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Inland Revenue

Tax Policy

Chapter 1 – Introduction

1.1 The use of debt is one of the simplest ways of shifting taxable profits from one jurisdiction to another. For example, because interest payments are deductible, a related-party cross-border loan between a foreign parent and their New Zealand subsidiary will reduce taxes payable in New Zealand.

1.2 New Zealand has rules that limit the interest deductions of firms with international connections (the inbound and outbound thin capitalisation rules together with the transfer pricing rules). Our thin capitalisation rules, first introduced in 1996 have been strengthened numerous times, such as reducing the safe harbour from 75 per cent to 60 per cent in 2011, and by extending the rules so they apply to New Zealand firms controlled by non-residents who act together in 2015.

1.3 Overall, we consider that our rules are serving us well. The rules are well understood and set clear and largely predictable limits on the amount of deductible debt allowable in New Zealand. Firms subject to the rules are significant taxpayers in New Zealand – for example, foreign controlled firms paid 39 per cent of company tax in the 2015 tax year.

1.4 While the majority of firms subject to the thin capitalisation rules have taken conservative debt positions, there is a minority that engages in more aggressive tax practices. Of particular concern is that some firms have borrowed from their foreign parents at high interest rates, resulting in very large interest deductions in New Zealand. A proposal to address this is discussed in chapter 3.

1.5 In reviewing our thin capitalisation rules, we have identified several other areas for improvement. A proposal to change how a firm’s total assets are determined for the thin capitalisation rules – that they should be determined net of a firm’s non-debt liabilities – is discussed in chapter 4. This change would bring New Zealand into line with other countries with thin capitalisation rules.

1.6 Chapter 5 discusses other proposals to improve the rules. These include introducing a de minimis, which will reduce compliance costs for smaller firms, and a permissive regime for project-financed infrastructure projects funded with third-party debt, reflecting the fact that such projects represent a low profit shifting risk.

Scope of review

1.7 New Zealand’s thin capitalisation rules apply to outbound investment (New Zealand-based firms that have international operations) as well as inbound investment (foreign-owned firms operating in New Zealand).

1.8 We propose that the proposals discussed in this document apply to both foreign-owned firms and domestically-owned firms with foreign affiliates. While the focus of the BEPS project in New Zealand has been on inbound investment, similar base protection considerations can arise in an outbound context. We consider that it makes sense for a similar set of rules to apply to both inbound and outbound investment.

1.9 In the context of the interest rate proposal discussed in chapter 3, this means that the rule would apply to loans from a foreign-parent to a New Zealand owned subsidiary, and to loans from a foreign subsidiary to a New Zealand parent.[1] The rule would not apply to loans from a New Zealand parent to its foreign affiliates, as the same base protection concerns do not arise.

1.10 In the context of the changes discussed in the other chapters, this means that the proposals would apply in relation to both the inbound and outbound thin capitalisation rules.

1.11 A special thin capitalisation regime also applies to registered banks operating in New Zealand. Most of the changes discussed in this paper would not apply as they are not relevant to that regime. However, we propose to apply the interest rate proposal discussed in chapter 3 to banks subject to the banking thin capitalisation rules.

1.12 This paper does not discuss a reduction in the thin capitalisation safe harbour of 60 per cent. Setting the safe harbour is ultimately a matter of judgement, and the Government is satisfied with its current level.


1.13 The Government seeks submissions on the proposals set out in this discussion document.

1.14 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for Inland Revenue and Treasury officials to contact those making the submission to discuss the points raised, if required.

1.15 Submissions should be made by 18 April 2017 and can be emailed to [email protected] with “BEPS – Interest limitation rules” in the subject line.

1.16 Alternatively, submissions may be addressed to:

BEPS – Interest limitation rules
C/- Deputy Commissioner, Policy and Strategy
Inland Revenue Department
PO Box 2198
Wellington 6140

1.17 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their release. The withholding of particular submissions, or parts thereof, on the grounds of privacy, or commercial sensitivity, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider that there is any part of it that should properly be withheld under the Act should clearly indicate this.

1.18 In addition to seeking written submissions, Inland Revenue and Treasury officials intend to discuss the issues raised in this discussion document with key interested parties.


1 Loans between a foreign subsidiary and domestic parent are not common but are possible. For example, the recent Chevron case in Australia was about such a loan.