International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Sponsored

New Zealand Inland Revenue updates anti-avoidance guidance after Supreme Court decision

Sponsored by

sponsored-firms-russel-mcveagh.png
new-zealand-73230.jpg

Fred Ward and Young-chan Jung of Russell McVeagh explain the newly adopted approach to New Zealand’s GAAR that was shaped by a Supreme Court decision.

The New Zealand Inland Revenue issued Interpretation Statement: Tax Avoidance and the interpretation of the general anti-avoidance provisions sections BG 1 and GA 1 of the Income Tax Act 2007 (the ‘Interpretation Statement’) on February 3 2023.

The Interpretation Statement sets out the Commissioner of Inland Revenue's (the ‘Commissioner’s’) view on how New Zealand's general anti-avoidance rule (GAAR) applies and replaces the previous interpretation statement that was issued in 2013. Of relevance to the updated Interpretation Statement is the Supreme Court's decision in Frucor delivered in September 2022.

The GAAR

The GAAR provides that a tax avoidance arrangement is void as against the Commissioner and that the Commissioner may counteract a tax advantage obtained from or under a tax avoidance arrangement. A tax avoidance arrangement has tax avoidance as its sole purpose or effect, or if it has more than one purpose or effect, tax avoidance is more than merely incidental to any other purpose or effect.

In determining whether an arrangement has the purpose or effect of tax avoidance, the ‘Parliamentary contemplation test’ as set out in the Supreme Court case Ben Nevis has been adopted as the authoritative approach by New Zealand's courts, including by the Supreme Court in Frucor.

The Commissioner's approach to the GAAR

The Interpretation Statement sets out the Commissioner's approach to applying the GAAR in detail, which can be summarised as the following steps:

  • Understanding the legal form of the arrangement;

  • Ascertaining Parliament's purpose for the specific provisions involved;

  • Understanding the commercial and economic reality of the arrangement as a whole;

  • Considering whether the arrangement makes use of, or circumvents, the specific provisions in a manner consistent with Parliament's purpose;

  • Deciding whether there is a tax avoidance purpose or effect; and

  • If tax avoidance is not the sole purpose or effect of the arrangement, whether the tax avoidance purpose or effect is merely incidental.

Supreme Court decision in Frucor

In September 2022, the Supreme Court delivered its decision in Frucor, under which the Commissioner was successful in arguing that the GAAR applied to a cross-border financing structure on the basis of interest deductions being claimed in excess of the economic funding cost under the structure.

While the Frucor decision adopted and applied the Parliamentary contemplation test as set out in Ben Nevis, the approach of the Supreme Court majority could be considered to have applied a broader economic substance test, with much emphasis placed on the impression the structure gave.

The Interpretation Statement, while generally following the same thrust as the previous version, reflects the approach in Frucor and provides that the Commissioner's approach also places greater emphasis on the economic substance of arrangements.

Practical considerations

The Interpretation Statement is not technically binding on the Commissioner; however, from a practical perspective, it is of use to taxpayers as a risk analysis tool because it provides an updated statement as to the Commissioner's approach to the GAAR.

Although not addressed in the Interpretation Statement, also of relevance to taxpayers is the liberal approach to the imposition of shortfall penalties by the Supreme Court in Frucor, which may necessitate an increased threshold for taxpayer certainty as to the GAAR's application before implementing structures.

As a result, a continuing trend of caution is expected from businesses when engaging in structuring and considering the potential application of the GAAR, with likely continued reliance on the ability to obtain binding rulings from Inland Revenue before implementing structures.

more across site & bottom lb ros

More from across our site

Sandy Markwick, head of the Tax Director Network (TDN) at Winmark, looks at the challenges of global mobility for tax management.
Taxpayers should look beyond the headline criteria of the simplification regime to ensure that their arrangements meet the arm’s-length standard, say Alejandro Ces and Mark Seddon of the EY New Zealand transfer pricing team.
In a recent webinar hosted by law firms Greenberg Traurig and Clayton Utz, officials at the IRS and ATO outlined their visions for 2023.
The Asia-Pacific awards research cycle has now begun – don’t miss on this opportunity be recognised in 2023
An intense period of lobbying and persuasion is under way as the UN secretary-general’s report on the future of international tax cooperation begins to take shape. Ralph Cunningham reports.
Fresh details of the European Commission’s state aid case against Amazon emerge, while a pension fund is suing Amgen over its tax dispute with the Internal Revenue Service.
The OECD’s rules may be impossible for businesses to manage, according to tax experts from companies including Shell.
Sanjay Sangvhi and Sahil Sheth of Khaitan & Co explore this legal concept and its implications for companies doing business in India.
The UK government is now committed to replacing the ‘super-deduction’ with a 100% capital allowances regime to offset the impact of the corporate tax rise to 25%.
Corporate tax is set to rise in the UK for the first time in decades, but the headline rate remains historically low despite what many observers think.