New Zealand s incoming Government to prioritize International tax reforms

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1 30 October 2017 Global Tax Alert New Zealand s incoming Government to prioritize International tax reforms EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary New Zealand s incoming Government is expected to implement international tax reforms announced by the outgoing Government prior to the 2017 New Zealand general election, which took place in September. Previously announced reforms include new rules for hybrid mismatch arrangements, a permanent establishment (PE) anti-avoidance rule, a restricted transfer pricing rule, and other wide-reaching transfer pricing changes. Unless the new Government changes existing timeframes, the international tax reforms announced prior to the election are scheduled to take effect for income years beginning on or after 1 July The Government may also introduce further reforms, such as a diverted profits tax (DPT), increased penalties for corporate fraud and tax evasion, and may allocate additional audit resources to New Zealand Inland Revenue (Inland Revenue) to facilitate a crackdown on multinational avoidance.

2 2 Global Tax Alert Detailed discussion Background The outgoing Government, which was led by the National Party (National), announced an ambitious and aggressive package of measures to combat Base Erosion and Profit Shifting (BEPS) before the election. The announced measures were scheduled to take effect from 1 July Pre-election international tax reforms The international tax reforms announced before the election include: Hybrid mismatch arrangements Permanent establishments Transfer pricing New rules aimed at the exploitation of inconsistencies between the tax rules of different territories, giving rise to a tax benefit. The proposed new rules broadly follow the Organisation for Economic Co-operation and Development s (OECD s) recommended approach published in A new PE anti-avoidance rule to prevent companies artificially avoiding a taxable presence in New Zealand. The proposed rules effectively replicate Australia s multinational anti-avoidance law (MAAL) and elements of the United Kingdom s DPT. A restricted transfer pricing rule for pricing inbound related party loans, being a novel rule that will in many circumstances cap the deductible interest rate in respect of related party borrowing. Other wide-reaching transfer pricing changes bringing New Zealand s transfer pricing regime in line with recent revisions to the OECD Transfer Pricing Guidelines and specific measures delegating greater power to the Commissioner of Inland Revenue. The proposed changes are complex, may be more wide-ranging than intended, and some commentators argue go too far in the New Zealand context. Global operating models and tax economics for multinationals doing business in New Zealand will be materially impacted. 1 Further reforms possible under new Government We have previously noted, that multinationals contribute strongly to the New Zealand tax base. Former Revenue Minister Judith Collins is on record as stating that most firms are not gaming the system, and there is limited evidence of widespread erosion of the New Zealand tax base through multinational tax avoidance. The incoming Government is nevertheless expected to implement the former Government s proposals. The new Government is led by the Labour Party (Labour), in coalition with the New Zealand First Party (New Zealand First) and support from the Green Party. Labour has stated that it supports the OECD s BEPS program of work, New Zealand First wants to crack-down on corporate tax avoidance and base erosion, and the Green Party intends to match Labour s commitment to the reduction of multinational tax avoidance. In addition to previously announced international tax reforms, the new Government may implement further reforms: A DPT to impose penalty tax where certain arrangements are structured to inappropriately erode the New Zealand tax base. Labour has previously mentioned the possibility of a DPT. Additional audit resources allocated to Inland Revenue to facilitate a crackdown on multinational tax avoidance. Labour believes that providing Inland Revenue with an additional NZ$30 million per year will result in the collection of an extra NZ$200 million per year from multinationals currently avoiding their New Zealand tax obligations. Increased penalties for corporate fraud and tax evasion. The penalties are explicitly provided for in the Labour-New Zealand First Coalition Agreement.

3 Global Tax Alert 3 It is likely the new Government will introduce further complex legislation and that there will be a greater number of international tax-related disputes over the next few years. Expected timeframe for reforms A tax bill containing the former Government s proposed reforms is being prepared for introduction to Parliament before the end of 2017, with an effective date of July To expedite the introduction of a bill, officials have advised that they are only undertaking limited further consultation. As the proposals are complex, it is uncertain whether the new Government will remain committed to this ambitious timeframe. Transparency and collaboration should be prioritized over timing considerations. Unless the new Labour-led Government decides to change previously announced timeframes, the next substantive opportunity for the public to comment on the proposed changes will be at Select Committee stage. The Select Committee stage will take place after the Bill is introduced to Parliament. Implications Multinational businesses should revisit their financing arrangements, operating models, and related party transactions to assess risks in light of the proposed BEPS measures. Decisions around such fundamentals as operating model design and financing structures are usually applied consistently across global or at least regional lines, and any response to the proposed changes must consider implications far beyond New Zealand. We have been working closely with Inland Revenue to emphasize that remedial restructuring requires fundamental business change something that creates complexity and requires time. It will be important for Inland Revenue to take a flexible approach to imposing the new rules. Overly aggressive enforcement of the proposed new rules from 1 July 2018 would be incompatible with good principles of tax administration. Endnote 1. For further details, see EY Global Tax Alert, New Zealand to implement wide ranging international tax reforms, dated 15 August 2017.

4 4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young New Zealand, Auckland Dean Madsen Ernst & Young New Zealand, Wellington David Snell

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