Global Tax Alert | 20 March 2015
New Zealand's 2015-16 work programme calls for development of BEPS and international tax related reforms
On 13 March 2015, New Zealand Minister of Revenue Todd McClay confirmed that a range of measures to address base erosion and profit shifting (BEPS) and other international tax reforms will be a priority for the recently re-elected center-right government.
Speaking at the annual conference of the New Zealand branch of the International Fiscal Association, McClay set out his view that the Government expects multinationals to pay their fair share of tax.1
New Zealand will therefore continue to work closely with the Organisation for Economic Co-operation and Development (OECD) and G-20 on the entire BEPS action plan. McClay's view is that New Zealand already has some of the best anti-BEPS rules among OECD member countries. Furthermore, the New Zealand Inland Revenue has also succeeded in applying the General Anti-Avoidance Rule (GAAR) to a wide range of transactions.
New Zealand Government's tax policy work programme makes an explicit commitment to BEPS-related work
New Zealand sees itself as a leading-light in OECD tax circles. Successive governments have a longstanding tradition of releasing tax policy work programmes, followed by detailed consultation before specific measures are enacted. The latest work programme,2 released by McClay to coincide with his speech, commits New Zealand to BEPS-related actions and other international tax reforms.
Selected international tax and BEPS-related measures on the work programme include:
Hybrid instruments and entities
Consideration of hybrid instruments and entities in light of the OECD's recommendations (part of the BEPS Action Plan).
Nonresident withholding tax on related-party debt
Address problems with the application of nonresident withholding tax on interest on related-party debt.
Interest limitation rules
Consideration of New Zealand's interest limitation rules in light of the OECD's recommendations (part of the BEPS Action Plan).
Automatic exchange of information
Domestic implementation of a new global standard on the automatic exchange of financial bank account information with treaty partners.
Tax Information Exchange Agreements and Multilateral Convention on Mutual Administrative Assistance in Tax Matters
On-going work to bring the Multilateral Convention on Mutual Administrative Assistance in Tax Matters into force for New Zealand.
Tax treaties and avoidance
Work to clarify the relationship between the general anti-avoidance rules and double tax agreements.
Companies becoming treaty nonresident
Work to address possible tax avoidance areas around the rules relating to companies becoming treaty nonresident.
Goods and Services Tax (GST) on imports of services, intangibles and low-value goods
Contributing to the OECD's work on this issue and, in particular, purchases from offshore of services and intangibles such as digital downloads and low-value goods. Considering what this work means for New Zealand.
Government strategy appears to be one of public support for the BEPS project, behind the scenes commitment of its top officials to developing the action plan, but waiting for clarity before changing New Zealand law. The critical points are discussed below.
Action 1 – Tax challenges of the digital economy
Imposing GST on imports of services, intangibles such as digital downloads, and low-value goods, is one specific area where New Zealand may look to move, ahead of international consensus. Currently, New Zealand has a GST which is levied at 15%.
Currently, imports of under NZ$400 generally attract no GST. Combined with the challenges of servicing a small, geographically challenging, domestic market, New Zealand retailers argue they are struggling to compete. New Zealand continues to track the experience of other jurisdictions in this area, with the Government believing that such developments show promise. The Government has asked Inland Revenue and Treasury for an early report on how to implement reform here.
While enforcement without multilateral agreement in this area presents challenges, Prime Minister John Key has backed calls for change. More detailed information is expected in the near-term.
Action 2 – Neutralizing hybrid mismatch arrangements
New Zealand's current tax rules are already broadly consistent with some OECD recommendations in relation to hybrid instruments. A dividend received from a foreign country is taxable in New Zealand if it is deductible in its home jurisdiction. However, there is no full domestic law which denies deduction for payments that are not taxable in another country.
Hybrid tax treatment has been the cause of all New Zealand's cross border avoidance cases in the last decade. Given the Government's support for the approach set out in the OECD's September 2014 discussion draft, changes to New Zealand domestic law appear certain.
The next step is likely to be a Government discussion document, covering proposals for reform to domestic law on both hybrid instruments and hybrid entities, in late 2015. Detail is not yet available on possible reforms. Although speculative, reforms that could be considered include denying deductions for New Zealand payments that are not included as income by the overseas recipient or looking at legislative limits on the deductibility of high-priced
debt. Depending on the outcome of consultation, legislation in 2016 is a possibility.
Action 4 – Limiting interest deductibility
The OECD's December 2014 discussion draft sets out several proposals3 to limit interest deductibility – group-wide rules, fixed-ratio rules and a combination of the two.
New Zealand's domestic thin capitalization rules fundamentally represent the combination approach. The primary interest apportionment threshold is determined by applying the debt to asset ratio while having an overlay referring to the worldwide group position for those companies outside the safe-harbor limits.
Nevertheless, implementing the OECD proposals domestically is likely to require some persuasion. The Government plans to consult on changes in late 2015. Legislation could follow in 2016.
Action 6 – Preventing treaty abuse
New Zealand has an extensive treaty network and the Government is committed to clarifying the relationship between the GAAR and New Zealand's double tax agreements and addressing tax avoidance in relation to companies becoming treaty nonresident. For most tax reforms, the Government consults by way of a discussion document in advance of making its final decisions. Taxpayers are encouraged to make written submissions on the proposals and their views taken into account before the Government makes its final decisions. Advance consultation in this form does not usually extend to anti-avoidance measures. However, the inclusion these items in the work programme could mean specific measures will follow in a tax bill by year-end.
Nonresident withholding tax for related-party debt
In common with other jurisdictions, the Government has used the BEPS brand to justify looking at other reforms. A key measure is likely to involve examining the possibility of tightening the rules applying nonresident withholding tax (NRWT) to related-party debt. Detailed proposals are anticipated in late April 2015.
Automatic exchange of information
New Zealand has endorsed the OECD's Declaration on the Automatic Exchange of Information in Tax Matters. The Government has committed to implementing a new single global standard for the automatic exchange of financial account information. Information exchange will begin on a voluntary basis from 2018, aiming for mandatory reporting in 2019.
As a general point, New Zealand's Inland Revenue has wide information gathering powers and supports global co-operation. New Zealand therefore presents a disproportionate risk when compared to its size in terms of information sharing with other jurisdictions.
New Zealand has a proven track record of delivering transparent, speedy and coherent tax reforms. In recent years, its international tax regime has aligned closely to OECD norms, with robust controlled foreign company and thin capitalization rules, and strong transfer pricing enforcement. Successive governments have supported OECD work around harmful tax competition and BEPS over the last 15 years.
The existence of a broad range of BEPS-related measures in the 2015-16 tax work programme is therefore of little surprise, nor is the potential for early adoption of such measures by the Government. Companies are therefore advised to continue to closely monitor New Zealand developments with a view to understanding how countries may adopt final OECD recommendations.
For additional information with respect to this Alert, please contact the following:
Ernst & Young New Zealand, Auckland
- • Aaron Quintal
+64 9 348 8001
Ernst & Young New Zealand, Wellington
- • Geoff Blaikie
+64 4 817 0576
- • David Snell
+64 4 470 8602
EYG no. CM5310