In June 2018, reforms intended to address BEPS became law in
New Zealand with the enactment of the Taxation (Neutralising
Base Erosion and Profit Shifting) Act 2018 (BEPS Act). Given
the complexity of some of the reforms, the New Zealand Inland
Revenue has taken the unusual step of issuing, and seeking
feedback on, draft guidance regarding the application of the
new rules.
New Zealand BEPS-related reforms
On August 3 2017, the New Zealand government announced its
final policy decisions on proposals to address BEPS (see 'New
Zealand's BEPS proposals go beyond OECD's recommendations' in
the August 2017 edition of International Tax Review for our
summary of the policy decisions.) The BEPS Act includes
measures that:
- Address hybrid mismatch arrangements;
- Address arrangements that avoid creating a
permanent establishment;
- Further limit related-party interest
deductions; and
- Further strengthen the transfer pricing
rules and Inland Revenue's enforcement powers more
generally.
The BEPS Act reforms have been controversial in many
respects, with concerns raised during the legislative process
that the reforms go beyond what is necessary to implement the
OECD's BEPS recommendations, and in certain respects depart
from international norms, including provisions of New Zealand's
double taxation agreements.
The reform process for the BEPS Act has also been
controversial. This has been partly due to the ambitious
legislative timetable which meant there were only a few days
between enactment and certain measures taking effect on July 1
2018.
Inland Revenue's draft guidance regarding the BEPS Act
The Inland Revenue typically publishes guidance after the
enactment of tax legislation. For the BEPS Act, the Inland
Revenue has taken the unusual step of publishing draft guidance
and seeking public feedback on that draft guidance.
One example of an explanation provided in the draft guidance
concerns a rule which requires certain borrowers to assume (for
transfer pricing purposes) the credit rating of the company in
its worldwide group with the most long-term senior unsecured
debt (i.e. not necessarily the parent). The draft guidance
acknowledges that long-term senior unsecured debt is not
defined in the BEPS Act and suggests that in many circumstances
a borrower "will be able to consider non-current liabilities on
each [group] member's balance sheet". Such an interpretation
would be a pragmatic application of the rule, especially for a
borrower that is part of a large worldwide group. The guidance,
however, goes on to caution that such an approach "may not be
sufficient to differentiate between long-term senior unsecured
debt and other instruments as subordinated or secured
debt…".
The above example illustrates the practical issues taxpayers
face in complying with the BEPS Act. Because the new
legislative provisions are so detailed and prescriptive, the
Inland Revenue's guidance will necessarily be of limited value
in some cases. Submissions on the draft guidance closed on
September 28 2018.
Matt Woolley (matt.woolley@russellmcveagh.com)
Russell McVeagh
Tel: +64 4 819 7303
Website: www.russellmcveagh.com