On March 3, 2017 the New Zealand Government published 3 BEPS consultation papers proposing new measures to strengthen New Zealand’s rules for taxing large multinationals. The consultation documents contain proposals for:
· Transfer pricing and permanent establishment avoidance;
· Preventing multinationals using interest payments to shift profits offshore; and
· New Zealand’s implementation of the multilateral convention to implement tax treaty related measures to prevent BEPS.
Closing date for the consultation of New Zealand’s implementation of the multilateral convention to implement tax treaty related measures to prevent BEPS is April 7, 2017. The closing date for the other 2 consultations is April 18, 2017.
Transfer pricing and permanent establishment avoidance
This discussion document seeks submissions on a package of proposed measures to counter certain base erosion and profit shifting (BEPS) activities by large multinationals in New Zealand. The package is focussed on BEPS activities which involve transfer pricing and permanent establishment (PE) avoidance. The package complements other BEPS related measures which the Government is progressing.
The consultation document discusses a.o. the following subjects:
· Permanent establishment avoidance
· Amendments to the source rule
· Strengthening the transfer pricing rules
· Administrative measures
The consultation document gives the following summary of the proposed rules:
“Source and permanent establishment avoidance
1. A new anti-avoidance rule will be introduced that will apply to large multinationals (with over EUR €750m3 of consolidated global turnover) that structure to avoid having a permanent establishment (taxable presence) in New Zealand. The proposed rule would deem a non-resident entity to have a permanent establishment in New Zealand if a related entity carries out sales related activities for it here. This permanent establishment will be deemed to exist for the purpose of any applicable double tax agreement (DTA).
2. An amount of income will be deemed to have a source in New Zealand if New Zealand has a right to tax that income under the permanent establishment article of any applicable DTA. For non-residents in respect of whom no DTA applies, New Zealand’s model treaty permanent establishment article will be incorporated into domestic law to apply as an additional source rule.
3. A non-resident’s income will have a source in New Zealand if the income would have a source, treating the non-resident’s wholly owned group as a single entity. This complements the existing rule in section CV 1 for income derived by corporate groups.
4. Some potential weaknesses of the life insurance source rules will be addressed by amending section DR 3 to ensure that no deductions are available for the reinsurance of life policies if the premium income on that policy is not taxable in New Zealand and by amending the definition of a FIF to ensure that New Zealand residents are subject to the FIF rules in respect of any policies that are not subject to New Zealand tax under the life insurance rules.
Transfer pricing rules
5. The transfer pricing rules will be strengthened so they align with the OECD’s guidelines and Australia’s new transfer pricing rules. This involves amending our transfer pricing rules so that:
• they disregard legal form if it does not align with the actual economic substance of the transaction;
• in cases where independent entities would not have entered into the contracted conditions, the transfer pricing rules would allow for those conditions to be replaced by arm’s length conditions (or allow the entire arrangement to be eliminated or disregarded);
• the legislation specifically refers to arm’s length conditions and the latest OECD Transfer Pricing guidelines (which incorporate the BEPS actions 8–10 revisions).
6. The burden of proof for demonstrating that the actual conditions align with arm’s length conditions will be shifted from the Commissioner of Inland Revenue to the taxpayer (consistent with the burden of proof for other tax matters).
7. The “time bar” for transfer pricing issues will be increased to seven years (in line with Australia).
8. In addition to applying to dealings between associated parties, the transfer pricing rules will be amended to also apply to investors that “act together”, such as private equity investors.
9. Inland Revenue will collect the information required by the OECD’s countryby-country reporting initiative from multinational groups with over EUR €750m of annual consolidated group revenue (large multinationals). We will not require large multinationals to annually file their master and local files, but we will increase Inland Revenue’s powers to access information and documents held by large multinationals offshore.
Administrative rules
11. If the large multinational (over EUR €750m worldwide revenues) does not cooperate with Inland Revenue, then Inland Revenue may more readily issue a notice of proposed adjustment (NOPA) (and any subsequent documents under the disputes process) based on the information available to Inland Revenue at the time.
12. Any disputed tax must be paid by a large multinational earlier in the disputes process. This only applies in respect of disputes over transfer pricing, the amount of New Zealand sourced income, and the application of a DTA.
13. Tax payable by any member of a large multinational can be collected from any wholly owned group member, or the related New Zealand entity in case of the new PE avoidance rule.
14. Inland Revenue will be empowered to collect more information from large multinationals, including information about its various non-resident group members.
Application dates
15. The proposed administrative rules would apply from the date of enactment of the relevant legislation. The proposed rules for addressing the source, permanent establishment and transfer pricing issues would apply to income years beginning on or after the date of enactment.”
Submissions for this consultation should be made by April 18, 2017.
Click here to the consultation documents “BEPS – Transfer pricing and permanent establishment avoidance” as released on march 3, 2017 by the New Zealand Government.
Preventing multinationals using interest payments to shift profits offshore
A.o. the following subjects are discussed in the consultation document:
· New Zealand’s approach
o New Zealand’s inbound investment framework
o Link to the OECD’s BEPS Action 4
· Limiting the interest rate on related-party loans
o Background
§ Proposal
§ Rejected approach: hard interest rate cap
§ Preferred approach: cap based on parent credit rating
§ International comparison
o Further detail
§ Interest rate cap
§ Meaning of “related-party”
§ Treatment of guarantee fees
§ De minimis
§ Link to transfer pricing
§ Anti-abuse rule
§ Maximum loan term
§ Transitional rules
§ Consistency with New Zealand’s DTAs
· Treatment of non-debt liabilities
o Background
o The problem
§ Commercial debt levels
§ Worldwide apportionment
§ Restrict profit shifting
o Proposal: non-debt liability adjustment
§ International comparison
§ Impact of the proposals
· Other matters
o De minimis for the inbound thin capitalisation rules
§ Proposal: De minimis for companies with little interest expense and third-party debt
o Infrastructure projects controlled by single non-residents
§ Proposal: carve-out for infrastructure projects with third-party funding
o Firms controlled by non-residents acting together: related-party debt
§ Proposal: restrict the use of related-party debt
o Asset valuations
§ Proposal: remove net current valuation method
o Measurement date for assets and liabilities
§ Proposal: Allowing only average valuation methods
o Remedial change: trusts and owner-linked debt
§ Proposal
o Application date for all proposal
Submissions for this consultation should be made by April 18, 2017
Click here to the consultation documents “BEPS – Strengthening our interest limitation rules” as released on march 3, 2017 by the New Zealand Government.
New Zealand’s implementation of the multilateral convention to implement tax treaty related measures to prevent BEPS
This issues paper seeks feedback on New Zealand’s implementation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (referred to as the multilateral instrument or MLI). The MLI will modify a number of New Zealand’s existing double tax agreements (DTAs) in order to bring them into line with OECD recommendations.
Due to the novel nature of the MLI and its interaction with New Zealand’s DTAs, officials are interested in receiving submissions on the implementation of the MLI and practical issues associated with its adoption.
For this consultation the closing date for submissions is April 7, 2017.
Click here to the consultation documents “New Zealand’s implementation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS” as released on march 3, 2017 by the New Zealand Government
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