New Zealand proposes rules to combat multinational tax avoidance through use of hybrid mismatches

The New Zealand government has today released for discussion proposed measures to prevent multinational corporations from avoiding tax through use of hybrid mismatch arrangements.

The government recommends that New Zealand adopt proposals consistent with OECD/G20 base erosion profit shifting (BEPS) plan recommendations on hybrid mismatch arrangements, released last October.

“It is important that our rules complement those of other countries, particularly Australia and the UK who have both announced their intentions to adopt the OECD recommendations in this area,” explained Revenue Minister Michael Woodhouse.

Woodhouse said that while New Zealand has strong tax rules to counter BEPS, its rules on hybrids could be stronger.

Hybrid mismatches arrangements occur when a multinational avoids tax by taking advantage different ways that different countries treat financial instruments or entities for tax purposes.

An example of such a mismatch occurs when a multinational corporation arranges its affairs so that one group member makes a payment to another group member located in different country and the payment is considered deductible interest in the first country but not considered to be taxable interest income (or even taxable at all) in the second country. Such payments lower the overall tax burden of the MNE.

The New Zealand proposal seeks to address hybrids through a series of rules that neutralize their tax advantages.

According to the consultation document, multinationals frequently exploit mismatches between New Zealand and Australian tax law, through use, for example, of mandatory convertible notes, which are a hybrid financial instruments. MNEs also commonly exploit differences in the ways the two countries treat Australian limited partnerships for tax purposes, the document said.

Further, the consultation states that multinationals often use the US check-the-box rules to create mismatches, so a New Zealand unlimited liability company is treated as opaque by New Zealand for tax purposes but transparent for US tax purposes.

The consultation will run until October 17.