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Inland Revenue

Tax Policy

Appendix - Substantive BEPS provisions in the multilateral instrument

BEPS measure Detail Minimum standard Should NZ adopt?
1. Neutralising the effects of hybrid mismatch arrangements that have a treaty aspect
(Action 2 report)

Fiscally transparent entities

The MLI introduces or amends a fiscally transparent entity (FTE) provision. FTEs (like trusts or partnerships) create arbitrage opportunities because they are treated differently for tax purposes by different countries. The MLI provision clarifies that treaty benefits will only be allowed to the extent to which the item of income is taxed in the state in which the entity is resident. New Zealand already includes this provision (or an equivalent provision) in its DTAs with Australia, United States, Chile and Japan.

Article 3 of the MLI

No Yes

Dual resident entities

The MLI introduces or amends a dual resident entity (DRE) tie breaker provision. Like FTEs, DREs can be used to take advantage of arbitrage opportunities. The proposed provision will require CAs to agree the residence status of a DRE and the DRE will only be entitled to such treaty benefits as the CAs agree.

Article 4 of the MLI

No Yes

Relief of double taxation

The MLI allows countries to strengthen their application of the exemption method to relieve double taxation. New Zealand already applies the (more robust) credit method in all of its DTAs, and therefore proposes not to adopt any of the options.

Article 5 of the MLI

No Not applicable
2. Preventing the granting of treaty benefits in inappropriate circumstances (Action 6 report)

Preamble language – minimum standard

The MLI will amend the preamble to DTAs to emphasise that as well as aiming to relieve double taxation, the treaty also aims to prevent opportunities for non-taxation, reduced taxation or tax avoidance.

Article 6(1) and (2) of the MLI

Yes Yes

Preamble language – optional amendment

The MLI allows countries to adopt the following optional amendment to the preamble to DTAs: “Desiring to further develop their economic relationship and to enhance their co-operation in tax matters,”

Article 6(3) and (6) of the MLI

No Yes

Treaty anti-abuse rules

The MLI requires jurisdictions to introduce an anti-abuse rule into DTAs. Jurisdictions can meet this minimum requirement in one of three ways:

  1. a principal purpose test (PPT) alone;
  2. a PPT plus a “simplified limitation on benefits” (LOB) clause. The LOB is a mechanical provision that seeks to identify, through a series of black-letter tests, whether a person is genuinely entitled to the benefits of a DTA; or
  3. enter into bilateral negotiations to include a detailed LOB provision plus a PPT or anti-conduit rules.

In the case of New Zealand, officials’ favour adopting a PPT alone. The PPT is very similar to New Zealand’s domestic law GAAR and will deny treaty benefits if the principal purpose of an arrangement was to secure those benefits. Also, in officials’ view, it generally covers the same treaty shopping issues as the alternative approaches.

Article 7 of the MLI

Yes Yes

Dividend transfer transactions

The MLI introduces a provision that requires shares to be held for a minimum of 365 days for the shareholder to be entitled to the reduced withholding tax (WHT) rates on dividends. This is to stop shareholders buying shares temporarily to access the reduced WHT rates and then immediately selling them.

Article 8 of the MLI

No Yes

Land rich company rules

The MLI introduces a treaty provision that strengthens the anti-abuse “land-rich company” test (land rich companies are companies whose assets are mainly land). Some treaties do not contain this provision at all, so the MLI also allows it to be inserted into those treaties.

The new rule reinforces the position that the source jurisdiction can tax land held by non-resident owners in the other jurisdiction through corporate vehicles. To prevent artificial and temporary dilution of the amount of land held by a company just before sale, the MLI provision requires the threshold for the amount of land ownership which triggers the rule to be measured on every day in the 365 day period leading up to the sale of the shares.

The MLI provision also ensures the same rule applies to other investment vehicles such as partnerships and trusts.

Article 9 of the MLI

No Yes

Third-state PE rules

The MLI introduces a treaty provision that denies treaty benefits in the case of income derived by a PE of a resident of one of the parties to the DTA, where that PE is situated in a low tax third-state.

Article 10 of the MLI

No Yes

Right to tax own residents

The MLI introduces a provision that preserves a jurisdiction’s right to tax its own residents (for example, this prevents New Zealand residents engaged in a tax avoidance arrangement claiming a DTA prevents New Zealand from using the domestic law GAAR to impose tax).

Article 11 of the MLI

No Yes
3. Preventing the artificial avoidance of PE status

Commissionaire arrangements and similar strategies

Currently, a number of artificial structures including the civil law concept of a “commissionaire” can be used to avoid having a PE in a jurisdiction. A new provision will deem non-residents using these structures to have a PE in the jurisdiction.

Articles 12 and 15 of the MLI

No Yes

Specific activity exemptions – preparatory and auxiliary qualification

Certain specific activities carried on in a jurisdiction are deemed not to constitute a PE (for example, premises used for simply storing goods or stock maintained for display or delivery). These specific carve-outs from the PE definition allowed quite substantial economic activities to fall within them. The MLI proposes clarifying that the specific carve-outs listed in the DTA must be subject to an additional requirement that they be “preparatory and auxiliary” in nature.

There are two options for dealing with this issues – Option A (which New Zealand favours) which subjects all of the existing specific activities to an explicit “preparatory and auxiliary” test, and Option B, which does not subject the specific activities to the “preparatory and auxiliary” test (because these activities are considered to be inherently preparatory and auxiliary in nature), but subjects any other activity or combination of activities to the “preparatory and auxiliary” test.

Articles 13 and 15 of the MLI

No Yes

Specific activity exemptions – Anti-fragmentation rule

The MLI introduces an “anti-fragmentation” rule that will prevent an enterprise from dividing up all of its activities so that related parties each carry on a separate part of the business (that fall within the PE exceptions), but taken together they constitute a PE.

Articles 13 and 15 of the MLI

No Yes

Anti-contract splitting rule

Currently a construction, installation or building project does not constitute a PE unless it last for more 12 months. Entities were abusing this 12 month limit by having back-to-back 12 month contracts so they never exceeded the 12 month threshold. Generally the contracts were undertaken by different companies within the same group of companies. The new an “anti-contract splitting” rule will aggregate related projects to prevent PE avoidance.

Articles 14 and 15 of the MLI

No Yes
4. Providing improved mechanisms for effective dispute resolution

MAP – access to the CAs of either jurisdiction

In covered tax agreements that do not already have it, the MLI will introduce a provision allowing taxpayers to request mutual agreement procedure (MAP) in cases where they believe taxation is not in accordance with the treaty. If a MAP provision is already contained in a DTA, the MLI will amend it to allow taxpayers to approach the CA of either jurisdiction to resolve uncertainty as to how the DTA applies (New Zealand’s DTAs currently contain MAP provisions, but taxpayers are only entitled to approach the CA of the jurisdiction of which they are a resident).

Article 16 of the MLI

Yes Yes

MAP – corresponding adjustment

Requires contracting states to make appropriate corresponding adjustments in transfer pricing cases.

Article 17 of the MLI

No Yes


If, under the MAP process, the CAs do not agree on the correct interpretation of the DTA, the CAs can submit the matter to an independent arbitrator (or a panel of three arbitrators) for decision. The arbitrators will decide which of the CAs is correct. The CAs are generally bound by the decision of the arbitrators, but the taxpayer is not. Therefore, the taxpayer could pursue a court case if it disagrees with the arbitrators’ decision.

New Zealand’s approach is to adopt what is referred to as “final offer” or “last best offer” arbitration (in Article 23(1)), but to accept “independent opinion” arbitration if the other party to the Covered Tax Agreement chooses this (by entering a reservation under Article 23(2)). In the case of “independent opinion” arbitration, New Zealand will adopt Article 24(2) and (3) which means that the arbitrators’ decision will not be binding on the CAs if they come to an alternative resolution of all unresolved issues within 3 calendar months of the delivery of the arbitrators’ decision.

New Zealand also proposes to require undertakings of confidentiality by all parties involved in arbitration (Article 23(5)) and reserves the right not to include arbitration provisions in Covered Tax Agreements with jurisdictions that do not require the same (Article 23(6) and (7)).

New Zealand intends to enter a free form reservation in respect to arbitration to carve out cases that involve the application of New Zealand’s general anti-avoidance rule contained in section BG 1 of the Income Tax Act 2007.

Articles 18 – 26 of the MLI

No Yes