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More BEPS reforms to come in New Zealand

25 January 2017

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The New Zealand government has released a cabinet paper, prepared by the Ministers of Finance and Revenue, recommending further reforms to address base erosion and profit shifting.

Brendan Brown Joshua Aird

The paper suggests measures to strengthen New Zealand's transfer pricing rules and to prevent multinational enterprises from avoiding permanent establishment (PE) status.

The paper discusses the diverted profits tax (DPT) measures being implemented in Australia and the UK but recommends that, instead of enacting a separate DPT, New Zealand should proceed with a tailored package of amendments to its income tax laws. The package is likely to include provisions countering the avoidance of PE status along with amendments to the transfer pricing rules. The paper, however, does not rule out the introduction of a separate DPT at a later stage.

Three amendments to the transfer pricing rules are suggested as possibilities:

  • Amendments to facilitate the collection of "better information";
  • Amendments requiring Inland Revenue and the courts to look to the economic substance of an arrangement when applying the transfer pricing rules; and
  • An amendment to the onus of proof in transfer pricing matters.

Whether the first two possible amendments are justifiable in practice may be debatable. As to the first, Inland Revenue already has wide-ranging powers to collect information. In regards to the second, New Zealand's general anti-avoidance rule (GAAR), which Inland Revenue and the courts have given a broad application, is generally seen as the appropriate mechanism for addressing aggressive tax-driven arrangements in which the arrangement's form does not reflect its substance.

The third possible amendment concerns the onus of proof in transfer pricing matters. The law states that provided the taxpayer has determined the arm's-length amount of consideration under an arrangement in accordance with one or more of the five methods recognised by OECD practice, the amount determined is the arm's length amount unless either Inland Revenue can demonstrate that another amount "is a more reliable measure of the arm's-length amount", or if the taxpayer has not cooperated with Inland Revenue and the non-cooperation has materially affected Inland Revenue in the administration of the transfer pricing provisions.

This rule (an exception to the usual rule that the taxpayer bears the onus of proof) was intended to recognise that determining an arm's-length amount is not an exact science and that taxpayers should not be subject to re-assessment merely because Inland Revenue arrives at a different arm's-length amount in circumstances where reasonable minds may differ.

If the amendment to the onus of proof proceeds, Inland Revenue and the tax profession will need to consider the implications, including the possibility of more aggressive positions being taken in the audit context, greater demand for advance pricing agreements to protect against future adjustments, and potentially increased scope for disputes.

The government expects to release a discussion document early this year detailing its proposals and inviting submissions from interested parties. New Zealand is due to hold a general election later this year and it is unlikely the measures would be passed into law until late this year or early 2018, after the election.

Brendan Brown ( and Joshua Aird (
Russell McVeagh
Tel: +64 4 819 7748

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