Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting

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1 Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting 22 December 2017 Chartered Accountants Australia and New Zealand Level 1, Carlaw Park, Nicholls Lane, Parnell, PO Box 3334, Shortland Street, Auckland 1140, New Zealand P charteredaccountantsanz.com Chartered Accountants Australia and New Zealand ABN (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.

2 Chartered Accountants Australia and New Zealand Chartered Accountants Australia and New Zealand is a professional body comprised of over 117,000 diverse, talented and financially astute members who utilise their skills every day to make a difference for businesses the world over. Members are known for their professional integrity, principled judgment, financial discipline and a forward-looking approach to business which contributes to the prosperity of our nations. We focus on the education and lifelong learning of our members, and engage in advocacy and thought leadership in areas of public interest that impact the economy and domestic and international markets. We are a member of the International Federation of Accountants, and are connected globally through the 800,000-strong Global Accounting Alliance and Chartered Accountants Worldwide which brings together leading Institutes in Australia, England and Wales, Ireland, New Zealand, Scotland and South Africa to support and promote over 320,000 Chartered Accountants in more than 180 countries. We also have a strategic alliance with the Association of Chartered Certified Accountants. The alliance represents 788,000 current and next generation professional accountants across 181 countries and is one of the largest accounting alliances in the world providing the full range of accounting qualifications to students and business.

3 General Position In formulating its submissions, Chartered Accountants Australia and New Zealand takes a best practice, public policy perspective. That is, we endeavour to provide comment on a what is best for New Zealand basis. We recognise Government s legitimate right to set tax policy direction. We comment on those policies, and also make comment on their practical implementation. Our public policy perspective means we endeavour to provide comment free from self-interest or sectorial bias. Research confirms that in practice the best tax system is one with a broad tax base and low tax rates. Such an approach restricts the conditions that make tax avoidance attractive. Our guiding principles in formulating this submission are that New Zealand s tax system must not impede New Zealand s international competitiveness; growth of the New Zealand economy; and innovation and entrepreneurship. Recognising there are judgments and trade-offs, taxes should, as far as possible: be simple in their application; provide certainty in their application; be perceived as broadly fair; minimise the costs of compliance and administration; minimise distortions to the economic behavior of individuals and businesses; utilise businesses own accounting systems as the data source for calculation; align the obligations with the businesses own cash flows; and be imposed at an overall rate which allows adequate retention of investment funds within businesses.

4 We believe one of the pillars of an effective and efficient tax system is taxpayer certainty. This will increase voluntary compliance, decrease administration costs, and deliver positive economic benefits. Tax legislation must be as clear in its policy intent and application. Further, any identified errors post-enactment should be corrected without delay. In Chartered Accountants Australia and New Zealand s view tax legislation should not be retrospective unless it corrects an anomaly to ensure taxpayers pay no more tax than Parliament intended. Retrospective application dates undermine the principle of taxpayer certainty and the Generic Tax Policy Process.

5 22 December 2017 The Chair Finance and Expenditure Committee Parliament Wellington Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting Thank you for the opportunity to submit on New Zealand s ratification of the Multilateral Instrument (MLI). CA ANZ supports the underlying objective of the MLI. The MLI provides an easy streamlined process of implementing the tax treaty related base erosion and profit shifting (BEPs) reforms by amending the double tax agreements (DTAs) of the participating countries without having to re-negotiate each double tax agreement separately. National Interest Analysis The National Interest Analysis (NIA) does raise some concerns. We are not convinced, the NIA provides a balanced view because it does not: address the interaction of the MLI and the proposed BEPs legislation (Taxation (Neutralising Base Erosion and Profit Shifting) Bill); fully consider the effect and consequences of the reservations entered into by our treaty partners. For example, New Zealand has elected to apply the expanded permanent establishment (PE) provision for Commissionaire Agents (Article 12) whereas the majority of our treaty partners, including Australia and the United Kingdom, have elected not to apply Article 12;

6 discuss why some of our treaty partners have decided not to modify their DTA with New Zealand by adopting the MLI or making reservations. In our opinion the MLI and the proposed BEPs legislation should be considered together. We recommend a final decision on ratification of the MLI be delayed until the interactions of the MLI and the proposed BEPs legislation have been fully considered. To help understand the various positions our treaty partners have adopted in respect of the purpose rules, permanent establishment rules and arbitration rules we have prepared the attached table (Appendix A). It is interesting to note, in respect of these particular rules, only France and the Netherlands match New Zealand s approach. Article 12 In our, 7 April 2017, submission on New Zealand s implementation of the multilateral convention we supported adopting Article 12. However, now that the positions of other countries are known we are concerned that expanding the definition of PE will negatively affect our exporters and may not be in New Zealand s national interest. Adopting Article 12 may result in a fiscal cost for New Zealand if our exporters are negatively affected. We also understand Australia is not accepting Article 12 because it is not in their national interest. Their preference is to renegotiate Article 12 on a bilateral basis. They also believe that their MAAL will provide them with adequate protection. In our view, further research is required to understand why other countries are choosing not to adopt Article 12 and what the implications are for New Zealand exporters if Article 12 is adopted.

7 Article 12 and proposed s GB 54 The proposed BEPs legislation (Taxation (Neutralising Base Erosion and Profit Shifting) Bill contains a new PE avoidance rule (s GB 54) which will only apply when a country has not signed up to the MLI s PE changes (Article 12). However, because of the interaction of the DTAs, the effectiveness of proposed s GB 54 is not clear. Where s GB 54 is invoked and the relevant country has chosen not to accept Article 12 there may be grounds to conclude that turning off treaty relief with s GB 54 is inappropriate and may result in an infringement of the treaty. Effectively, proposed s GB 54 attempts to unilaterally amend the PE definition. If disputed by the other country a challenge would impose additional compliance costs. The appropriate course of action would be to renegotiate a DTA bilaterally. DTA Commentary Given the added complexity that will arise with the introduction of the MLI we recommend that Inland Revenue provides detailed commentary to assist with the interpretation of the provisions of a DTA. Further, it is essential that Inland Revenue provides adequate resources to New Zealand taxpayers when other countries try to tax income New Zealand has already taxed. As stated in our April submission, we support the proposals for New Zealand to adopt the following MLI provisions: 1. Article 5 Relief of double taxation; 2. Article 6 Preventing the granting of treaty benefits in inappropriate circumstances 3. Article 7 Treaty anti-abuse rules 4. Article 8 Dividend transfer transactions

8 5. Article 9 Land rich company rules 6. Article 10 Third State PE Rules 7. Article 11 Application of tax agreements to restrict a party s right to tax its own residents 8. Article 11 Right to tax own residents 9. Article 13 preparatory and auxiliary qualification Our concerns with the proposals for Articles 3, 4, 14 and and consolidated versions of the modified treaties are set out in Appendix B. If you have questions about our submission please contact us. Yours sincerely, Paul Dunne Chair, New Zealand Tax Advisory Group John Cuthbertson Tax New Zealand Leader

9 Appendix A Multilateral instrument articles adopted by NZ DTA partners Purpose rules PE rules Arbitration rules NZ DTA Preamble PPT Dep Agent Anti-frag Con split MAP Corrs adj Man Arb Article not adopted Partner Art 6 Art 7 Art 12 Art 13 Art 14 Art 16 Art 17 Art 29 New Zealand Australia Austria Belgium Canada Chile China Czech Republic Denmark Fiji Finland France Germany Hong Kong India Indonesia Ireland Italy Japan Korea Mexico Netherlands Poland Art 7 SLOB/PPT* Art 7 trans PPT (LOB)** Art 7 SLOB***

10 Purpose rules PE rules Arbitration rules NZ DTA Preamble PPT Dep Agent Anti-frag Con split MAP Corrs adj Man Arb Partner Art 6 Art 7 Art 12 Art 13 Art 14 Art 16 Art 17 Art 29 Russia Singapore South Africa Spain Sweden Switzerland Turkey United Kingdom United States * Art 7 SLOB/PPT: Combination simplified limitation of benefits & principal purpose test ** Art 7 trans PPT-LOB: intends to use transitional principal purpose test while working to limitation of benefits on bilateral basis *** Art 7 SLOB: Simplified limitation of benefits

11 Appendix B Article 3 Transparent Entities Article 3 is consistent with New Zealand s preferred treaty practice of including provisions in its bilateral treaties to ensure that treaty benefits are available for income derived by or through FTEs. New Zealand intends to adopt Article 3 of the MLI across all of its covered tax agreements. Submission The effect of Article 3 on Collective Investment Vehicles (CIVs) in New Zealand with nonresident beneficiaries needs to be considered. As a minimum, the treatment of CIVs should be addressed in Inland Revenue guidance. Comment The proposed amendments to Article 3, as currently drafted, may lead to a number of unintended adverse outcomes from a taxation perspective for investors who are presently investing through a CIV in a third State (i.e. a State that is neither the investment destination, nor the country of residence for the investor).

12 Article 4 Dual resident entities New Zealand s treaty practice has varied (with most of New Zealand s bilateral treaties prescribing the POEM as the determinative test) but has not previously permitted the competent authorities to decide on the extent of treaty benefits to be granted if the competent authorities are unable to agree on a single jurisdiction of residence. Submission New Zealand should consider not adopting Article 4. Comment In our view adopting the expanded criteria for determining a dual resident entity s treaty and requiring the competent authorities to attempt to agree on a single jurisdiction of residence will not improve the integrity of the current tie breaker rules nor provide any certainty of outcomes to taxpayers. Our concerns arise because New Zealand has one of the widest corporate tax residency tests in the world. Consequently, there are a large number of New Zealand dual resident companies. A simple example is when a New Zealand company moves its CEO to Australia and, as a result, the company becomes a dual resident. We consider the expanded criteria requiring the competent authorities to agree on a single jurisdiction will result in significant costs and lengthy delays. It is difficult to see how the competent authorities will agree between place of incorporation and place of effective management By way of illustration, consider the New Zealand/United States treaty tiebreaker test, which is consistent with proposed Article 4. We understand the question of dual residence has never

13 been settled by mutual agreement between the United States and New Zealand tax authorities. The United States has always refused to resolve the issue. Further support for not adopting Article 4 is that there is no evidence of problems arising with our current self-assessment regime, which appears to be working well.

14 Article 12 Commissionaire arrangements and similar strategies Article 12 is consistent with New Zealand s preferred treaty practice of circumventing deemed PE time thresholds. New Zealand intends to adopt Article 12 without reservation across all its Covered Tax Agreements. Submission New Zealand should reconsider adopting Article 12. Comment In our view, Article 12 may not be in New Zealand s national interest and will negatively affect our exporters. Committing New Zealand to adopting the article leaves other countries to choose whether or not to reciprocate. Only where it is in their best interests will they choose to do so. Adoption of this article is best achieved through bilateral agreement where New Zealand is able to benefit from negotiation.

15 Article 14 Splitting up of contracts Article 14 is consistent with New Zealand s preferred treaty practice of circumventing deemed PE time thresholds. New Zealand intends to adopt Article 14 (and possibly enter the reservation permitted by Article 14(3)(b) to exclude bilateral treaties that deem a PE to exist in relation to exploration for or exploitation of natural resources) across its covered tax agreements. Submission The issues need to be given further consideration. Comment In our view, Article 14 will disadvantage a number of taxpayers for whom splitting of contracts occurs for genuine commercial reasons and is not abusive. To illustrate, a multi-national has subsidiaries in different jurisdictions, with one subsidiary carrying on an engineering consultancy business and another subsidiary carrying on a construction business. Each subsidiary tenders for different parts of the same infrastructure project. Use of the general domestic anti-avoidance provisions or the rule provided in Article 6 of the MLI should be adequate to deal with aggressive avoidance situations.

16 Articles Arbitration Part VI is consistent with New Zealand s commitment to implement binding MAP arbitration in its bilateral tax treaties. New Zealand intends to adopt Article 23(1) final offer or last best offer but accept independent arbitration. It will also require undertakings of confidentiality and reserve the right not to include arbitration provisions in a CTA with jurisdictions that do not require the same (23(6) and (7)). Submission New Zealand should not choose to include a DTA as a CTA where the other country chooses not to include the arbitration provisions. Comment New Zealand s approach to adopt final offer or last best offer arbitration but to accept independent opinion arbitration if the other party to the CTA chooses this (by entering a reservation) is consistent with New Zealand s model treaty provision. We therefore support adopting Article 23(1). However, we are concerned about New Zealand choosing to include a DTA as a CTA where the other country chooses not to include the arbitration provisions. The extensive changes to international tax rules resulting from the BEPS projects will create divergent interpretations which are likely to create uncertainty and potential conflicts. Without an arbitration process there will be no effective determination. The arbitration process is a means of reducing the risk of conflicting decisions and uncertainty. That is, we are concerned with a situation where an overseas jurisdiction, under a CTA, applies the BEPs provisions in

17 an aggressive way against New Zealand-based tax payers in an overseas jurisdiction. This will leave our taxpayers exposed, with ineffective methods of arbitration not agreed. GAAR Submission Further consideration should be given to entering a free form reservation in respect to arbitration to carve out cases that involve the application of s BG 1 of the Income Tax Act. Comment It is not clear that New Zealand s intention to enter a free form reservation in respect of arbitration to carve out cases that involve the application of New Zealand s general antiavoidance rule in s BG 1 Income Tax Act 2007 is appropriate. By reserving against these provisions New Zealand effectively prevents mandatory arbitration from being used where the treaty is being abused. In our view mandatory arbitration is essential. It allows the other party to the CTA to agree the treaty is being abused.

18 Confidentiality Submission Further consideration should be given to the proposal to require undertakings of confidentiality of the arbitration proceedings. Comment New Zealand s proposal to require undertakings of confidentiality may lead to unintended consequences. For example, not all listed companies may be able to participate in confidential arbitration because they have continuous disclosure obligations to notify the Stock Exchange of any change in the tax status of the company.

19 Consolidated versions of modified treaties Submission The Government should publish and maintain consolidated versions of modified treaties. Comment Paragraph 4.18 of the Discussion Document states that the Government will not be producing consolidated versions of each DTA modified by the MLI. This is consistent with existing practice for amending protocols. Although this is consistent with the current practices for treaties, overlaying MLI amendments will introduce added complexity which we believe justifies a different approach. We consider it is inappropriate for Government to abdicate responsibility for communicating the effects of the MLI. In our view, the applicable MLI amendments should be consolidated with the existing bi-lateral treaties and maintained on the New Zealand legislation website. Chartered Accountants Australia and New Zealand Level 1, Carlaw Park, Nicholls Lane, Parnell, PO Box 3334, Shortland Street, Auckland 1140, New Zealand P charteredaccountantsanz.com Chartered Accountants Australia and New Zealand ABN (CA ANZ). Formed in Australia. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.