Tax Watch, Edition 1, March 2018

Commissioner’s new information gathering powers will have real teeth

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Extended information gathering powers for Inland Revenue

Inland Revenue has struggled with its inability to obtain information held offshore by non-residents. To try and solve this problem, the BEPS Bill extends the reach of the Commissioner’s current general information gathering powers to members of the taxpayer’s worldwide group.

Key points include:

  • Severe penalties for non-compliance: The BEPS Bill gives teeth to this expanded power by providing for a civil penalty of up to $100,000 on any New Zealand member of the multinational group that fails to provide the requested information. A strict knowledge criminal liability may also be imposed.
  • Impact on investigations or disputes: The new provision ensures the Commissioner is entitled to make an assessment based on the information available – and prevents the taxpayer from later attempting to introduce new records to support its case that had not previously been provided. Given the onus of proof imposed on the taxpayer, failure to provide the requested information may adversely impact their arguments in any investigation or dispute.
  • Commissioner likely to embrace new powers: We anticipate the Commissioner will make ready use of this new power, especially as it will permit requests for information regarding prior income years covered by a present audit / dispute. The new power effectively obliges the New Zealand member of the group to act as the Commissioner’s agent and collect the requested information from other members of the group, while exposing it to a range of new draconian sanctions if it fails to do so.

Recovery of tax from New Zealand group member

Another concern for the Commissioner is the ability to recover unpaid tax from non-resident taxpayers. Again, under the BEPS Bill the Commissioner will be permitted to treat the New Zealand member of the group as if it were “agent” of the non-resident member and recover any tax owed by the non-resident member from the New Zealand member directly.

Importantly, this power extends only to taxpayers within the same “wholly owned group”. Where the “wholly owned group” requirement is satisfied, the New Zealand member becomes fully liable for all tax payable by the non-resident member.

Presumably this power is primarily intended to allow the Commissioner to recover tax owing on income attributed to the non-resident’s alleged new permanent establishment under the BEPS Bill – but is drafted widely so could potentially apply to all tax obligations owed by the non-resident. The result is a significant new risk for non-resident groups operating in New Zealand.

Commissioner’s new powers to have immediate impact on investigations

The extensions to Inland Revenue’s powers to conduct audits and recover tax allegedly owing by non-residents come into effect from the date the BEPS Bill is enacted. The changes are therefore likely to have a significant immediate impact on the conduct of any present investigation or dispute.

Burden of proof

We expect the BEPS Bill will result in increased audit activity. The burden of proof in all tax disputes (including transfer pricing) will rest with the taxpayer. Any tax position taken will ultimately only be as effective as the quality of the evidence.

Taxpayers will need to take extra care to ensure they have contemporaneous documentation to support tax positions taken.

Get in touch with us today if you want to discuss possible implications of the Commissioner’s proposed new powers on your business.