the above matters.