New Zealand Finalizes Guidance On BEPS Response
Mary Swire, Tax-News.com, Hong Kong
10 May, 2019
New Zealand's Inland Revenue Department has finalized its guidance on the changes to tackle base erosion and profit shifting enacted on June 27, 2018, in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018.
The guidance concerns New Zealand's new interest limitation rules; hybrid and branch mismatch rules; transfer pricing rules; permanent establishment avoidance rules; and legislative provisions on the definition of the term "large multinational group" for the purposes of new Inland Revenue powers to assess tax and collect additional information on multinationals' tax affairs.
Interest limitation rules
New rules have been introduced requiring related-party loans between a non-resident lender and a New Zealand-resident borrower to be priced using a restricted transfer pricing approach. Under these rules, specific rules and parameters are applied to certain inbound related-party loans to:
- determine the credit rating of New Zealand borrowers at a high risk of BEPS, which will typically be either one or two notches below the ultimate parent's credit rating; and
- remove any features not typically found in third party debt in order to calculate (in combination with the credit rating rule) the appropriate amount of interest that is deductible on the debt.
Separate rules apply to financial institutions such as banks and insurance companies.
These measures apply to income years starting on or after July 1, 2018.
Hybrid and branch mismatch rules
The hybrid and branch mismatch rules introduce a number of new concepts to tax legislation. The changes are intended to eliminate opportunities for double non-taxation benefits arising from hybrid mismatch arrangements, which exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions. Hybrid mismatches can otherwise enable a taxpayer to inappropriately claim double deductions for the same income.
The majority of the hybrid and branch mismatch rules apply for income years beginning on or after July 1, 2018.
Transfer pricing rules
New Zealand has amended Sections GC 6 to GC 13 of the Income Tax Act 2007. These changes are intended to strengthen the transfer pricing rules so they align with the OECD's transfer pricing guidelines and Australia's transfer pricing rules.
The guidance states that the key changes are:
- In addition to applying to transactions between associated persons, the transfer pricing rules will also apply when there are transactions between members of non-resident owning bodies and companies, and to cross-border related borrowings. (Section GC 6(2)(b))
- Including a reference to using the 2017 OECD transfer pricing guidelines as guidance for how the transfer pricing rules are applied. (Section GC 6(1B))
- The economic substance and actual conduct of the parties, along with the legal contract, will inform the transfer pricing analysis. In certain circumstances, the economic substance and actual conduct will have priority over the terms of the legal contract. This is achieved by requiring the transfer pricing transaction to be "accurately delineated" using the approach in section D.1 of chapter I of the 2017 OECD transfer pricing guidelines. (Section GC 13(1B))
- Where a transfer pricing arrangement is not commercially rational because it includes unrealistic terms that unrelated parties would not be willing to agree, the approach described in section D.2 of chapter I of the new OECD guidelines may apply to disregard and, if appropriate, replace the transaction. (Section GC 13(1C))
- Requiring the arm's length amount of consideration to be determined using arm's length conditions. This clarifies that it may be necessary to adjust some conditions of the arrangement other than the price, in order to determine the arm's length price. (Section GC 13(1)(b))
- Placing the onus of proof onto the taxpayer for providing evidence (such as transfer pricing documentation) that their transfer pricing positions are correct (that is, they are determined using arm's length conditions). The general onus of proof in section 149A(2)(b) of the Tax Administration Act 1994 will now apply to transfer pricing as well as other tax matters.
- The time bar that limits Inland Revenue's ability to adjust a taxpayer's transfer pricing position can be increased to seven years, in those cases where the Commissioner of Inland Revenue has notified the taxpayer that a tax audit or investigation has commenced within the usual four-year time bar. (Section GC 13(6))
Permanent establishment anti-avoidance rules
This guidance concerns the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018, which inserted a new anti-avoidance rule into the Income Tax Act for large multinationals (with over EUR750m of consolidated global turnover) that structure to avoid having a permanent establishment (PE) in New Zealand.
The rule deems a non-resident to have a PE in New Zealand if a related entity carries out sales-related activities for it here under an arrangement with a more than merely incidental purpose of tax avoidance (and the other requirements of the rule are met). This PE is deemed to exist for the purpose of any applicable double tax agreement (DTA), unless the DTA incorporates the OECD's latest PE article.
In addition, the Act inserts further provisions under which an amount of income will be deemed to have a source in New Zealand if that income can be attributed to a PE in New Zealand. If a New Zealand DTA applies to the non-resident, the definition of a PE in that DTA will apply for this purpose. If no New Zealand DTA applies to the nonresident, then a new domestic law definition of a PE will apply.
The Act introduced a new PE anti-avoidance rule in section GB 54 of the Income Tax Act. The rule deems a PE to exist in New Zealand for a non-resident if all the following criteria are met:
- The non-resident is part of a large multinational group. The OECD has defined a "large multinational group" as a group with at least EUR â‚¬750m of consolidated global turnover for the purpose of filing Country-by-Country reports. The same revenue threshold is used for section GB 54.
- The non-resident makes a supply of goods or services to a person in New Zealand.
- A person (the "facilitator") carries out an activity in New Zealand for the purpose of bringing about that particular supply.
- The facilitator is associated with the non-resident, is an employee of the nonresident, or is commercially dependent on the non-resident.
- The facilitator's activities are more than preparatory or auxiliary to the nonresident's supply.
- The non-resident's income from the supply is subject to a DTA that does not include the OECD's latest PE article.
- A more than merely incidental purpose or effect of the arrangement is to avoid New Zealand tax, or a combination of New Zealand tax and foreign tax.
Where a supply is subject to the rule, the non-resident is deemed to make that supply through the deemed PE. The activities of the facilitator in relation to the supply are also attributed to the PE. The deemed PE exists for all the purposes of both the Act and the applicable DTA, notwithstanding anything in that DTA.
The tax consequences of the deemed PE are determined by the other provisions of the Act and the DTA. For example, New Zealand will have a right to tax the profits attributable to the PE under the business profits article of an applicable DTA (unless that business profits article provides otherwise).