On 29 April 2019, Inland Revenue published the final versions of the special reports on the new rules for base erosion and profit shifting (BEPS). The rules were enacted in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 on 27 June 2018.
The new rules are comprised of five separate reports, addressing special transfer pricing interest limits for controlled inbound financing, transfer pricing in general, administrative measures, hybrids, and permanent establishments.
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. New sections GC 15 – GC 19 of the Income Tax Act 2007 mandate a step test to determine the interest rate applicable to controlled inbound financing transactions.
The key changes contained a flowchart outlining the process for determining a New Zealand borrower’s credit rating (i.e. whether transfer pricing rules apply, a credit rating adjustment is required or no credit rating adjustment is required), with each step explained in further detail.
Hybrid mismatch arrangements
The rules in subpart FH addressing the hybrid and branch mismatches arising from hybrid financial instruments, disregarded hybrid payments and deemed branch payments, reverse hybrid and branch payee mismatches, deductible hybrid and branch payments resulting in double deductions, dual resident payers and imported mismatches. Subpart FH of the Income Tax Act 2007 contains the core aspects of the OECD recommendations with suitable modification for the New Zealand context.
Transfer pricing rules
Sections GC 6 and GC 13 have been amended to strengthen the transfer pricing rules so they align with the OECD’s transfer pricing guidelines and Australia’s transfer pricing rules. The amendments to the transfer pricing rules generally apply from income years beginning on or after 1 July 2018.
Permanent establishment avoidance
The Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 inserts a new anti-avoidance rule into the Income Tax Act for large multinationals (with over €750m of consolidated global turnover) with a structure intended to avoid having a permanent establishment (PE) in New Zealand. The rules deem a non-resident entity to have a PE in New Zealand if a related entity carries on sales-related activities for it in New Zealand under an arrangement that has a more than merely incidental purpose of tax avoidance. The PE will be deemed to exist for the purpose of any applicable income tax treaty, unless the treaty incorporates the OECD’s latest PE article.
Administrative measures
New rules introduces the term “large multinational group”, which is relevant as Inland Revenue’s increased powers to assess tax or collect information only apply to members of large multinational groups. Large multinational groups whose ultimate owner is a New Zealand resident parent entity are required to file a country-by-country report with Inland Revenue under new section 78G of the Tax Administration Act 1994.
New section 139AB of the Tax Administration Act 1994 provides the ability for the Commissioner of Inland Revenue to apply a civil penalty of up to $100,000 on a member of a large multinational group that does not co-operate with requests for information The new BEPS rules generally apply for income years beginning on or after 1 July 2018, though some provisions have application from 1 July 2018.
