New Zealand enacts OECD GloBE (Pillar Two) rules effective 1 January 2025

Executive summary

The New Zealand Government has enacted legislation to implement the Organisation for Economic Co-operation and Development's (OECD's) Global Anti-Base Erosion (GloBE) Pillar Two Rules in New Zealand. To ensure consistency, New Zealand has largely adopted the OECD Model Rules into domestic tax legislation by direct reference, as a package.

All multinational (MNE) groups operating in New Zealand with consolidated accounting revenue exceeding €750m in at least two of the preceding four years are within scope of the new rules.

The Income Inclusion Rule (IIR) and Under Taxed Profits Rule (UTPR) will apply equally to both New Zealand-parented MNE groups and foreign-parented MNE groups. Both rules apply from 1 January 2025.

Conversely, the Domestic Income Inclusion Rule (DIIR) will apply only to New Zealand-headquartered MNEs and is deferred to 1 January 2026. This limited scope distinguishes the DIIR from a Qualifying Domestic Minimum Top-up Tax (QDMTT), as defined by the OECD.

Entities making payments under a QDMTT will be eligible for a foreign tax credit in New Zealand. Payments made under the DIIR will be eligible for imputation credits in New Zealand, but credits will not be available for payments under the IIR or UTPR.

We expect significant compliance effort will be required both in New Zealand and globally. In-scope groups should assess whether their existing resources, systems and processes are ready.

Detailed discussion

The Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill (Multinational Bill) passed through the final stages of the Parliamentary process on 27 March 2024. Once Royal assent is given, New Zealand will have enacted the OECD GloBE Pillar Two Rules into domestic tax law. Royal assent is expected imminently.

The Multinational Bill was first introduced in May 2023. For a detailed analysis of the New Zealand rules, see EY Global Tax Alert, New Zealand to adopt the OECD GloBE (Pillar Two) rules, dated 25 May 2023.

Rules as introduced

The core aspects of the New Zealand rules include:

• An IIR and UTPR apply equally to both New Zealand-parented MNE groups and foreign-parented MNE groups. Noting that the UTPR represents a back-stop rule so that if top-up tax is collected under the IIR (in relation to any New Zealand-parented low-taxed constituent entity (LTCE) or DIIR (for domestic New Zealand operations)), the UTPR rule should not apply.
  
  
• A DIIR, which replaces the OECD norm of a QDMTT, also applies. The DIIR is narrower in scope than a QDMTT, as the DIIR applies only to the profits of domestic LTCEs of New Zealand-headquartered MNE groups.
  
  
• The rules apply to all MNE groups that meet a €750m consolidated accounting revenue threshold.
  
  
• The rules override existing double-tax treaties with New Zealand (unless the double-tax treaty specifically refers to the Pillar Two rules).
  
  
• Top-up tax collected under the IIR or UTPR will not give rise to imputation credits, but top-up tax collected under the DIIR will give rise to imputation credits.
  
  
• A transitional safe harbor regime applies, consistent with the regime that the OECD Inclusive Framework agreed to in February 2023 (namely the De Minimis Test, Simplified Effective Tax Rate Test and Routine Profits Test).
  
  
• The Pillar Two Model Rules are adopted by specific reference to the OECD Guidelines, rather than by replicating the rules in New Zealand's domestic law.

Some aspects changed following public submissions

Since then, the Bill underwent a public submission process and a review by the Finance and Expenditure Parliamentary Select Committee, as is the usual process in New Zealand.

This led to a number of changes, including:

• Deferring the application of the rules until 1 January 2025 (for the IIR and UTPR) and 1 January 2026 (for the DIIR). The Bill originally proposed leaving the application date to be set by Order in Council (an administrative step not requiring parliamentary action). Setting fixed application dates provides some certainty to affected entities and allows them time to establish systems needed for compliance.
  
  
• Clarifying that payments under the GloBE QDMTTs are eligible for a foreign tax credit by expressly including a QDMTT under the meaning of "foreign income tax." However, top-up tax paid under either the IIR or UTPR remain ineligible for foreign tax credits in New Zealand.
  
  
• Limiting joint and several liability under the GloBE rules for New Zealand entities when they leave an in-scope MNE group.
  
  
• Allowing the Commissioner of Inland Revenue to make binding rulings on the application of the GloBE Rules if taxpayers apply. The Commissioner's power extends to include rulings on the commentary and agreed administrative guidance of the rules. Agreed-to rulings would provide certainty for taxpayers by binding the Commissioner to act in accordance with the interpretation set out in the ruling.

Preparing for compliance

Now that the rules are enacted, Inland Revenue will begin establishing the necessary administrative processes to facilitate compliance. This includes providing additional guidance to help taxpayers understand their new obligations.

Given the small number of New Zealand-headquartered MNEs that are likely to be in scope, there is an expectation that Inland Revenue will work closely with these groups to provide adequate support. Inland Revenue may be limited in its ability to simplify Pillar Two compliance for taxpayers, however, given the detailed data disclosure requirements of the annual filings required under the OECD Model Rules.

Our earlier Tax Alert (dated 25 May 2023 and linked above) provides additional detail on required compliance. As noted in that Alert, the rules impose significant compliance costs on affected taxpayers, including new registration and filing requirements.

MNE Groups with New Zealand operations will want to undertake an assessment to consider the technical impact of the rules as well as the organization's data and systems readiness to comply with and report on the rules.

Many in-scope MNEs parented in New Zealand will likely be in a position to avail themselves of at least the temporary safe harbor concession. Where this does apply, it should materially reduce the initial compliance burden. Taxpayers looking to rely on the safe harbors will need to substantiate their positions with the requisite data to support conclusions drawn.

Finally, now that the Multinational Bill is substantively enacted, consideration will need to be given to the new accounting public disclosure rules governing the disclosure of Pillar Two information in financial accounts.

Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Limited (New Zealand)

• Dean Madsen, New Zealand Tax and Law Leader
  
  
• Paul Dunne, New Zealand Tax Policy Leader
  
  
• Simon Scoulding, New Zealand Tax Accounting Leader

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.