John Cantin and Darshana Elwela explore New Zealand's new proposals for addressing base erosion and profit shifting.
The New Zealand (NZ) Government considers that its tax system is robust. It has a good framework with continuous improvements. The focus is “repair and strengthening”, rather than fundamental reform.
However, the Base Erosion and Profit Shifting (BEPS) project has raised perceptions of unfairness. This drives the need to do something. The aim of the latest package of proposals is a “fair tax” system - those with economic activity in NZ should pay “their fair share”.
The measures, given the BEPS action points and the political context, have a certain inevitability. It is the “tag along” changes, with potentially unexpected effects, which are of particular interest.
The proposed deemed Permanent Establishment (PE) rule (modelled on Australia’s Multinational Anti-Avoidance Law (MAAL)) is an expected headline. It brings forward the Multi-lateral Instrument (MLI) changes to NZ’s Double Tax Agreements (DTAs) with a technical focus on how the proposal will be made to work. (Australia and others experience is that it isn’t intended to work but to change behaviour.) However, it is the accompanying domestic PE law changes and extensions to the source rules which may unexpectedly widen the New Zealand tax net. How much wider will depend on existing structures.
The NZ interest deductibility headline – the welcome sidelining, for now at least, of the Organisation for Economic Co-operation and Development (OECD) earnings before interest, taxes, depreciation and amortisation (EBITDA) recommendation – is offset by the need to consider interest rate caps. In a world first, the NZ Government is proposing to cap interest rates on related party loans based on the credit rating the parent would be able to borrow at. Other proposals will require certain non-debt liabilities to be excluded from NZ thin capitalisation “asset” calculations. This may result in more volatile “net” asset figures.
Those areas will understandably get the most focus, as business determines the consequences and appropriate adjustments.
However, of potentially widest impact, is the MLI which NZ intends to sign this year. The Government has indicated that it will adopt most of the MLI provisions (with minor modifications and reservations). However, it is not yet clear what other countries will accept or whether their DTAs with New Zealand will be “Covered Agreements”. Predicting that future is more difficult and will require constant review.
A “fair” tax system is like “motherhood and apple pie”. It is difficult to argue against. However, the devil in the detail – impracticalities and overreach – should be the focus for assessing the impact of the NZ proposals.