New Zealand Considers Toned-Down Tax on Shifted Profits

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By Alex M. Parker

New Zealand appears poised to diverge from Australia and stick closer to OECD guidelines in addressing profit shifted through offshore arrangements.

Officials with the Inland Revenue Department said they expect the government to release a detailed plan on strengthening the country’s transfer pricing and permanent establishment rules by late February.

In December, a joint committee between the country’s revenue and finance departments issued a paper that recommended pursuing a plan melding anti-tax-avoidance recommendations from the Organization for Economic Cooperation and Development with the “diverted profits tax” that its larger neighbor unveiled in its November 2016 budget.

A diverted profits tax, which was also enacted by the United Kingdom, targets excess profit deemed to have been artificially diverted from the jurisdiction. It is seen as a more drastic step to address tax avoidance than what the OECD has recommended through its project to combat tax base erosion and profit shifting. The BEPS project released new guidance on how to tighten transfer pricing rules on cross-border income allocation as well as rules outlining when a permanent establishment—a foreign country’s taxable presence within a jurisdiction—is triggered.

Effect on Investment

The December paper didn’t rule out a diverted profits tax, but cautioned that it could have a negative effect on investment into New Zealand. The tax would “counter non-residents who try to avoid having a taxable presence in New Zealand,” but would also mean implementing an entirely new tax, separate from the country’s current corporate income tax.

“It could impact foreign investors’ perceptions of the predictability and fairness of New Zealand’s tax system for foreign investment,” the paper stated. “As a separate tax from our general income tax, it may produce unintended adverse consequences for taxpayers—especially with regard to normal grouping of tax attributes.”

A diverted profits tax would “chip away at the consistency, neutrality and relative simplicity of our tax system from a global perspective,” the government said. “The more we get into imposing arbitrary taxes the greater the risk of other countries doing the same to our exporters.”

The paper instead recommended combining “certain features” of the diverted profits tax with BEPS recommendations—although it didn’t spell out which aspects of the diverted profits tax should be enacted. The BEPS recommendations for tightening the rules on when a PE can be declared relate mostly to language in double-tax treaties, although there is an analogous provision in New Zealand domestic law relating to fixed establishment.

Rules Likely to Follow OECD

John Cantin, a partner at KPMG in Wellington, New Zealand, said the paper is the latest indication that New Zealand is likely to pass rules following the OECD guidelines rather than implement a diverted profits tax—despite “political pressure” to follow Australia and crack down on perceived tax shifting.

The changes in law are likely to occur after parliamentary elections in 2017, which must be held by November, Cantin added.

“I think the New Zealand process in terms of tax policy is pretty well-established,” Cantin said. “It’s unlikely that in the future, New Zealand won’t follow the OECD.”

In September the New Zealand Inland Revenue Department issued a discussion draft recommending that the country adopt new OECD recommendations on hybrid mismatch arrangements, or when corporate groups exploit variations in tax laws to avoid full taxation. The BEPS project resulted in model legislation that the OECD included as an option, rather than part of the project’s “minimum standards.”

To contact the reporter on this story: Alex M. Parker in Washington at aparker@bna.com

To contact the editor responsible for this story: Molly Moses at mmoses@bna.com

For More Information

The government's December paper is at http://src.bna.com/lec.

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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