Contents

• Contents – summary
• Contents – full

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Bill overview

General Bill issues

Interest limitation rules

• Overview
• General
• Application to the same groups as thin capitalisation
• Adjusted credit ratings
• Disregarded features
• Insuring or lending persons
• Thin capitalisation – exclusion of non-debt liabilities
• Infrastructure project finance
• Other thin capitalisation

Permanent establishment anti-avoidance rule

• Overview
• General
• Application of the rule
• Role of the facilitator
• Purpose of avoidance test
• Administrative matters
• Other matters
• Permanent establishment source rule
• Dta source rule

Transfer pricing and country-by-country reporting

• Transfer pricing
• Overview
• Country-by-Country reports
• Overview

Hybrid and branch mismatch rules

• Overview
• General issues
• Hybrid Financial instrument rule
• Disregarded hybrid payments rule and deemed branch payments
• Reverse hybrid rule and branch payee mismatch rule
• Deductible hybrid and branch payments rule
• Dual resident payer rule
• Imported mismatch rule
• Surplus assessable income
• Election Rules
• Interaction with other tax regimes
• Other definitions
• NRWT on hybrid arrangements – treaty issue

Other policy matters

• Inland Revenue’s administrative powers to investigate large multinationals
• Overview
• Life reinsurance

Miscellaneous issues

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Bill overview

General Bill issues

• Issue: Support for the intent of the Bill
• Issue: Deferred application of proposed rules
• Issue: Grandparenting of existing advance pricing agreements
• Issue: Drafting of the provision to Grandparent of existing advance pricing agreements
• Issue: Grandparenting of existing advance pricing agreements
• Issue: Quality of the Bill
• Issue: Need for guidance
• Issue: The proposals go too far
• Issue: The proposals put New Zealand out of step with other countries
• Issue: Cost of capital and wider economic impact
• Issue: The package of reforms lacks coherence
• Issue: Consultation on draft legislation

Interest limitation rules

Overview

General

• Issue: Support for rules
• Issue: The restricted transfer pricing rule should not proceed
• Issue: Existing legislative tools are sufficient
• Issue: Restricted transfer pricing rule may not meet the internationally accepted arm’s length principle
• Issue: Rebuttable safe harbour
• Issue: Rationale used to justify restricted transfer pricing approach
• Issue: Group credit rating approach should not proceed
• Issue: Defer until further OECD research completed
• Issue: Inconsistency with the approach taken in Australia
• Issue: Withholding Tax
• Issue: Application date drafting
• Issue: Restricted transfer pricing de minimis
• Issue: Grandparenting existing loans
• Issue: Mutual Agreement Procedure
• Issue: Application to thin cap groups
• Issue: Second transfer pricing analysis required
• Issue: Asymmetric application of rules to inbound and outbound loans
• Issue: Pricing date for existing loans
• Issue: Interaction with wider transfer pricing rules
• Issue: The drafting of the restricted transfer pricing rule is too complicated
• Issue: Duplication of terms
• Issue: Cross-border related party loans taxable within New Zealand
• Issue: Minor drafting issues

Application to the same groups as thin capitalisation

• Overview
• Issue: Officials’ proposal should not be accepted
• Issue: Policy development
• Issue: Effect on iwi
• Issue: More than 100% combined interests
• Issue: Lack of control over New Zealand entity
• Issue: Consistency with CFC and thin capitalisation rules
• Issue: Non-voting preference shares
• Issue: Appointment of directors
• Issue: Scope of draft legislation
• Issue: Application of thin capitalisation threshold to restricted transfer pricing
• Issue: Public perception of integrity of Parliamentary process

Adjusted credit ratings

• Overview of three policy recommendations
• Income-interest test
• Third party credit ratings
• Two notches below group credit rating
• Issue: Linkage with parent’s credit rating
• Issue: Flat 40% gearing ratio limit
• Issue: 40% gearing limit is too low
• Issue: Location of 40% gearing ratio
• Issue: Income-interest test
• Issue: Annual income-interest test
• Issue: Income-interest ratio in a first year of operation
• Issue: Income-interest ratio of 3.3 is too high
• Issue: Residence test – having the usual tax status of a company
• Issue: Two out of three high BEPS risk tests
• Issue: Credit rating adjustment when third party loan with similar features exists
• Issue: Highest group credit rating
• Issue: Access to credit ratings
• Issue: Calculation date for interest rate on existing loans
• Issue: Calculation periods for income-interest ratio
• Issue: Data for the income-interest ratio calculation
• Issue: 12 month period
• Issue: Control by co-ordinated group
• Issue: Co-ordinated group rules should apply to interposed special purpose vehicles
• Issue: Foreign government shareholders
• Issue: Local published credit ratings
• Issue: Safe harbour for loans under $10 million
• Issue: Application of $10 million de minimis
• Issue: Compliance costs
• Issue: Calculation dates
• Issue: Restricted credit rating debt percentage
• Issue: Borrower’s credit rating

Disregarded features

• Issue: List of features
• Issue: Long-term loans with shorter term interest rate resets
• Issue: Total debt terminology
• Issue: Commissioner’s discretion
• Issue: Terms greater than five years
• Issue: Terms greater than five years related party exception
• Issue: Exception from five year limit
• Issue: Proportionality requirements in exotic terms
• Issue: Payment-in-kind
• Issue: Deferral of interest
• Issue: Calculation dates
• Issue: Term of the loan approach
• Issue: Third party exception for acting together

Insuring or lending persons

• Issue: General support for rules
• Issue: Insuring or lending persons applying the same credit rating as their parent
• Issue: Third party tests for insuring or lending persons
• Issue: Definition of “insuring or lending person” is unclear
• Issue: Definition of insuring or lending person – securitisation trusts
• Issue: Long-term credit rating in section GC 17
• Issue: Credit rating of insurers
• Issue: Reserve Bank capital requirements
• Issue: Regulatory capital should be exempt from the rules
• Issue: Regulatory capital that is an excepted financial arrangement
• Issue: Matching features of a back-to-back loan
• Issue: De minimis

Thin capitalisation – exclusion of non-debt liabilities

• Issue: Should the proposal to subtract non-debt liabilities from value of assets in calculating debt percentages for the non-bank thin capitalisation rules proceed?
• Issue: Should the exclusion of non-debt liabilities reflect how they would be treated by a third party lender
• Issue: Should deferred tax liabilities be included in non-debt liabilities
• Issue: The exclusion from non-debt liabilities for certain deferred tax liabilities should be clarified
• Issue: Should derivative positions be included in non-debt liabilities 100
• Issue: Liabilities of retirement village operators under occupational licences should be grandparented or excluded from non-debt liabilities
• Issue: Should there be industry specific carve outs for certain non-debt liabilities
• Issue: Related party trade payables should be excluded from non-debt liabilities
• Issue: Inconsistent measurement approaches in determining non-debt liabilities
• Issue: Other exclusions from non-debt liabilities

Infrastructure project finance

• Issue: Support for concessionary rule for infrastructure projects
• Issue: Opposition to concessionary rule for infrastructure projects
• Issue: Scope of rule – Central Government
• Issue: Scope of rule – Determination power
• Issue: Scope of rule – management phase
• Issue: Public project debt - security requirement
• Issue: Limited recourse debt
• Issue: Excess debt
• Issue: Public project participant debt (FE 4B (3))
• Issue: Debt applied to assets used in the project
• Issue: Debt refinancing
• Issue: On-lending funds to persons not associated with the project
• Issue: Rule should be optional
• Issue: Allow investor to divest interest to a separate investor
• Issue: Taxpayers within scope (FE 7B(1)(a))
• Issue: Exclude interest expenditure on public project debt from ordinary thin capitalisation rules (FE 7B(6))
• Issue: Drafting issues
• Issue: Threshold debt amount
• Issue: Non-debt liabilities
• Issue: Disposing of asset to the Crown

Other thin capitalisation

• Issue: Non-proportionate shareholder debt
• Issue: De minimis threshold for inbound thin capitalisation rules should include owner-linked debt
• Issue: Non-residents acting in concert: related–party debt
• Issue: Group acting in concert
• Issue: Grandparenting of non-residents acting in concert
• Issue: Asset valuation
• Issue: Assets not recognised for financial reporting purposes
• Issue: Drafting of thin capitalisation rules
• Issue: Interest carry forward rule
• Issue: Inbound de minimis
• Issue: Definition of assets
• Issue: Frequency of asset valuation
• Issue: Valuation of unique assets
• Issue: Independent expert valuations of assets
• Issue: Support for anti-avoidance rule
• Issue: Anti-avoidance rule scope
• Issue: Anti-avoidance rule dominant purpose
• Issue: Owner-linked debt when the borrower is a trust
• Issue: Worldwide group debt percentage and on-lending concession

Permanent establishment anti-avoidance rule

Overview

General

• Issue: General support for the rules
• Issue: Proposed rules will have a detrimental effect on foreign direct investment
• Issue: Clear guidance should be provided in the Officials’ Report
• Issue: The proposed PE anti-avoidance rule is misconceived
• Issue: Treaty override
• Issue: Royalties and the deemed PE source rule
• Issue: Scope of the PE anti-avoidance rule

Application of the rule

• Issue: Consolidated group turnover threshold is appropriate
• Issue: Threshold may still result in rule applying to smaller New Zealand resident entities
• Issue: Application dates unclear
• Issue: Proposed application dates do not allow sufficient time for multinationals to restructure

Role of the facilitator

• Issue: Support for non-resident supply of goods or services to New Zealand rule
• Issue: Introducing the concept of a ‘facilitator’ is a good step forward
• Issue: The proposed PE rules should be consistent with the OECD Action Plan
• Issue: Facilitator rule should cover sales only
• Issue: The legislation should further clarify the kind of activities intended to be caught by the rule
• Issue: Does the facilitator include employees visiting New Zealand?
• Issue: Physical location of the facilitator
• Issue: Criterion for commercial dependence of non-resident is appropriate
• Issue: The facilitator should not include commercially dependent entities, or the measurement should be clarified
• Issue: The 80% assessable income test should be a necessary but not sufficient criterion in the commercially dependent test for a facilitator

Purpose of avoidance test

• Issue: More than merely incidental purpose criterion is appropriate
• Issue: Proposed purpose of avoidance test too broad
• Issue: The phrase “merely incidental” needs legislative clarification
• Issue: Parliamentary contemplation test should apply
• Issue: Parliamentary contemplation test could still apply
• Issue: Purpose of avoidance test should use similar wording to section BG 1
• Issue: Avoidance test should require further indicia of avoidance
• Issue: Savings provision for no avoidance in other country
• Issue: Avoidance of foreign tax

Administrative matters

• Issue: Clarifying guidance required
• Issue: Guidance on attribution of profits to PEs
• Issue: Compliance obligations for new rule
• Issue: Post-implementation review

Other matters

• Issue: Profit attribution
• Issue: A DPT should not be dismissed
• Issue: A DPT should be adopted
• Issue: New Zealand should adopt a ‘facilitation from abroad’ rule
• Issue: Interaction between the PE anti-avoidance rule and the Transpacific Partnership
• Issue: The PE concept is outdated

Permanent establishment source rule

• Issue: The PE attribution rule is clear and workable
• Issue: PE source rule should not proceed
• Issue: PE source rule too broad
• Issue: PE income apportionment rule
• Issue: PE rule is not an anti-fragmentation rule
• Issue: Reference to the OECD Commentary will mean continuous law change

Dta source rule

• Issue: General support for the deemed source rule
• Issue: Deemed source rule is a bad faith change
• Issue: Drafting issues

Transfer pricing and country-by-country reporting

Transfer pricing

Overview

• Issue: Strengthening transfer pricing rules is not required
• Issue: Impacts on taxpayer and Inland Revenue resourcing of transfer pricing
• Issue: That New Zealand’s transfer pricing legislation explicitly refer to the OECD transfer pricing guidelines
• Issue: That the OECD transfer pricing guidelines should be annexed to the New Zealand Income Tax Act 2007 or otherwise made available free of charge to all taxpayers
• Issue: Applying the transfer pricing rules to investors that act in concert
• Issue: Economic substance
• Issue: Definition of arm’s length conditions
• Issue: Requirements for not recognising a transfer pricing arrangement
• Issue: Drafting of requirement for not recognising a transfer pricing arrangement
• Issue: Onus of proof for transfer pricing issues should remain with Inland Revenue
• Issue: Consequential changes if the onus of proof for transfer pricing issues is shifted to the taxpayer
• Issue: Transfer pricing documentation requirements and timeframe
• Issue: Guidance materials for transfer pricing documentation and investigations
• Issue: A consistency committee should be established within Inland Revenue
• Issue: Extending the time bar for transfer pricing issues from four to seven years
• Issue: Deadlines for investigation of transfer pricing matters and responding to Advance Pricing Agreement applications
• Issue: Seven year time bar should not apply to the restricted transfer pricing rules for related party debt
• Issue: Refund provision should match the proposed seven year time bar and drafting of the time bar
• Issue: Drafting of the transfer pricing time bar
• Issue: Drafting structure of the transfer pricing rules
• Issue: Redrafting of existing transfer pricing rules

Country-by-Country reports

Overview

• Issue: Protection of information provided in Country-by-Country reports
• Issue: Publication of Country-by-Country reports
• Issue: Application date of Country-by-Country reports provision
• Issue: Drafting uses incorrect definition of “ultimate parent”
• Issue: Definition of large multinational group

Hybrid and branch mismatch rules

Overview

General issues

• Issue: Complexity of proposed rules and compliance costs
• Issue: Breadth of proposed rules
• Issue: New Zealand should not be a leader on hybrid and branch mismatch rules
• Issue: Purpose/targets of OECD recommendations are flawed
• Issue: Reassessment of corporate income tax rate
• Issue: Transitional period
• Issue: Restructuring safely
• Issue: Widened corresponding hybrid mismatch legislation
• Issue: List of corresponding hybrid mismatch legislation
• Issue: Clarity of tax regimes affected by rules
• Issue: Split ownership
• Issue: Determination-making power to correct errors
• Issue: Application of rules to consolidated groups
• Issue: Legislative deferrals and consultation
• Issue: Branch mismatch rules consultation and application
• Issue: De minimis threshold/safe harbour
• Issue: Practical implications of rule with foreign country laws
• Issue: Drafting issues

Hybrid Financial instrument rule

• Issue: Franking credits and partial deduction denial
• Issue: Scope of rule
• Issue: Full grandparenting
• Issue: Payment tax status in payee country
• Issue: Scope of ordinary income counterfactual test
• Issue: Level of association required for rule to take effect
• Issue: Need for defensive rule
• Issue: Regulatory capital for insurers
• Issue: Taxation in jurisdiction other than payee jurisdiction
• Issue: Definition of ordinary income
• Issue: Effect of delayed recognition

Disregarded hybrid payments rule and deemed branch payments

• Issue: Third party expense margin
• Issue: Payments taxed in New Zealand
• Issue: No definition of a branch

Reverse hybrid rule and branch payee mismatch rule

• Issue: Foreign trusts

Deductible hybrid and branch payments rule

• Issue: Active income exemption for branches
• Issue: Actual offset before deduction denial
• Issue: US dual consolidated loss rules

Dual resident payer rule

• Issue: Rule should not be enacted
• Issue: Priority of rules
• Issue: Stranded losses

Imported mismatch rule

• Issue: Incorporation of OECD guidance into domestic law
• Issue: Opposition to imported mismatch rule
• Issue: Timing mismatches
• Issue: Guidance on imported mismatch rule
• Issue: Redraft of imported mismatch rule

Surplus assessable income

• Issue: Application to each mismatch situation
• Issue: Definition of surplus assessable income needs to be revisited
• Issue: Continuity
• Issue: Offset of carried forward mismatch amounts
• Issue: Unrecognised amounts
• Issue: Grouping of surplus assessable income amounts
• Issue: Broader stranded losses provision
• Issue: Foreign tax credits and surplus assessable income
• Issue: Additional limit on ability to carry forward mismatch amounts

Election Rules

• Issue: Support for rules
• Issue: Broadening the opaque election to non-wholly owned entities
• Issue: Opaque election for new entities
• Issue: Further consideration needed on election regimes
• Issue: Opaque election should not be permanently binding

Interaction with other tax regimes

• Issue: Removal of NRWT liability when deduction denied permanently
• Issue: NRWT overreach
• Issue: Support for consequential thin capitalisation changes
• Issue: Banking thin capitalisation rules
• Issue: FIF rule changes
• Issue: Share lending provision difficult to understand

Other definitions

• Issue: Structured arrangement facts and circumstances and exclusion
• Issue: Definition of a control group
• Issue: Trumping existing legislation

NRWT on hybrid arrangements – treaty issue

• Issue: Amendment should not override New Zealand’s DTAs
• Issue: Lack of certainty and consolation
• Issue: Clarify drafting of RF 11C(2)
• Issue: Hybrids treaty issue and tax havens

Other policy matters

Inland Revenue’s administrative powers to investigate large multinationals

Overview

• Issue: Inland Revenue’s ability to request information held by offshore group members
• Issue: Limitations and safeguards on Inland Revenue’s ability to request information held by offshore group members
• Issue: Limitations on Inland Revenue’s ability to impose the consequences in section 21BA when a multinational does not provide the requested information
• Issue: The scope of section 21BA should be narrowed
• Issue: Evidence exclusion rule when the requested information has not been provided
• Issue: Deadlines for responding to a request for information under new section 21BA
• Issue: Criminal penalties for not providing information requested about an offshore group member
• Issue: Civil penalties for not providing information requested about an offshore group member
• Issue: Civil penalty should be imposed by a Court, rather than Inland Revenue
• Issue: Collecting any unpaid tax owed by large multinational group from a New Zealand member of that group
• Issue: Scope of proposed section HD 30 should be clarified

Life reinsurance

• Issue: Unilateral change to DTAs
• Issue: Grandparenting
• Issue: Publish detailed commentary on each DTA
• Issue: Lack of knowledge
• Issue: Drafting

Miscellaneous issues

• Issue: The cumulative effect of and interaction of changes needs to be considered more
• Issue: Proposals do not strike the right balance between compliance costs for businesses and Inland Revenue
• Issue: Engagement with the public before a Bill is introduced to Parliament
• Issue: Start-ups should have a chance
• Issue: Paying a fair share of tax
• Issue: Human Rights should be considered
• Issue: The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) should be ratified
• Issue: General determination making power
• Issue: Tax avoidance should be fraud and criminal
• Issue: Need a comprehensive statutory framework for combating tax avoidance
• Issue: The provision of advertising services and platforms should be tax neutral
• Issue: Transparency
• Issue: End Tax Havens: New Zealand to support Pacific Island Nations to establish alternative sources of revenue and implement BEPS
• Issue: New Zealand to actively support the creation of a new global tax body
• Issue: Remove tax on wages, salary, and superannuation benefits
• Issue: No interest payments to a related party should be deductible regardless of the rate
• Issue: Henry George “one tax solution”
• Issue: Bill will change how businesses operate in New Zealand