With the new BEPS legislation being released, it definitely seems that there will be no escaping tax by multinationals.
Inland Revenue recently released their draft special reports on the new Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018. The BEPS Act was finalised in July 2017 and looks to bring New Zealand legislation in line with the OECD transfer pricing guidelines which went through a significant update in 2017. The legislation is some of the most complex that we have seen in some time, and it was introduced very quickly.
Whilst it is not unusual that the Inland Revenue releases special reports on the treatment of certain tax matters, what is interesting is that this report is a draft that is open for public feedback. This is a big positive, indicating that Inland Revenue understands that taxpayers and advisors need clarity to effectively apply these rules.
There are a few points to draw out from this draft guidance, namely in relation to the special report on Transfer Pricing and the report on Permanent Establishments.
The Transfer Pricing report provides guidance the application of the new transfer pricing rules, including what are considered arm’s length conditions and Inland Revenue’s new ability to set aside or replace commercially irrational arrangements.
Guidance on transfer pricing documentation is also provided, but this area could use some further work. Specifically, taxpayers are required to have adequate documentation but there is no explicit legislation or guidance as to how to prepare this. Rather taxpayers are referred to the OECD transfer pricing guidelines and are advised to exercise their own judgement to meet this criteria. Leaving this requirement open to interpretation is problematic, especially with the burden of proof now always remaining with the taxpayer (as is similar to other large OECD countries) and the potentially significant shortfall penalties for preparing inadequate documentation.
It seems that Inland Revenue are trying to walk a line between adopting the OECD documentation standard and maintaining a pragmatic approach to transfer pricing documentation where the risks are not high. Unfortunately the result makes it challenging for taxpayers to know when they have done enough from a transfer pricing perspective.
The new PE anti-avoidance rules are a complex piece of legislation, designed to address specific instances of potential tax avoidance. Without going into too much detail, this new section is attempting to address the ability of some multinationals to structure their affairs so they do not have a taxable presence in New Zealand, but still conduct significant activity in the country.
The provision of the flowchart for the application of the rule and a comprehensive list of potential scenarios, is extremely helpful, and will go a long way to guide and assist taxpayers.
However, by failing to adopt the current Authorised OECD Approach (AOA), and opting to stick to the older (albeit modified) version of Article 7, multinationals may find complying with the new transfer pricing rules challenging and leave them open to double tax (if foreign jurisdictions follow the current AOA while New Zealand follows the old approach).
The new PE rules acknowledge that some structures are “commercially required” due to the inherent nature of the business. Despite this, the BEPS Act and guidance indicates that taxpayers still need to prove any purpose of tax avoidance is merely incidental. Whilst the rationale for doing this is understandable, it increases compliance costs for taxpayers, which may be disproportionate to their New Zealand activities.
Another interesting point is the contrast between New Zealand’s new PE rules and those in Article 12 of the OECD transfer pricing guidelines. Article 12 of the guidelines provides a very specific definition of when an enterprise is considered to have a PE in a particular tax jurisdiction. New Zealand’s new BEPS Act and draft guidance however provide their own set of criteria to determine when deemed PE exists where the new article 12 does not apply.
This is well and good, if it wasn’t for the fact that the new deemed PE rules are broader in scope than article 12. This creates an issue for taxpayers, as there is a likelihood that New Zealand will consider arrangements to result in a ‘deemed’ PE, when this would not be the case under the OECD model.
The BEPS Act and the draft guidance can have a significant impact on taxpayers (foreign and domestic) that just want to do the right thing. The Act has done a great job of codifying the 2017 OECD guidelines, attempts to addresses some real, and arguably growing, issues and brings New Zealand (almost) up to mark with the wider international tax community.
As it stands, and given Inland Revenue’s request for feedback from the public, it would not be surprising to see additions or even amendments to the guidance. For this to happen, taxpayers and advisors need to engage with Inland Revenue and put forward their submissions and comments.
Send your comments in to Inland Revenue. Submission close on 30 September 2018.