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 Ignore
• 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

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Issue: Support for the intent of the Bill

Submission

(ANZ, ASB, BNZ, Bryce Jensen, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, Human Rights Commission, KPMG, New Zealand Bankers’ Association, New Zealand Council of Trade Unions, New Zealand Law Society, Powerco, Oxfam, Public Health Association of New Zealand, Westpac)

Most submitters recognised that base erosion and profit shifting (BEPS) is a problem and most expressed at least some support for the Government’s approach and intent on BEPS.

In particular, one submitter urged the Finance and Expenditure committee to not weaken the Bill in light of critical submissions. (Public Health Association of New Zealand)

Support was also expressed for the consultative approach taken in developing the proposals. (ANZ, Chartered Accountants Australia and New Zealand, EY, KPMG, New Zealand Bankers’ Association)

A number of submitters who noted their support for the rationale underlying the proposals in the Bill caveated that support with specific concerns, which are set out below.

Comment

While officials understand that submitters have concerns with various aspects of the Bill, it is good that there seems to be general acceptance of BEPS as an issue and some support for the Government’s proposals to address international tax avoidance. This report notes the specific concerns raised by submitters as separate issues.

Recommendation

That the support be noted.

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Issue: Deferred application of proposed rules

Submission

(ANZ, ASB, Chapman Tripp, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, KPMG, PwC, New Zealand Bankers’ Association)

Some submitters have proposed that the application of the Bill (or parts of it) should be deferred or that a transitional period should be included in the measures. Submitters generally support deferral for various reasons, in particular with regard to a perceived rushed timeframe and minimal interval between enactment and coming into effect.

Submissions on this point were as follows:

• The application date of the Bill should be deferred by twelve months. (ASB, New Zealand Bankers’ Association)
• The interest limitation proposals should be delayed by 12 months to income years beginning on or after 1 July 2019. (ANZ, New Zealand Bankers’ Association)
• New Zealand should delay the application date of the hybrid mismatch proposals by at least a year. (Chapman Tripp)
• New Zealand should wait to see the effect of 2017 US tax reform before proceeding with BEPS and hybrid proposals. (Chapman Tripp)
• The application date should be amended to income years beginning on or after 1 April 2019. (Chartered Accountants Australia and New Zealand)
• The structured imported mismatch part of the hybrid and branch mismatch rules should apply from 1 January 2020, consistent with the unstructured imported mismatch rule. (Chartered Accountants Australia and New Zealand, EY)
• The application date for certain aspects of the Bill (notably interest limitation rules and transfer pricing changes) need to be deferred to allow taxpayers the opportunity to understand the final form of the rules and to restructure, as necessary, prior to the rules taking effect. Those rules should apply to income years beginning on or after a date six months after the Bill receives Royal Assent. Without extra time after enactment, businesses with June balance dates will be applying rules very soon after the rules are made certain which is not optimal given the complexity of the rules. (Corporate Taxpayers Group)
• The application date should be (income years on or after) 1 January 2020 or for 2019/20 tax years for alignment with the expected implementation of Australian hybrid mismatch rules. (KPMG)
• The application date should be deferred such that the rules apply no earlier than the first income year after 31 March 2019. In addition, there should be a further two years until the imported mismatch rule (which is part of the hybrid mismatch rules) applies. The proposed application date will not allow taxpayers time to properly understand the rules or restructure if they need to. (PwC)
• The proposed application dates contained in the Bill do not recognise that restructures, particularly in the context of large multinationals, generally take a reasonable amount of time and resources to implement. The Bill should contain provisions for transitional periods to be implemented alongside the proposed new rules, or the proposed application dates should be delayed to give multinationals an opportunity to restructure (New Zealand Law Society)
• In relation to the permanent establishment rules, the rules will apply to non-residents with no current New Zealand tax obligations. The rules will apply from 1 April 2019 as those non-residents will not have an agreed balance date for New Zealand tax purposes. (KPMG)

Comment

The proposals in the Bill are the result of a measured consultation process which began over a year ago in accordance with the Generic Tax Policy Process. Discussion documents were used to consult on the proposals in September 2016 and March 2017. The major policy decisions were announced and underlying policy reports and Cabinet papers were published in August 2017. Officials also had some targeted consultation on the detailed design of key items with submitters in September-October 2017.

The proposals are to apply from 1 July 2018 in order to balance the need to provide certainty to taxpayers and to efficiently respond to the fairness and fiscal concerns associated with BEPS.

Officials consider that the proposals have been well heralded and businesses concerned about the application of the Bill’s new rules have been given sufficient time to undertake any restructuring which they may feel appropriate. Any additional tax imposed by the hybrid rules should reflect a rational and sensible taxation outcome, so taxpayers who for some reason have not restructured to avoid their application are unlikely to be prejudiced.

Recommendation

That the submission be declined.

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Clauses 34 to 37, 44, 46 and 47

Issue: Grandparenting of existing advance pricing agreements

Submissions

(Chapman Tripp, Corporate Taxpayers Group, EY, New Zealand Law Society, PwC)

Support the Bill’s proposed grandparenting of Advance Pricing Agreements. (Corporate Taxpayers Group)

The grandparenting for existing Advance Pricing Agreements should be expanded to Clause 35, to extend grandparenting protection for existing APAs to all of the transfer pricing changes, including the restricted transfer pricing rule; and Clause 34, to extend grandparenting protection for existing APAs to the PE anti-avoidance. (Chapman Tripp)

Clause 36(6) provides that an arrangement complying with an advance pricing agreement (APA) issued before 1 July 2018 is grandparented from the proposed changes to sections GC 6 to GC 14. Clause 37(2) should clarify that sections GC 15 to GC 18 do not apply to an arrangement complying with an APA issued before 1 July 2018. (EY, PwC)

A number of Advance Pricing Agreements (APAs) would have been issued by Inland Revenue to taxpayers with structures to which the PE anti-avoidance rule could potentially apply. Given APAs only rule on the transfer pricing element of an arrangement, it is not clear how the proposed PE anti-avoidance rules would apply to taxpayers who have existing APAs in place. (New Zealand Law Society)

APAs should be grandfathered from the PE anti-avoidance rule. This was previously recommended by officials and agreed to by ministers. In particular, if a taxpayer has obtained an APA in relation to whether the amount payable by a non-resident to its New Zealand subsidiary is on arm’s length terms, then section GB 54 should not be able to apply to deem the non-resident to have a PE under the arrangement. This is because the non-resident has already obtained a ruling on the appropriate amount of tax payable in New Zealand under the existing legislation. In addition, the amount of tax payable as a result of the application of the transfer pricing rules pursuant to the APA should be the same as if the non-resident had a PE in New Zealand. (Chapman Tripp)

If the PE source rule and new section YD 5B are to proceed with the potential to apply to a non-resident’s sales income from sales to non-NZ customers, existing binding rulings on apportionment under section YD 5 should be grand parented for the period of the ruling to protect taxpayer certainty. (Chapman Tripp)

Comment

Advance Pricing Agreements (APAs) are binding rulings between the Commissioner and taxpayers to agree on how a transaction will be priced for the purposes of the transfer pricing rules.[1] They do not have any effect for other transactions or tax positions taken by that taxpayer.

It was intended that all of the changes to the transfer pricing rules (including the new restricted transfer pricing rules for related party loans) would be grandparented so they do not apply to transactions subject to an APA issued before 1 July 2018. However, the current grandparenting provision in clause 36(6) only applies to the proposed changes to clause 36.

Officials therefore recommend extending the grandparenting of APAs so it applies to all the transfer pricing changes in clauses 35, 36 and 37 of the Bill.

Previous reports did include a standalone recommendation that APAs be grandparented from the BEPS proposals in the Bill. This was agreed to by Ministers. However, APAs only cover the application of the transfer pricing rules to transactions between related parties and the allocation of income between New Zealand and overseas sources under section YD 5. APAs do not rule on whether a PE exists. Therefore grandfathering the APA from the proposals does not affect the application of proposed section GB 54.

In addition, APAs and other rulings only provide taxpayers with certainty in respect of the particular tax laws to which apply. Accordingly, a taxpayer that acquires an APA on transfer pricing has no certainty as to whether they have a PE. In fact the APA would not even indicate Inland Revenue’s view on the issue. Officials also disagree that the application of the transfer pricing rules on their own would produce the appropriate amount of tax where a PE exists or is being avoided (this is for the reasons stated in response to Chapman Tripp’s submission on the issue).

Accordingly, officials consider that it is not appropriate to grandfather APAs from the PE anti-avoidance rule in clause 34.

Apportionment under section YD 5 is dealt with under APAs. The proposed changes to the source rules in the Bill could upset the application of an APA that ruled on the amount of income attributable to New Zealand under section YD 5. For this reason officials also recommend that the APAs which ruled on the amount of income attributable to New Zealand under section YD 5 be grandfathered from the proposed new source rules in clauses 44, 46 and 47 of the Bill. This should be for the remaining duration of the APA.

Recommendation

Accept those submissions that propose extending grandparenting provisions for Advance Pricing Agreements issued prior to 1 July 2018 to:

• all of the changes to the transfer pricing rules, including the restricted transfer pricing rules in clauses 35, 36 and 37;
• the changes to the source rules in clauses 44, 46 and 47 of the Bill.

The submissions for extending grandparenting to the PE anti-avoidance rule in clause 34 be declined.

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Clause 36

Issue: Drafting of the provision to Grandparent of existing advance pricing agreements

The grandparenting of Advance Pricing Agreements should be codified in its own section. (Corporate Taxpayers Group)

The drafting of the grandparenting provision should adopt language used in Part 5A of the Tax Administration Act to specify when a private ruling remains binding, rather than “complies with”. (Chapman Tripp)

Comment

Grandparenting provisions are generally drafted as part of the Bill’s application date clauses. Officials do not consider it is necessary to change this approach and have a standalone section for the grandparenting of APAs.

Officials consider that the language used in the current drafting is appropriate and achieves the policy intention of applying to the set of advance pricing agreements issued before 1 July 2018, which remain binding on the Commissioner.

Recommendation

That the submissions be declined.

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Issue: Quality of the Bill

Submission

(Corporate Taxpayers Group, PwC)

Submitters raised issues with the quality of the drafting of the Bill, noting that it contained several errors. They also noted that in some cases the Commentary to the Bill was inconsistent with the Bill itself.

The bill should be redrafted. (PwC)

Comment

By way of background, although not mandatory to provide, a Bill Commentary has typically been made available by officials whenever tax legislation has been introduced to Parliament. They are intended to provide useful background to what can often be complex proposed legislation. They are not a legal document and are intended solely as an aid to comprehension.

Over recent years additional steps have been added to the quality control processes in place around the compilation of proposed legislation and associated Bill commentaries. Despite this, and while every endeavour is made to ensure that all legislation and associated commentaries are technically correct in every way at publication, some errors (and variances between the Bill and the Commentary) can occur when a Bill is introduced.

The BEPS policy issues that form the basis of this Bill are very complex in nature, and this is reflected in complex legislation to deal with the issues involved. Given this complexity as much time as was possible in the circumstances prior to the Bill’s introduction was devoted to consulting with stakeholders on developing the policies and proposed legislation, and this consultation on the technical detail has continued whilst the Bill has been at select committee. Officials have greatly appreciated all the feedback received on this, as it ultimately helps improve the quality and the resulting legislation.

Where appropriate, any errors (or discrepancies between the proposed legislation and issues referenced in the Commentary) identified by submitters and/or officials have been clarified under the relevant items in this officials’ report.

Recommendation

That the submitters’ comments be noted, and individual issues addressed where appropriate.

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Issue: Need for guidance

Submission

(ANZ, Deloitte, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, New Zealand Bankers’ Association, PwC)

Due to the complexity of the Bill and its effects on various existing tax regimes, thorough guidance on application of any new rules should be provided by Inland Revenue on a timely basis to assist taxpayers and advisors with compliance. Some submitters asked for guidance on specific parts of the Bill, and others asked for more general guidance to be issued. A number of submitters requested an increased number of examples from the amount that were in the Commentary on the Bill.

One submitter suggested that the guidance, when issued, should be subject to a public consultation process.

Comment

Officials agree that guidance will be useful to taxpayers who are affected by these rules, and will provide guidance and examples in a Tax Information Bulletin after the rules are enacted.

Recommendation

That the submission be accepted.

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Issue: The proposals go too far

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, PwC)

Submitters commented that some of the proposals went further than they felt was necessary, and suggested there were several examples of overreach.

The proposals apply to (and will impose compliance costs on) a large population of businesses, the majority of which are compliant and acting within the spirit of the tax rules (and complying with Inland Revenue’s requests for information, such as the international questionnaire). It would be more appropriate to better target rules at those taxpayers who are non-compliant, and to better use the existing legislative tools (such as section BG 1 tax avoidance). (Corporate Taxpayers Group)

The Bill contains substantial reforms which will put New Zealand in the forefront of worldwide approaches to BEPS implementation. We are concerned that several measures, including the restricted transfer pricing approach and the scope of the hybrid and branch mismatch rules, appeared likely to overreach in the New Zealand context. (EY)

A number of areas of the proposed new tax regimes are significant overreaches by New Zealand and will potentially be of significant detriment to ordinary commercial arrangements. (PwC)

The proposals are out of proportion relative to the problem being addressed. (Chartered Accountants Australia and New Zealand)

Conversely, one submitter noted that they were concerned the proposed legislation was not comprehensive or ambitious enough to effectively tackle the problem of tax avoidance by multinational companies. (Oxfam)

Comment

Officials consider that the proposed measures in the Bill provide a comprehensive response to BEPS strategies that can be used to avoid paying tax. These are intentionally broad in their application. Officials acknowledge that some of the proposals will increase compliance costs for some taxpayers; however, officials think this is necessary to address the problems created by BEPS strategies.

Officials recommend changes to some proposals which aim to address submitters’ concerns that some proposals have too broad a reach. These recommended changes are outlined later in this report in relation to specific submissions.

Recommendation

That the submissions be noted, and individual issues addressed where appropriate.

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Issue: The proposals put New Zealand out of step with other countries

Submission

(Chartered Accountants Australia and New Zealand, KPMG, Corporate Taxpayers Group, ANZ, New Zealand Bankers’ Association, New Zealand Council of Trade Unions)

If this package of reforms is enacted, New Zealand will be going further than most other OECD countries. Other countries have not adopted the measures proposed by the OECD in full because they have determined that it is not in their national interest to do so. It is not in New Zealand’s best interests to be an outlier from international norms in any international tax regime. (Chartered Accountants Australia and New Zealand)

Some proposals contained in this Bill are outside of international norms and will create double taxation. (Corporate Taxpayers Group)

It is important that New Zealand does not rush into new rules before other jurisdictions or take unilateral action which is out of step with either the OECD or the consensus of the international community. It is also important that any measures remain proportional to the scale of the problem. (Corporate Taxpayers Group)

Any measures to address concerns about BEPS should be multi-lateral to ensure consistent and certain application of tax rules across tax jurisdictions. (New Zealand Bankers’ Association)

One submitter raised a further concern that the unilateral measures in the Bill would have a detrimental effect on New Zealand’s international reputation, and would potentially have significant ramifications for future tax treaty negotiations and international agreements. (Corporate Taxpayers Group)

Implementation of the recommendations on a unilateral basis may disadvantage New Zealand. To the extent that the BEPS recommendations produce a fairer tax system, they are best implemented on a consensus basis. (KPMG)

Conversely one submitter noted that while BEPS would best be addressed by international cooperation, it is important that New Zealand acts promptly to take advantage of such agreement both to protect revenue and to support other countries acting or considering acting to do the same. They expressed that they would not like to see New Zealand lagging in these important matters. Some matters will not find international agreement or will take many years to find agreement. That should not stop New Zealand from taking what action it can. (New Zealand Council of Trade Unions)

Comment

Officials have closely monitored the OECD/G20 work to address BEPS and have followed the multilateral consensus where appropriate. However, parts of this Bill are unique or tailored to the New Zealand context, including existing tax laws and frameworks.

Recommendation

That the submissions, aside from the supporting submission, be declined.

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Issue: Cost of capital and wider economic impact

Submission

(ANZ, Chapman Tripp, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, PwC, New Zealand Council of Trade Unions)

The proposed BEPS measures will increase the effective tax rate on inbound investment which is undesirable due to the country’s position as a capital importer.

The rules in the Bill should be as consistent as possible with other jurisdictions (particularly Australia) due to the importance of foreign capital to the New Zealand economy. (ANZ)

Investors from countries such as China and the United States of America will be sensitive to proposals that tax foreign direct investment at a higher rate. (Chapman Tripp)

New Zealand’s economy relies on foreign investment to grow. There has been no actual analysis of the effect of the proposals on cost of capital and the wider economy. (Chartered Accountants Australia and New Zealand) Such an analysis should be undertaken before the rules proceed. (Corporate Taxpayers Group)

The balance between discouraging tax avoidance and encouraging commercial behaviour has not been appropriately found. (Corporate Taxpayers Group)

The proposed rules will negatively impact on foreign direct investment and will discourage multinational corporations from using New Zealand as a hub for their commercial activities. (Corporate Taxpayers Group)

If these rules are enacted this will materially impact on the perception of New Zealand as an easy place to do business. (Deloitte)

Inbound investment will be at risk if the proposals proceed. (PwC)

Conversely, one submitter noted that they did not believe that New Zealand should be swayed by concerns or threats of disinvestment by multinational companies. They further state that if investors’ presence in New Zealand depends on tax avoidance then it is questionable what value they add to New Zealand and whether their character should be welcomed, let alone encouraged by weak tax laws. (New Zealand Council of Trade Unions)

Comment

Officials acknowledge that, in some limited cases, the cost of investing in New Zealand will be increased because of the BEPS proposals without any change in New Zealand tax revenues. This argument is dealt with in detail in the 2016 joint Treasury/IRD paper New Zealand’s taxation framework for inbound investment:[3]

There are more general arguments in favour of joining a multilateral effort to remove arbitrage possibilities (which are at the heart of many BEPS issues). When companies engage in BEPS, the result is that no tax is paid anywhere on a portion of income. This clearly leads to an inefficient allocation of investment internationally as cross-border investments are subsidised relative to domestic investments. Eliminating this misallocation would increase worldwide efficiency, leading to higher worldwide incomes. The best approach for New Zealand may be to co-operate with other countries in eliminating this worldwide inefficiency in the hope of gaining its share of this extra worldwide income.

Double non-taxation reduces company taxes worldwide. While there may be arguments that in certain circumstances the cost falls on other countries, it would be naïve to suggest that the cost never falls on New Zealand. Experience suggests that once taxation is eliminated in the residence country, source country taxation is placed at risk. For example, the BEPS-induced decline in US taxation of US residents’ foreign-sourced income is often cited as a major reason for the increased focus on reducing source-country taxation by US multinationals. In that case, a general move to eliminate BEPS possibilities would make tax collections in all countries, including New Zealand, more secure and less vulnerable to unexpected tax planning.

Officials therefore consider that the proposed measures are in the best interests of New Zealand’s economy.

Recommendation

That the submission be declined.

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Issue: The package of reforms lacks coherence

Submission

(Chartered Accountants Australia and New Zealand)

The submitter is of the view that the package of BEPS reforms in the Bill lacks coherence. They note that each major part appears to have been developed in isolation rather than as part of an overall package.

Comment

Officials agree that the measures in the Bill can be viewed as separate measures, however when taken as a whole address the various BEPS strategies that the Government is concerned with. Officials would refer to the diagram on page 4 as an indication of how the proposed measures fit together.

Recommendation

That the submission be noted.

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Issue: Consultation on draft legislation

Submission

(Corporate Taxpayers Group)

The Group had the opportunity to provide comments on aspects of the Bill in draft form. We found this process extremely valuable and welcome the opportunity to work further with Officials on these proposals. We believe that Officials would agree that this led to the positive refinement of aspects of the legislative drafting. The difficulty is that not enough time was afforded to this process. The Group was only able to review and comment on a limited number of aspects of the Bill and the consultation time period was constrained. There was not time to work through updated iterations of the Bill and in the Group’s view this has meant that the overall quality of the Bill is not as high as it would have been if more time had been afforded to this process.

Comment

The submitter has requested that more draft legislation provisions be made available for consultation, and more time be allowed to review and comment on such material.

Officials agree that where appropriate to do so, and where time permits, consultation on certain draft legislative provisions should occur, in particular when dealing with complex or technical regulatory issues. Such targeted consultation is a very useful way to identify and resolve practical problems with complex legislation before being introduced to Parliament (as part of a wider policy consultation process).

To that end, it should be noted that the Attorney-General's Protocol for Release of Draft Government Legislation outside the Crown (CO (14) 4 refers) specifically allows for consultation on proposed wording for new or amended legislative provisions that a department prepares for consultation purposes as part of the policy development process.

Officials agree that, in respect of the consultation on this Bill that was able to the undertaken in the time permitted, this process did indeed lead to positive refinement to aspects of the legislative drafting.

Recommendation

That the submission and officials’ comment be noted.

[1] More information on APAs can be found at http://www.ird.govt.nz/transfer-pricing/practice/transfer-pricing-practice-apas.html

[2] More information on APAs can be found at http://www.ird.govt.nz/transfer-pricing/practice/transfer-pricing-practice-apas.html

[3] New Zealand’s taxation framework for inbound investment, Policy and Strategy, Inland Revenue and the Treasury, June 2016 at 21.