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Inland Revenue

Tax Policy

Chapter 1 - Summary


1.1 There are international concerns about multinationals not paying their fair share of tax. This is because some multinationals use base erosion and profit shifting (BEPS) strategies to report low taxable profits in New Zealand and other countries in which they operate. These BEPS strategies include arrangements between related parties which shift profits out of New Zealand (usually into a lower taxed jurisdiction). They also include arrangements which are designed to ensure New Zealand is not able to tax any income from sales here despite there being a physical presence in New Zealand in relation to the sales. These particular BEPS strategies are known as transfer pricing and permanent establishment avoidance (TP and PE avoidance).

1.2 This discussion document seeks submissions on a package of proposed measures to counter certain base erosion and profit shifting (BEPS) activities by large multinationals in New Zealand. The package is focussed on BEPS activities which involve transfer pricing and permanent establishment (PE) avoidance. The package complements other BEPS related measures which the Government is progressing.

1.3 The proposed measures seek to counter BEPS activities by strengthening the existing rules in the Income Tax Act 2007. They focus on improving the transfer pricing rules and the source rules, while preventing the abuse of double tax agreements (DTA) to avoid New Zealand tax. The proposals also include some new administrative rules to make it easier to assess and collect tax from uncooperative multinationals in practice.

1.4 The proposed measures are intended to prevent the existing tax rules from being avoided or circumvented by multinationals. They are not intended to make any fundamental changes to the current international tax framework. Therefore multinationals whose legal arrangements match the economic substance of their activities and who cooperate with Inland Revenue should not generally be affected by the new measures.

1.5 Multinationals provide many benefits for the New Zealand economy, and the Government is committed to making New Zealand an attractive place for them to do business. However, this does not mean rewarding firms that are aggressive in attempting to flout the current rules. It is important to enforce the integrity and efficiency of the tax system in designing tax policy so that there is a level playing field. Multinational enterprises that set out to circumvent the current tax rules should not be allowed to outcompete more compliant multinational enterprises or domestic firms.

1.6 In this regard, the package contains base maintenance measures that are intended to ensure that the intended level of tax is borne by all non-residents carrying on business in New Zealand. Neutral taxation of different investors into New Zealand is consistent with New Zealand’s taxation framework for in-bound investment and is in New Zealand’s best economic interest.

1.7 Addressing transfer pricing and PE avoidance is also an important revenue integrity measure. For New Zealanders to have confidence in their tax system, it is important that everyone is seen to pay their fair share of tax, including multinationals.


1.8 While the majority of multinationals operating here are tax compliant, there is a minority that engage in aggressive tax practices. This kind of aggressive tax planning may increase if it is left unchecked. In addition, incentives to engage in these practices could increase as we address other profit shifting techniques through other BEPS measures (such as hybrid mismatch arrangements and excessive interest deductions).

1.9 It can also be difficult and resource intensive for Inland Revenue to investigate and assess multinationals that are suspected of engaging in TP and PE avoidance. This is due to the highly fact dependant nature of the cases, combined with the fact that the multinationals possess all the information needed by Inland Revenue to prove its case. Getting this information can also be difficult when it is held offshore by non-residents, even when they are in the same group as a New Zealand taxpayer.

1.10 The OECD has recommended various courses of action to address general BEPS strategies in its BEPS Action Plan. Along with other OECD countries, New Zealand is implementing a number of these OECD recommendations. However we consider that the OECD BEPS actions will not completely address the issue of TP and PE avoidance. Accordingly, the Government would like to explore additional measures to address this issue.

1.11 One overseas response to the issue has been to impose a separate tax on the diverted profits that arise from TP and PE avoidance. This is known as a diverted profits tax (DPT), and has been proposed by Australia and adopted by the UK. France is also considering adopting a DPT. A DPT is levied at a penal rate compared to income tax and has greatly enhanced assessment and collection powers. A DPT is intended to incentivise multinationals to pay the correct amount of income tax under the normal rules rather than to raise revenue by itself.

1.12 While the Government has not ruled out the adoption of a DPT, it would like to investigate an alternative approach.[1] This is to take certain features of a DPT and combine them with the OECD’s BEPS measures and some domestic law amendments to produce a package of measures that is tailored for the New Zealand environment. The intention is that this approach would be as effective as a DPT in addressing TP and PE avoidance in New Zealand, but it would do so within our current frameworks and with fewer drawbacks. This discussion document sets out these alternative measures.

1.13 These measures are in addition to a number of other measures to address BEPS and related issues which the Government has been progressing. In particular:

  • A bill has recently been reported back from select committee which would 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.
  • A bill has recently been enacted to strengthen the foreign trust disclosure rules and implement automatic exchange of information with other tax authorities.
  • GST now applies to cross border services – including e-books, music, videos and software purchased from overseas websites.
  • The Government has released a discussion document on addressing hybrid mismatch arrangements. These proposals are designed to prevent taxpayers reducing their tax liability by exploiting technical differences in countries’ tax.[2]
  • The BEPS – Strengthening our interest limitation rules discussion document outlines some proposed law changes that will limit the ability of multinationals to use interest payments to shift their New Zealand profits offshore.
  • New Zealand intends to sign the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (also known as the multilateral instrument or MLI). An officials’ issues paper has been released to consult on implementation issues associated with New Zealand signing the MLI.

Summary of proposed rules

Source and permanent establishment avoidance

  1. A new anti-avoidance rule will be introduced that will apply to large multinationals (with over EUR €750m[3] of consolidated global turnover) that structure to avoid having a permanent establishment (taxable presence) in New Zealand. The proposed rule would deem a non-resident entity to have a permanent establishment in New Zealand if a related entity carries out sales related activities for it here. This permanent establishment will be deemed to exist for the purpose of any applicable double tax agreement (DTA).
  2. An amount of income will be deemed to have a source in New Zealand if New Zealand has a right to tax that income under the permanent establishment article of any applicable DTA. For non-residents in respect of whom no DTA applies, New Zealand’s model treaty permanent establishment article will be incorporated into domestic law to apply as an additional source rule.
  3. A non-resident’s income will have a source in New Zealand if the income would have a source, treating the non-resident’s wholly owned group as a single entity. This complements the existing rule in section CV 1 for income derived by corporate groups.
  4. Some potential weaknesses of the life insurance source rules will be addressed by amending section DR 3 to ensure that no deductions are available for the reinsurance of life policies if the premium income on that policy is not taxable in New Zealand and by amending the definition of a FIF to ensure that New Zealand residents are subject to the FIF rules in respect of any policies that are not subject to New Zealand tax under the life insurance rules.

Transfer pricing rules

  1. The transfer pricing rules will be strengthened so they align with the OECD’s guidelines and Australia’s new transfer pricing rules. This involves amending our transfer pricing rules so that:
  •  they disregard legal form if it does not align with the actual economic substance of the transaction;
  •  in cases where independent entities would not have entered into the contracted conditions, the transfer pricing rules would allow for those conditions to be replaced by arm’s length conditions (or allow the entire arrangement to be eliminated or disregarded);
  •  the legislation specifically refers to arm’s length conditions and the latest OECD Transfer Pricing guidelines (which incorporate the BEPS actions 8–10 revisions).
  1. The burden of proof for demonstrating that the actual conditions align with arm’s length conditions will be shifted from the Commissioner of Inland Revenue to the taxpayer (consistent with the burden of proof for other tax matters).
  2. The “time bar” for transfer pricing issues will be increased to seven years (in line with Australia).
  3. In addition to applying to dealings between associated parties, the transfer pricing rules will be amended to also apply to investors that “act together”, such as private equity investors.
  4. Inland Revenue will collect the information required by the OECD’s country-by-country reporting initiative from multinational groups with over EUR €750m of annual consolidated group revenue (large multinationals). We will not require large multinationals to annually file their master and local files, but we will increase Inland Revenue’s powers to access information and documents held by large multinationals offshore.

Administrative rules

  1. If the large multinational (over EUR €750m worldwide revenues) does not cooperate with Inland Revenue, then Inland Revenue may more readily issue a notice of proposed adjustment (NOPA) (and any subsequent documents under the disputes process) based on the information available to Inland Revenue at the time.
  2. Any disputed tax must be paid by a large multinational earlier in the disputes process. This only applies in respect of disputes over transfer pricing, the amount of New Zealand sourced income, and the application of a DTA.
  3. Tax payable by any member of a large multinational can be collected from any wholly owned group member, or the related New Zealand entity in case of the new PE avoidance rule.
  4. Inland Revenue will be empowered to collect more information from large multinationals, including information about its various non-resident group members.

Application dates

  1. The proposed administrative rules would apply from the date of enactment of the relevant legislation. The proposed rules for addressing the source, permanent establishment and transfer pricing issues would apply to income years beginning on or after the date of enactment.


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

1.15 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.

1.16 Submissions should be made by 18 April 2017 and can be emailed to [email protected] with “BEPS – Transfer pricing and PE avoidance” in the subject line.

1.17 Alternatively, submissions may be addressed to:

BEPS – Transfer pricing and PE avoidance
C/- Deputy Commissioner, Policy and Strategy
Inland Revenue Department
PO Box 2198
Wellington 6140

1.18 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.

1.19 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 See the Cabinet paper published in November 2016, Measures to strengthen transfer pricing rules and prevent permanent establishment avoidance – a Government discussion document,

2 Addressing hybrid mismatch arrangements – a Government discussion document, September 2016,

3 The EUR €750m threshold has been chosen to align application of the proposed rule with the OECD’s threshold for requiring large multinationals to file country-by-country reports.