Friday, May 10, 2019
New Zealand's Inland Revenue Department has finalized its guidance on the changes to tackle base erosion and profit shifting enacted on June 27, 2018, in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018.
The guidance concerns New Zealand's new interest limitation rules; hybrid and branch mismatch rules; transfer pricing rules; permanent establishment avoidance rules; and legislative provisions on the definition of the term "large multinational group" for the purposes of new Inland Revenue powers to assess tax and collect additional information on multinationals' tax affairs.
Interest limitation rules
New rules have been introduced requiring related-party loans between a non-resident lender and a New Zealand-resident borrower to be priced using a restricted transfer pricing approach. Under these rules, specific rules and parameters are applied to certain inbound related-party loans to:
Separate rules apply to financial institutions such as banks and insurance companies.
These measures apply to income years starting on or after July 1, 2018.
Hybrid and branch mismatch rules
The hybrid and branch mismatch rules introduce a number of new concepts to tax legislation. The changes are intended to eliminate opportunities for double non-taxation benefits arising from hybrid mismatch arrangements, which exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions. Hybrid mismatches can otherwise enable a taxpayer to inappropriately claim double deductions for the same income.
The majority of the hybrid and branch mismatch rules apply for income years beginning on or after July 1, 2018.
Transfer pricing rules
New Zealand has amended Sections GC 6 to GC 13 of the Income Tax Act 2007. These changes are intended to strengthen the transfer pricing rules so they align with the OECD's transfer pricing guidelines and Australia's transfer pricing rules.
The guidance states that the key changes are:
Permanent establishment anti-avoidance rules
This guidance concerns the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018, which inserted a new anti-avoidance rule into the Income Tax Act for large multinationals (with over EUR750m of consolidated global turnover) that structure to avoid having a permanent establishment (PE) in New Zealand.
The rule deems a non-resident to have a PE in New Zealand if a related entity carries out sales-related activities for it here under an arrangement with a more than merely incidental purpose of tax avoidance (and the other requirements of the rule are met). This PE is deemed to exist for the purpose of any applicable double tax agreement (DTA), unless the DTA incorporates the OECD's latest PE article.
In addition, the Act inserts further provisions under which an amount of income will be deemed to have a source in New Zealand if that income can be attributed to a PE in New Zealand. If a New Zealand DTA applies to the non-resident, the definition of a PE in that DTA will apply for this purpose. If no New Zealand DTA applies to the nonresident, then a new domestic law definition of a PE will apply.
The Act introduced a new PE anti-avoidance rule in section GB 54 of the Income Tax Act. The rule deems a PE to exist in New Zealand for a non-resident if all the following criteria are met:
Where a supply is subject to the rule, the non-resident is deemed to make that supply through the deemed PE. The activities of the facilitator in relation to the supply are also attributed to the PE. The deemed PE exists for all the purposes of both the Act and the applicable DTA, notwithstanding anything in that DTA.
The tax consequences of the deemed PE are determined by the other provisions of the Act and the DTA. For example, New Zealand will have a right to tax the profits attributable to the PE under the business profits article of an applicable DTA (unless that business profits article provides otherwise).