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Inland Revenue

Tax Policy

PUBLISHED 3 March 2017

BEPS consultation documents released

In her speech to the International Fiscal Association today, Revenue Minister Judith Collins discussed the objectives and proposals of three consultation documents released today, which address the issue of base erosion and profit shifting.

–  BEPS – Transfer pricing and permanent establishment avoidance

–  BEPS – Strengthening our interest limitation rules

–  New Zealand’s implementation of the multilateral convention to implement tax treaty related measures to prevent BEPS

For more information see the Minister’s media statement and speech.

Hon Steven Joyce
Minister of Finance

Hon Judith Collins
Minister of Revenue

3 March 2017

Media statement

Three BEPS consultation documents released

Finance Minister Steven Joyce and Revenue Minister Judith Collins have released three consultation papers proposing new measures to strengthen New Zealand’s rules for taxing large multinationals.

“Our broad-based low rate tax system continues to perform very well for New Zealand overall,” Mr Joyce says. “However it’s important that it keeps evolving to ensure that all companies operating in New Zealand pay their fair share of tax.”

“The proposals in these documents are in line with the recommendations from the OECD’s base erosion and profit-shifting (BEPS) project which has developed best practice measures for the global response to BEPS.”

The consultation documents contain proposals for:

  • Tackling concerns about multinationals booking profits from their New Zealand sales offshore, even though these sales are driven by New Zealand- based staff
  • Preventing multinationals using interest payments to shift profits offshore, and
  • Implementing New Zealand’s entrance into an international convention for aligning our double tax agreements with OECD recommendations.

“We also need to be mindful of the New Zealand context so the proposals address some specific BEPS arrangements that Inland Revenue has observed,” Ms Collins says.

“We welcome multinationals’ participation in our economy, but we also expect them to pay tax based on their actual levels of economic activity in New Zealand.”

Submissions on the consultation document on implementing the international convention are open until 7 April. Submissions on the other two are open until 18 April. Ministers will consider final proposals arising from the documents later in the year.

The consultation documents are available at

Hon Judith Collins
Minister of Revenue

3 March 2017


Address to International Fiscal Association Conference

Thank you for inviting me to open your conference.

It is a pleasure to be here.

I haven’t been in the Revenue portfolio very long but I have learned very quickly how important this grouping of professionals is to the success of our tax system.

Your professional advice provided in analysing policy proposals and suggesting improvements makes your contribution invaluable.

I take over the Revenue portfolio at a significant point for our economy and for the tax system.

Today I want to focus on one of the most significant items on the tax policy work programme – New Zealand’s response to base erosion and profit shifting or BEPS.

The Government is releasing three BEPS consultation papers today:

  1. BEPS – transfer pricing and permanent establishment avoidance
  2. BEPS – strengthening our interest limitation rules
  3. New Zealand’s implementation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS


Base erosion and profit shifting, or BEPS, the tactics used by some large multinationals to minimise their exposure to tax and spirit profits out of a country is not new.

As a small, open economy we’ve been aware of our potential vulnerabilities to this issue for several years and have been progressively strengthening our rules.

Therefore, we are well placed when we assess our tax system against the OECD’s 15 point Action Plan.

But we know there are areas where we could do better and we are progressing reforms in those areas.

Our strong starting point gives us the luxury of being able to take a considered, balanced approach.

The Government has therefore taken a measured approach to addressing base erosion and profit shifting, by prioritising the specific problems that Inland Revenue has actually observed in its investigations of multinationals.

We have also taken care to create a coherent package of measures. Stripping the tax benefits from one type of arrangement is ineffective if multinationals can get the same benefit from switching to a different arrangement.

We also need to ensure the BEPS reforms fit within New Zealand’s overall tax framework and do not unduly discourage foreign investment.

With these principles in mind, in the last year, the Government has implemented a number of measures to address BEPS.

These include applying GST to offshore service providers, introducing legislation to strengthen non-resident withholding tax rules, limit the use of look-through companies as conduit vehicles, and clarify that New Zealand’s general anti-avoidance rule overrides tax treaties.


The Government is committed to the implementation of the OECD’s suggested rules for dealing with hybrid mismatches.

We are encouraged by the evident determination to implement the rules which is also being shown in the UK, the EU and Australia.

But we recognise that the rules need to be implemented in a way that takes account of New Zealand’s existing tax framework.

To make sure this happens, officials are continuing to consult on the design of measures to address BEPS caused by hybrid mismatches.

The hybrids consultation process is a good example of the private sector and officials working together to address unintended consequences while ensuring the rules remain robust and effective.

As part of that, and in line with our generic tax policy process, I understand that my officials are keen to explore options for further consultation on this matter with you on technical aspects that may arise relating to legislative drafting.

But hybrids are only one of the BEPS issues. This is why we are releasing three BEPS consultation papers today that propose new measures to strengthen our rules for taxing multinationals.

Transfer pricing and permanent establishment avoidance

The first discussion document consults on proposals to counter permanent establishment avoidance, strengthen our transfer pricing rules, and help Inland Revenue deal with uncooperative multinationals.

These proposals are aimed at large multinationals that are able to report low taxable profits in New Zealand despite significant economic activity here.

Permanent establishment avoidance

The first proposal targets permanent establishment avoidance. As you know, in order for New Zealand to tax a non-resident on its sales here, the non-resident must have a PE in New Zealand. Our concern is that some non-residents have structured their affairs to avoid a PE at law, even when one exists in substance. This typically involves the non-resident engaging a related party to undertake sales activities instead of carrying them out itself. The fact that the non-resident and the related entity are legally separate means the related party’s sales activities do not give rise to a PE for the non-resident.

This kind of structure can allow multinationals to book the profit from their New Zealand sales offshore for tax purposes, even though these sales are driven by New Zealand-based staff.

To prevent this, the discussion document proposes a PE anti-avoidance rule that applies to large multinationals – that is multinationals with a global turnover of more than 750 million euros.

Under the proposal, a non-resident will be deemed to have a New Zealand PE if they sell goods or services to a person in New Zealand and have a related entity carrying out activities in New Zealand to bring the sale about. This deemed PE will only arise if the arrangement defeats the purpose of PE provisions in a tax treaty.

It will stop non-residents from using tax treaties to avoid New Zealand tax. The OECD has confirmed that tax treaties are not intended to be used in this way.

The new anti-avoidance rule will allow Inland Revenue to tax non-residents when their sales are actually generated through the work of New Zealand staff in related entities, such as subsidiaries or commercially dependent agents. The rules generally will not apply in respect of auxiliary or preparatory activities (such as advertising and marketing), or the activities of independent agents. This reflects the definition of a PE in most of New Zealand’s double tax agreements.

The rule will also apply to many third party channel provider arrangements, where a non-resident supplies its goods or services to New Zealand customers in effective partnership with an independent New Zealand distributor.

I want to be clear that if the multinational is simply shipping goods or supplying services over the internet - and has no-one working for it in New Zealand - they are not the intended target of the proposed rule.

This is consistent with the established international distinction between “trading with a country” and “trading in a country”.

This distinction benefits New Zealand by ensuring New Zealand exporters do not pay foreign income taxes simply because they export their products overseas.

New Zealand is not going out on an international limb with this rule. Our proposed rule is similar to aspects of rules recently adopted by Australia and the United Kingdom.  It is also broadly consistent with the OECD’s new measures to prevent PE avoidance. However the OECD’s measures will only apply if both parties to a tax treaty agree to include them. This means we need our own PE avoidance measure to supplement the OECD’s measures.

Transfer pricing avoidance

Another common way that multinationals shift profits offshore is through transfer pricing.

As I’m sure you know, this is where a related company charges a New Zealand subsidiary an artificially high price for inputs such as raw materials, head-office services, or the rights to use intellectual property. This shifts the multinationals profits from New Zealand, where we can tax it, into another jurisdiction, where we cannot.

To counter such arrangements, New Zealand has transfer pricing rules which require payments between related parties to be set at an arms-length rate.

However, our existing transfer pricing legislation is over 20 years old. Since that time multinational transactions have become vastly more complex and less aligned with market behaviours.

In particular, our current legislation focuses more on the legal form of the related party transaction. Some multinationals have tried to take advantage of this by legally structuring their transactions in a way that does not reflect their economic substance. They then use the legal structure to try and justify an artificial price.

The current legal focus has also allowed some multinationals to try and price transactions using contracts to shift the legal liability, ownership of IP or responsibility for funding arrangements into an offshore entity. These contracts can allow a greater share of the profits to be booked offshore, despite the fact that the offshore entity may carry out very little economic activity in relation to their new responsibilities.

While our existing rules offer some protection against these practices, they are not wholly effective.

The OECD has recently developed new transfer pricing guidelines specifically designed to address these issues as part of its BEPS project.

Australia has also recently introduced similar changes to its transfer pricing legislation.

The discussion document proposes strengthening New Zealand’s transfer pricing legislation so it aligns with the OECD's new guidelines and Australia’s transfer pricing rules.

It proposes introducing rules requiring transfer pricing to align with the economic substance of a transaction. It also proposes rules allowing a transaction to be disregarded or reconstructed if it would not have been entered into between independent parties.

Finally the discussion document proposes some rules to make it easier for Inland Revenue to investigate a multinational’s transfer pricing practices. These include shifting the burden of proof for transfer pricing matters on to the multinational and extending the time bar for transfer pricing from four years to seven years.

Enforcement barriers

It can be difficult for Inland Revenue to investigate large uncooperative multinationals.

Inland Revenue must currently prove that the multinational’s tax position is incorrect in relation to transfer pricing.

However, the multinational holds most of the information relevant to determining its own tax position.

This information is often held offshore, which requires the multinational’s co-operation to access.

To address these issues we are proposing a series of administrative measures to help Inland Revenue assess and collect the right amount of tax.

The measures generally only apply to large multinationals that refuse to cooperate with Inland Revenue.

The proposed measures will make it easier for Inland Revenue to assess uncooperative multinationals, by allowing them to be based on the information Inland Revenue has at the time.

The measures will also require tax to be paid earlier in the disputes process, and allow Inland Revenue to collect relevant information that is held offshore.

The proposed measures will also contain remedies for Inland Revenue where the non-resident does not cooperate, such as increased penalties and a power to allocate income to New Zealand in the absence of information to the contrary.

The measures are intended to incentivise cooperation and we so expect them only to be used if the multinational has been given fair notice and an opportunity to comply.

Overall the aim of our proposed administrative measures is to prevent the avoidance of our existing rules without substantially widening their scope or discouraging multinationals from doing business here.

Even where the new measures apply, Inland Revenue will still have to follow its standard disputes resolution process before it can issue an assessment.

We have designed the measures so that cooperative multinationals should not be affected by them provided they do not use artificial arrangements to avoid paying New Zealand tax.

Interest limitation

It is standard business practice to borrow in order to help finance investments. However, since interest payments are deductible, the use of debt is also a simple mechanism for shifting profits offshore.

For this reason, the design of best-practice interest limitation rules was a focus of the OECD’s BEPS Action Plan.

The OECD ultimately recommended a rule that limits a multinational’s interest deductions based on its earnings – more specifically, its EBITDA.

New Zealand’s current interest limitation rules – the thin capitalisation rules – take a different approach. Those rules limit a multinational’s interest deductions here in an indirect manner, by placing a limit on the amount of interest-bearing debt.

The discussion document I am releasing today on interest limitation does not propose the adoption of an EBITDA-based rule. Generally, the Government considers that the thin capitalisation rules are serving New Zealand well.

Most foreign-owned firms operating here have relatively conservative debt positions and pay significant amounts of tax. Moreover, in recent years the Government has strengthened our thin capitalisation rules by reducing the safe harbour debt to asset ratio from 75 per cent to 60 per cent, and expanded the scope of the rules so they apply to companies that are controlled by groups of investors.

Moreover, an EBITDA-based rule has some significant drawbacks. For example, EBITDA often declines in economic downturns, meaning that firms could face denial of interest deductions when they are also suffering from reduced sales.

A weakness of our current thin capitalisation rule, as compared to an EBITDA-based rule, is it is vulnerable to highly priced related-party debt. Accordingly, the Government is proposing to buttress the existing thin-cap rules with a new mechanism that will cap interest rates on cross-border related-party debt.

Exactly the same incentives that can push firms to thinly capitalise may encourage foreign parents to finance their New Zealand subsidiaries in ways which appear risky in order to justify higher interest rates. This can allow firms to lower their New Zealand tax liabilities and not pay their fair share of New Zealand tax.

While we do not think that most firms are gaming the system, there are some who appear to be doing so. We have firms, for example, with both third party and related party debt, where the interest rates on related party debt are much higher than on third party debt.

Small numbers of firms are charging very high interest rates, but this can represent a substantial fraction of related party interest payments.

Under the proposal, the deductible interest rate on a related-party cross-border loan will generally be set with reference to the parent company’s own interest costs.

This proposal is both hard to manipulate and objective. It should ensure that multinationals operating here can only deduct a reasonable amount of interest here in New Zealand, and avoid costly and lengthy disputes over the appropriate interest rate on a loan.

The discussion document also considers other proposals that address specific weaknesses of our existing thin-cap rules without abandoning the general framework.

The most significant of these is a proposal to require firms to value their assets net of their “non-debt liabilities”.

As I have mentioned, the thin capitalisation rules are based on a firm’s debt relative to its assets. However, what constitutes debt under the rules is much narrower than a firm’s total liabilities. A firm’s other liabilities – its non-debt liabilities – are currently ignored under the rules.

The Government is concerned that ignoring these non-debt liabilities means that some firms are able to be very highly geared without invoking the thin capitalisation rules – in fact some have negative equity. The existing rules are failing to treat them as having excessive debt.

This proposed adjustment for non-debt liabilities would bring New Zealand’s rules into line with the rules in other countries, including Australia which otherwise has rules similar to ours.

Multilateral Instrument

Finally, because many BEPS techniques rely on abuse of tax treaties, the BEPS Action Plan recommended a number of changes to strengthen them.

It would be very time consuming for individual countries to implement the recommended amendments on a treaty-by-treaty basis, so the OECD has developed a multilateral tax treaty that will modify a worldwide network of several thousand bilateral tax treaties in one fell swoop.

The Multilateral Instrument will insert a principal purpose test – similar to our general anti-avoidance rule – into treaties to deny treaty benefits to abusive arrangements.

It will also strengthen the treaty permanent establishment definition to prevent multinationals avoiding having a taxable presence in a country and introduce rules to prevent hybrid entities being used to obtain inappropriate treaty benefits.

It is important that these BEPS measures do not lead to unnecessary uncertainty for compliant taxpayers and to unintended double taxation. To address this risk, the Multilateral Instrument also contains an important measure to help business – the ability to submit disputes between competent authorities as to how a treaty applies to independent binding arbitration.

New Zealand expects to sign the Multilateral Instrument, along with many other countries, in June this year.

Because this is an unprecedented approach to modifying tax treaties, there will be some novel implementation issues.

To make sure the implementation goes smoothly, my officials are also today releasing an issues paper asking for your views on this.

In keeping with our generic tax policy process, we look forward to your feedback. We pay attention to what the private sector says and proposals are always improved by feedback.

While I recognise there is a lot of new material to digest, I encourage you to submit on all three BEPS consultation papers, as your views provide important insights into how the proposals could affect business.

Feedback from submitters will be critical to achieving the intended outcomes of preventing tax benefits from aggressive BEPS arrangements, whilst ensuring New Zealand remains a stable and attractive location for investment.


By closing loopholes and reducing opportunities for gaming the system, we not only ensure that multinationals and others pay their fair share of tax, but we also help maintain confidence in the fairness of the tax system.

I’m grateful to you for the time and effort you put in to review proposals.

I look forward to your continued interest in tax policy.

Thank you