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Inland Revenue

Tax Policy

Chapter 2 - Background

New Zealand’s current tax rules

2.1 New Zealand’s ability to tax non-residents on their New Zealand sales income is determined by our domestic tax rules in conjunction with our DTAs (which override our domestic rules). In general, New Zealand can at present only tax a non-resident multinational group on its sales here if both of the following conditions are met:

  • The multinational group has a sufficient taxable presence in New Zealand. This means the group must operate in New Zealand either though a New Zealand resident subsidiary (in which case the subsidiary is taxable on its income) or through a PE of a non-resident group member. A PE is basically a place of business of the non-resident, but it also includes an agent acting for the non-resident.
  • Where a multinational operates in New Zealand through a PE of a non-resident group member, some of the non-resident’s net profits from its sales can be attributed to its taxable presence here. This involves determining:
    • the amount of the non-resident’s gross sales income which can be attributed to its PE here; and
    • the amount of the expenses which can be deducted from that income to determine the net taxable profits in New Zealand.

2.2 The non-resident must also have a sufficient taxable presence in New Zealand (if a DTA applies) for New Zealand to charge NRWT on certain payments by the non-resident (such as a royalty) to other parties in connection with the New Zealand sales income.

The problem

2.3 It is hard to estimate the overall fiscal cost to New Zealand of TP and PE avoidance. In common with BEPS activities generally (and as noted by the OECD), TP and PE avoidance may not be directly observable in the absence of knowledge of the multinational’s global business structure. It is expected that the OECD’s country-by-country reporting initiative (which New Zealand intends to join) will assist in estimating the fiscal cost of BEPS related activities.

2.4 However we are aware of problematic structures being used in New Zealand.

2.5 Through the use of TP and PE avoidance strategies, some multinationals are able to report low taxable profits in New Zealand despite carrying on significant economic activity here. These avoidance strategies involve:

  • Tax structuring: Non-residents can structure their affairs to avoid a taxable presence in New Zealand, even when they are involved in significant economic activity here (PE avoidance). Non-residents can also enter into arrangements with related parties that reduce their taxable profits in New Zealand, but lack economic substance (transfer pricing avoidance).
  • Creating enforcement barriers: It is difficult and resource intensive to assess and engage in disputes with multinationals in practice. This is due to the highly factual nature of the issues and the difficulties Inland Revenue faces in obtaining the relevant information.

2.6 We set out examples of the more common structures used by multinationals to do business in New Zealand in the appendix, together with a discussion of their current tax treatment. We also discuss how these structures would be taxed under the proposed measures set out in this discussion document.

2.7 The revenue at risk from structures Inland Revenue is currently aware of is estimated to be $100 million per year. Naturally there will be BEPS cases that Inland Revenue is not aware of. In addition, multinationals which use these structures in other jurisdictions typically use them in New Zealand as well. Therefore the total revenue at risk will be greater than this figure.

The international response to the issue

2.8 BEPS activities are a global concern (including TP and PE avoidance). The OECD’s BEPS Action Plan has been formulated to address these kinds of activities by multinationals. Like many countries, New Zealand is picking up a number of the OECD’s recommendations to address BEPS. More information on BEPS generally and New Zealand’s response to it is set out in the published Cabinet paper on BEPS.[4]

2.9 However adoption of the OECD’s BEPS measures is not sufficient on its own for New Zealand to counter all TP and PE avoidance. Many of the OECD’s DTA related BEPS measures will only apply if both parties to the DTA so elect – and we expect several of our trading partners not to. The OECD’s BEPS measures also do not address issues specific to New Zealand, such as issues with our current source rules. Finally, the OECD’s BEPS measures do not generally address the practical difficulties of taxing multinationals (such as information asymmetry and the administrative costs of taxpayer disputes). Accordingly, it is sensible for New Zealand to take additional measures to counter TP and PE avoidance.

Diverted profits taxes

2.10 Another overseas response to the issue has been to impose a separate tax on the diverted profits that arise from TP and PE avoidance related BEPS activities. This is known as a diverted profits tax (DPT). The UK has adopted a DPT and Australia has introduced draft legislation for its DPT into Parliament. France has also proposed a DPT.

2.11 The DPTs that have been proposed in Australia and enacted in the UK tax the diverted profits of large multinationals. Their DPTs are an anti-avoidance measure and are entirely separate taxes levied at a penal rate compared with income tax. DPTs apply to large multinationals that sell goods or services into a country and try to avoid that country’s income tax by either:

  • using a structure to avoid having a PE in the country, even though they have significant economic activities carried on for them in that country; or
  • shifting profits out of the country to a low tax jurisdiction through arrangements which lack economic substance.

2.12 A DPT taxes the profit a multinational has avoided reporting for income tax purposes using these methods. A DPT is thus intended to incentivise large multinationals to pay the correct amount of income tax under the normal rules, rather than to raise revenue by itself.

2.13 A DPT has greatly enhanced assessment and collection powers. For example, the DPT must be paid up front, and the taxpayer then has to demonstrate to the revenue authority why its assessment is wrong and by how much (although the assessment can still be challenged in Court after the expiry of a review period).

2.14 Importantly, a DPT is an anti-avoidance measure. It does not change the fundamental basis on which non-residents are taxed. For this reason, a DPT would not tax non-resident suppliers without a material physical presence in the country. Such non-resident suppliers include some of the multinationals with a large internet footprint that have been the focus of some public concern in New Zealand and internationally.

The New Zealand response

2.15 While the Government has not ruled out the adoption of a DPT at this stage, it wishes to explore the alternative package of measures set out in this discussion document. These measures seek to address TP and PE avoidance within our current tax framework. However the measures do incorporate some elements of the DPTs, such as the PE avoidance measures and milder versions of the DPT’s administrative provisions.

2.16 The proposals in this discussion document aim to align the tax rules more with the actual economic substance of the multinational group and its intra-group dealings. That is, the proposed rules effectively disregard the legal separation between different group members (such as in relation to related party payments or the allocation of profits between a New Zealand subsidiary and a non-resident parent) to the extent that the legal form is inconsistent with the actual economic substance. The rules also ensure multinationals cannot avoid having a taxable presence in New Zealand by separating their activities into separate companies. Finally, the proposed rules will disregard artificial arrangements that would not occur between third parties dealing at arm’s length.

New Zealand’s international tax framework

2.17 The measures set out in this discussion document are consistent with New Zealand’s international tax framework.

2.18 New Zealand has a general broad-base low rate (BBLR) tax framework, which aims to minimise distortions and promote economic efficiency. A robust company tax rate is an important component of this framework. The company tax rate should apply to both residents and non-residents who derive income from New Zealand sources.[5] It should not favour some taxpayers or some types of economic activity.

2.19 TP and PE avoidance essentially exploit deficiencies in the current international tax system (both in New Zealand and abroad) to allow certain non-residents to pay less than the intended amount of tax. This distortion can lead to unfairness and the substitution of low-taxed investors for tax-paying investors. This has the potential to reduce national income while doing little or nothing to reduce the overall pre-tax cost of capital to New Zealand or increase the overall level of investment. It also distorts the allocation of investment by favouring foreign investors who set out to game the system.

2.20 The proposed measures protect New Zealand’s BBLR tax base from these distortions and ensure the intended level of tax is paid by all taxpayers. They are consistent with New Zealand’s general approach to taxing inbound investment.

2.21 Further information on New Zealand’s international tax framework and the economic impact of such base maintenance measures is set out in the document New Zealand’s taxation framework for inbound investment, available at

2.22 Inland Revenue is currently investigating or disputing several BEPS related cases. Nothing in this document is intended to prejudice any of those disputes or investigations. In particular, none of the proposed amendments in this discussion documents should be regarded as evidence that Inland Revenue cannot address the BEPS activities it is currently investigating or disputing under the current law, or that such BEPS activities are within the policy intent of the current law.


4 Base erosion and profit shifting (BEPS) – update on the New Zealand work programme, released June 2016,

5 There are a number of reasons for applying the company tax rate to non-residents, such as ensuring that location-specific economic rents are taxed, maintaining current taxation of sunk investments and land, ensuring an equal playing field for local and non-resident competitors, and the availability of tax credits for New Zealand tax in the non-resident’s jurisdiction (which effectively reimburses the non-resident for the New Zealand tax charged).