|Brendan Brown||Greg Neill|
The OECD's work on BEPS issues has been well publicised. The next stage in that project is for tax authorities from OECD member countries – such as New Zealand – and participating non-member countries to develop an action plan for addressing BEPS.
The initial advice to the New Zealand government from the Inland Revenue and Treasury was that New Zealand should adopt a three-pronged approach to BEPS concerns:
- Contributing to the OECD's BEPS project;
- Reviewing domestic law and prioritising projects that will address BEPS concerns; and
- Co-ordinating with Australia given its importance as a trading partner.
A recent tax policy report released by the Inland Revenue and the Treasury has provided more detail on reform projects for prioritisation as part of New Zealand's response to BEPS.
The first possible reform project identified is the proposed broadening of the thin capitalisation rules. It is proposed that:
- The scope of the inbound thin capitalisation rules be broadened to apply to New Zealand companies owned or controlled by a consortium of foreign investors, as well as to New Zealand companies controlled by a single foreign owner; and
- The rules for calculating limits on the level of debt and deductible interest expenditure allowable to the New Zealand group be tightened.
A second possible project identified relates to withholding taxes, and in particular withholding taxes on interest. It is understood that a possible concern relates to a timing mismatch between when interest expenditure is deductible to the payer, and when withholding tax becomes payable on the interest.
The recent report also foreshadows a possible review of tax arbitrage opportunities arising from cross-border mismatches in the treatment of hybrid instruments or hybrid entities. That review will be based on OECD work that will consider policy developments in other countries.
New Zealand's response to BEPS has so far been measured, reflecting the fact that domestic law already contains provisions limiting opportunities for tax planning, including comprehensive controlled foreign corporation and foreign investment fund regimes and a thin capitalisation and transfer pricing regime.
Furthermore, New Zealand's general anti-avoidance rule (GAAR) is now being applied in a broader way than GAARs in most other jurisdictions.
As an example, New Zealand's debt/equity boundary for tax purposes generally follows the legal form of the arrangement, but the GAAR has in some cases been applied to deny interest deductions under hybrid arrangements and shareholder debt, thereby, in effect, denying an interest deduction to a taxpayer that has a business need for the funds borrowed and that has complied with both the thin capitalisation and transfer pricing regimes.
Multinationals doing business in New Zealand therefore need to be aware that the recent more expansive application of the GAAR is a source of particular uncertainty, alongside whatever new measures targeting BEPS may be implemented.
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