by Julie Martin
The New Zealand government on March 3 released a slew of tax proposals in three consultation documents all aimed at preventing tax avoidance by multinationals.
Included are proposals that would tighten New Zealand’s permanent establishment (PE) and transfer pricing rules, further limit interest deductions, and provide the New Zealand tax authority with tools to deal with uncooperative multinationals.
The government also seeks feedback on its plan to sign the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).
Revenue Minister Judith Collins announced the proposals during an address to the International Fiscal Association.
“By closing loopholes and reducing opportunities for gaming the system, we not only ensure that multinationals and others pay their fair share of tax, but we also help maintain confidence in the fairness of the tax system,” she said.
New Zealand permanent establishment
A new antiavoidance rule is proposed, applicable to large MNEs (over €750m of consolidated global turnover), that would deem a nonresident entity to have a New Zealand PE if a related entity carries out sales-related activities there.
Specifically, a non-resident would be deemed to have a PE for the purposes of any applicable tax treaty if (1) there is an arrangement under which a nonresident supplies goods or services to a person in New Zealand, (2) a related entity (either associated or commercially dependent) carries out an activity in New Zealand in connection with that particular sale for the purpose of bringing it about, (3) some or all of the sales income is not attributed to a New Zealand PE of the nonresident, and (4) the arrangement defeats the purpose of a tax treaty’s PE provisions.
The paper states that New Zealand does not believe that the OECD/G20 BEPS plan sufficiently addresses issues of PE avoidance, especially since some countries are not expected to sign on to the MLI’s stricter PE provisions.
Still, New Zealand decided to not go as far as adopting a separate UK or Australia-style diverted profits tax, though it has not ruled out adopting such a tax in the future.
New Zealand transfer pricing
New Zealand transfer pricing rules would also be strengthened under the proposal by aligning the rules with the latest OECD guidelines and with Australia’s new transfer pricing rules, the draft states.
Further, the burden of proof for demonstrating that actual conditions align with arm’s length conditions would be shifted to the taxpayer and the “time bar” for transfer pricing issues would be extended to seven years.
The transfer pricing rules would be also be extended to apply to investors that “act together,” such as private equity investors, the consultation states.
Other provisions deny a tax deduction for reinsurance of life policies if the premium income on the policy is not taxable in New Zealand.
Proposals would also make it easier for the tax administration to assess and collect tax from large uncooperative multinationals. For such taxpayers, assessments may be based on the information available to Inland Revenue at the time.
The government further proposes to accelerate the time when tax is due for certain types of disputes and to increase fines for failure to respond to tax authority information requests.
Interest deductions
New Zealand is also considering a number of proposals designed to prevent MNEs from taking excessive interest deductions.
The government is considering augmenting its thin capitalization regime to restrict excessive interest rates in related-party loans, the consultation states. Another proposal would change to how to determine total assets for purposes of the New Zealand thin cap rules.
Also under consideration is the introduction of a de minimis rule for smaller firms, and a special rules for project-financed infrastructure projects funded with third-party debt.
New Zealand & the MLI
A separate paper seeks feedback on New Zealand’s plan to sign the OECD MLI, which would modify New Zealand’s existing tax treaties to follow OECD recommendations.
The paper states that the government has already made the preliminary decision to apply the MLI to the majority of its tax treaties (provided the other country agrees) and has selected which treaties it will cover. New Zealand desires to adopt all BEPS minimum standards and optional provisions, the paper states.
Nonetheless, the government still seeks feedback on its implementation of the MLI and regarding any practical issues associated with the MLI.
Feedback on the government’s proposals relating to the MLI are due April 7; feedback on the other proposals is sought by April 18.
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Julie Martin
Julie Martin is the founder of MNE Tax. She edits the publication and regularly contributes articles on new developments in cross-border business taxation.
Julie has worked as a tax journalist and editor for more than 13 years. Prior to that, she worked as an in-house tax attorney in New York. She also holds an LLM in taxation from New York University School of Law.
Julie can be reached at [email protected].
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