Following public consultation and in response to the COVID-19 pandemic and associated economic downturn, Parliament has just enacted changes to the Overseas Investment Act. Predominantly these changes are to streamline the OIO process and to protect the national interest for large or strategic assets acquired by overseas investors. The changes include taxation measures which, for the first time, have been introduced as part of the screening process when the OIO considers the capability of overseas investor applicants.

These changes address a perceived concern about "overseas persons acquiring sensitive New Zealand assets and not paying enough tax in New Zealand" which “could be viewed as contrary to the Overseas Investment Act's purpose, which recognises that it is a privilege for overseas persons to own or control such assets."

The tax factors to be considered include whether:

• The investor has become liable, in the preceding 10 years, to pay a penalty in respect of any of the following:
  • An “abusive tax position” under section 141D of the Tax Administration Act 1994 or an equivalent enactment in another jurisdiction. An “abusive tax position” is essentially a tax avoidance structure or transaction which does not meet the Parliamentary Contemplation test and when viewed objectively is one which is not “about as likely as not to be correct”.
  • “Evasion” or a similar act under section 141E of the Tax Administration Act 1994 or an equivalent enactment in another jurisdiction.
• The investor has outstanding unpaid tax of $NZD5 million or more (or equivalent foreign amount) due and payable in New Zealand or in another country. (A foreign amount is converted using the close of trading spot exchange rate on the date or dates on which the tax became due and payable).

These changes mean that a poor tax compliance history, in New Zealand or elsewhere, could potentially disqualify a potential overseas investor from receiving OIO approval.

Further changes to the Overseas Investment Act are currently in a Bill before Parliament.  These changes are not part of the screening process but increase the gathering of tax related financial information for overseas investments in New Zealand. When the relevant regulations (provided for in the Bill) are passed, this will require OIO applicants to submit certain information on the structure and tax treatment of proposed investments in significant business assets.  This information will be provided to Inland Revenue. This is to allow Inland Revenue to make risk assessments and to monitor the applicant’s compliance with New Zealand tax law through further audit activity.

The accompanying Treasury papers include this table of the information likely to be required:

Description of activities

1.	A short description of the investor's plan for the asset over the next three years (i.e. maintain status quo, expand or pivot), including any details of significant capital expenditure over that period.
2.	Tax residence of the investor entity, its holding company and ultimate holding company.

 

Capital structure for the investment

3.	Equity funding for the investment.
4.	Debt funding for the investment.
5.	Use of a hybrid instrument or hybrid entity for the investment.

Cross border related party transactions

6.	The nature and likely extent of any cross border related party transactions.
7.	Expected sales from New Zealand to non-New Zealand related parties.
8.	Expected breakdown as to the purchases of goods, services, royalties, interest/guarantee fees or any other charges to non-New Zealand related parties.

Other

9.	Any relevant double taxation agreements.
10	Whether an application to Inland Revenue will be made for a ruling or advance pricing agreement in respect of any aspect of the investment.

As you can see from the nature of the questions, it is a menu for further Inland Revenue enquiry. 

Well-reasoned investment committee papers, Board minutes, structuring advice, tax opinions, advanced pricing agreements and/or binding rulings should all be part of an investment case which progresses through OIO to produce the expected after-tax outcomes for investors. This will both reduce the likelihood of Inland Revenue challenge and improve the likelihood of a successful response to any inquiries.

The KPMG Deal Advisory - Tax team is here to help. Please reach out to Nisha Blanchard or Greg Knowles or your local KPMG advisor.