Inland Revenue's business transformation gathers pace
Kim Jarrett, a partner at KPMG New Zealand, looks at Inland Revenue’s Business Transformation project which has wide-reaching implications for businesses and other taxpayers.
Local tax environment
New Zealand has a coherent and mature tax system. A major overhaul of the tax system (eg to add new tax types) or a move away from the present broad-based and low-rate approach to taxation (ie the broad New Zealand tax policy settings) is not envisaged.
Business transformation of Inland Revenue
Inland Revenue has started a significant Business Transformation (BT) project which will have wide-reaching implications for businesses and other taxpayers in relation to how they interact with the tax authority. The project is aimed at redesigning Inland Revenue's systems and processes for the 21st Century. Inland Revenue's focus is on greater use of technology to interact with businesses' processes (eg their accounting and payroll systems) to access information on a more "real time" basis, and also to communicate with taxpayers. BT will provide opportunities to streamline processes.
Consultation on key aspects of BT, including changes to the operation of New Zealand's PAYE and GST and business tax regimes, is underway.
Other major tax policy changes
The New Zealand government has an 18-month tax policy work programme which encompasses a range of priority areas, including maintenance of the tax revenue base. The government is proposing and/or has introduced tax laws to:
Simplify the business tax rules, including the penalties and interest rules and to introduce a new business income calculation method to support Inland Revenue's BT project;
Widen the scope, and tighten the application, of New Zealand's withholding tax rules for non-residents;
Tax investment in residential land, which is bought and sold within two years;
Apply New Zealand's GST to offshore suppliers of services to New Zealand consumers; and
Streamline the tax rules for closely-held companies and other owner-operated entities.
New Zealand is an active participant in the OECD's project on BEPS.
New Zealand's relatively robust taxation system means that not all of the BEPS action areas are likely to feature as priorities. Any proposals are likely to be subject to normal tax policy consultation processes. Issues which are likely to be relevant to New Zealand and its present status are:
The Action 1 issues around taxing the digital economy. Non-resident suppliers of digital content (ie software and media) to New Zealand consumers will need to register for and pay New Zealand GST from October 1 2016 under a Tax Bill expected to be enacted early May 2016.
The Action 2 recommendations are to combat hybrid mismatch arrangements. New Zealand already has some anti-hybrid measures (eg deductible foreign dividends are taxable, while certain hybrid financial instruments are re-characterised as equity to deny a deduction for payments). Further consultation on New Zealand's response to the Action 2 recommendations is expected in the second half of 2016.
The Action 4 recommendations on interest deductibility. New Zealand already has thin capitalisation rules to deter non-residents from artificially loading debt onto their New Zealand business operations. These rules deny an interest deduction when the level of New Zealand debt gearing is greater than 60% (previously 75%) or is more than 110% of the worldwide group's debt gearing ratio. Recent changes have extended the application of the rules to New Zealand businesses owned by groups of non-residents "acting together". It is unclear whether further changes consistent with the OECD's recommendations will be considered. However, consultation on New Zealand's response is expected in the second half of 2016.
The Action 5 recommendations on countering harmful tax practices and promoting greater transparency. New Zealand is a party to the OECD's Convention on Mutual Administrative Assistance in Tax Matters and has signed an Inter-Governmental Agreement with the US on the application of the US Foreign Account Tax Compliance Act (FATCA). New Zealand has committed to implementing Automatic Exchange of Information (AEOI) under the Common Reporting Standard (CRS) from July 1 2017. The NZ Inland Revenue will also start automatically exchanging unilateral tax rulings (including APAs) with treaty-partner countries in 2016.
The Action 7 recommendations to prevent Permanent Establishment (PE) avoidance. To date, none of New Zealand's Double Taxation Treaties (DTAs) explicitly follow the OECD's recommendations (although some have provisions to create a PE where there is substantial negotiation of contracts). New Zealand is following with interest the OECD's ongoing work on attributing profit to PEs. New Zealand is also involved in the OECD's Working Party work on development of a multi-lateral instrument (Action 15) and the various transfer pricing recommendations (Action 8-10 and 13).
At a broader BEPS related level taxpayers can expect:
Changes to New Zealand's taxation of non-resident's interest income is expected (via a Bill to be introduced shortly). This will tighten the interest withholding tax and stamp duty rules applying to interest and interest like amounts; and
An independent review of the disclosure requirements relating to New Zealand foreign trusts (trusts settled by a non-resident but subject to New Zealand law and with New Zealand resident trustees) is underway. The report is due to Government June 30 2016.
Unilateral transfer pricing APAs remain popular and a cost-effective option for taxpayers to mitigate their New Zealand transfer pricing risk. Unilateral APAs are generally completed within six months of the date of acceptance of a formal application by Inland Revenue. KPMG's recent experience is there are some delays in scheduling pre-application meetings with Inland Revenue due to a large number of applications. On balance, however, a unilateral APA in New Zealand is generally a much quicker process compared to other countries.
With businesses and economic conditions evolving faster than ever, we are increasingly seeing breaches of APA critical assumptions. A breach of APA critical assumptions requires re-engagement with Inland Revenue to agree a suitable course of action. This may include termination and negotiation of a new APA.
Risk reviews and taxpayer audits
Inland Revenue's compliance programme makes use of regular risk reviews of taxpayers. The risk review may cover specific transactions or particular areas of interest (eg financing, transfer pricing, or functional tax types such as GST or PAYE). A risk review may also lead to a more formal audit.
In KPMG's experience, Inland Revenue's risk focus has become more tailored and sophisticated over time. Transfer pricing has consistently been one of the focus areas of Inland Revenue scrutiny and a wide range of issues, including cross border financing, remuneration for use of intangible property and loss making New Zealand operations may be looked at. Although there are no transfer pricing court cases in New Zealand, we are experiencing an increased number of disputes going through formal dispute resolution procedures.
Inland Revenue also requires multinational companies with large New Zealand operations (ie turnover of more than NZ$80 million ($57 million)) to complete an annual international tax questionnaire as well as provide a Basic Compliance Package (comprising the tax return, detailed financial statements and a tax reconciliation to accounting) for its risk analysis purposes.
KPMG in New Zealand
18 Viaduct Harbour Avenue, Auckland
Tel: +64 9 363 3532
Kim is an international tax specialist and leads KPMG New Zealand's Transfer Pricing and Customs team, with 20 years' experience advising on transfer pricing issues, advance pricing agreements, audits, documentation and dispute resolution.