NEWS -- Changes to New Zealand's cross-border interest withholding taxes: Tough but fair

NEWS - Cross-border interest withholding taxes changes

The "May Bill" will bring into place rules to stop multinationals side-stepping withholding taxes and levies on interest paid on borrowings.

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Tuesday’s introduction of The Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill attracted little press in New Zealand and was clearly overshadowed by the Australian Budget with its headline grabbing “Google tax” proposals.

Nevertheless anyone who doubts the continued efforts of the New Zealand Government to level the tax playing field between foreign owned and New Zealand owned businesses need look no further than this Bill (which in tax circles is known as the “May Bill” rather than its official mouthful of a name).

The May Bill contains laws which, once enacted, will bring into place rules designed to stop multinationals side-stepping withholding taxes and levies that are imposed on interest paid on borrowings by their New Zealand operations. This generally involves a 10% non-resident withholding tax (“NRWT”) being imposed on interest paid by a New Zealand borrower to an offshore lender. Where the borrower and lender are not associated, they can instead opt into the “world famous in New Zealand” approved issuer levy (or “AIL”) regime – which is a unique piece of New Zealand tax law that allows a 2% levy to be paid by the borrower as an alternative to the higher withholding tax charge.

Inland Revenue tax policy officials have been concerned about perceived abuses of these rules for some time now and in the middle of last year signalled significant changes to New Zealand’s tax laws to counter them. It is fair to say that the changes, when first proposed, were not greeted with a chorus of approval, particularly by the financial services industry, who rightly argued that certain exemptions from NRWT and AIL for foreign branch structures have been a long understood and intended consequence of New Zealand’s tax laws and allow banks to access offshore funds without suffering high levels of withholding tax. The argument is that these structures mitigated withholding tax costs that would ultimately be passed on to New Zealand customers and ensured that New Zealand banks are placed to in similar position to their foreign peers, who generally have many ways of accessing funding without incurring high withholding tax costs.

The May Bill introduces a range of measures to address the abuses identified, by proposing the following:

  • Aligning the obligation to pay NRWT and AIL with the timing of interest deduction claims by the New Zealand borrower, to prevent the payment of NRWT or AIL being deferred until interest is actually paid through the use of instruments that generate local deductions but defer the physical payment of interest until some much later point in time (or even until maturity of the instrument).
    • Introducing rules to look through “back to back” lending arrangements, so that a third party cannot be inserted into a related party lending arrangement in an attempt to access the lower AIL charge on the basis that the lender to the New Zealand entity is an unrelated entity.
      • Extending the concept of a non-resident owning body (being a group of non-residents who act together in controlling a New Zealand entity) from the thin capitalization rules to the withholding tax rules. Where such a group exists and lends to the New Zealand entity, with levels of debt that are proportionate to their respective shareholdings, the interest they receive from New Zealand will be subject to NRWT rather than the 2% AIL charge.
        • Removal of the on-shore and off-shore branch exemptions, which allow funds to be borrowed without the imposition of NRWT or AIL through either (1) a New Zealand entity borrowing via a foreign branch that it has established to raise funds on its behalf, or (2) a New Zealand entity which borrows from a foreign lender, where that foreign lender has a branch in New Zealand (even where the funds are not actually lent by the New Zealand branch). There will however be a five year grandfathering of branch structures for arrangements involving borrowers who are part of a New Zealand banking group.
          • In a further concession to New Zealand banks, all borrowings by New Zealand banking groups will be able to access the 2% AIL charge, regardless of whether they are borrowing from related or unrelated parties. This concession recognises that when a New Zealand bank borrows from its offshore parent company, it is borrowing funds that its offshore parent company will have raised from unrelated parties, meaning it is therefore appropriate to impose that lower 2% charge, which is intended to apply to borrowings from unrelated foreign parties.

          These changes represent a significant tightening of New Zealand withholding tax laws on intercompany debt, which in the current global and local environment of there being little tolerance for so called multinational tax avoidance, is only to be expected. The laws may be regarded as tough by some who have been able to benefit from some of the practices described above for a number of years now, but in my view they are fair and help level the playing field between foreign owned and New Zealand owned businesses with respect to taxes on their funding costs.

          For more information, contact

          Bruce Bernacchi
          Partner - Tax
          +64 9 363 3288
          bbernacchi@kpmg.co.nz

          Alexandra James
          Marketing and Communications Manager
          +64 9 363 3634
          alexandrajames@kpmg.co.nz

          © 2017 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

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