Important BEPS-related reforms have moved a step closer to becoming law in New Zealand, with the Taxation (Neutralising Base Erosion and Profit Shifting) Bill (Bill) being reported back from Parliament's Finance and Expenditure Select Committee (FEC). The Bill has been controversial in many respects, with many submissions to the FEC expressing concern that the Bill went beyond what was necessary to implement the OECD's BEPS recommendations, and in some respects departed from international norms, including provisions of New Zealand's double tax agreements (DTAs). While the FEC has recommended some changes to address these concerns, most of the measures will proceed as proposed in the Bill as introduced. In this article, we summarise three substantive changes that the FEC did recommend in response to submissions.
Prescriptive rules for pricing inbound related-party loans
The interest limitation proposals include rules requiring that certain features of related-party debt be disregarded and that the borrower's assumed credit rating be determined formulaically (in certain cases based on the credit rating of other entities in the group rather than the borrower's own credit-worthiness). Many submitters were concerned that the proposed rules would be inconsistent with the arm's-length principle, conflict with New Zealand's international law obligations under DTAs, and were unnecessary given other measures to address high priced debt.
The FEC has recommended generally that the proposed rules proceed but with some changes, particularly to the proposals requiring related-party debt to be priced on the basis of an assumed credit rating that is stronger than the borrower's actual credit rating. The recommended changes should allow more groups to price related-party debt based on the credit-worthiness of the actual borrower, rather than a stronger rating based on the creditworthiness of entities in its wider group.
Longer period for transfer pricing adjustments
Another area of focus for submitters was the proposal to increase the limitation period for transfer pricing adjustments from four years (after the end of the year in which the return is filed) to seven years. The FEC responded to concerns about more prolonged and aggressive transfer pricing audits by recommending that the limitation period could be extended to seven years only if Inland Revenue has begun a transfer pricing investigation within four years of the relevant tax return being filed, and has notified the taxpayer of the investigation. It is not clear how much difference this will make in practice, since it may be relatively easy for Inland Revenue to give the required notice.
Multinational group information collection power
The Bill proposes a new information collection power that would allow Inland Revenue to require a New Zealand entity within a multinational group to provide information held by a member of that group outside New Zealand. The FEC dismissed concerns that the new power was draconian and unworkable given New Zealand subsidiaries of a multinational group are unlikely to know where, in the wider group, the information requested is held or have the power to access it. The FEC did, however, recommend narrowing the power in response to the concerns of submitters that Inland Revenue could request information held outside New Zealand on customers or other third parties, which could conflict with foreign privacy and data protection laws. The FEC also recommended that non-compliance with a request for information held by foreign group members should not result in prosecution and a possible criminal sanction. Instead, non-compliance may result in a civil penalty of up to NZ$100,000 ($70,000).
The Bill is expected to be enacted by the end of June, with many of the proposals taking effect as soon as July 1 2018. Multinationals operating in New Zealand therefore need to be planning now for the consequences of the new rules.