In December 2017, the New Zealand Government introduced the Taxation (Neutralising Base Erosion and Profit Shifting) Bill 2017 into Parliament to counter the base erosion and profit shifting (BEPS) practices of multinational companies employed to reduce or avoid tax in New Zealand. The Bill is being reviewed by the Finance and Expenditure Committee and most of the changes in the Bill are expected to commence from 1 July 2018.
This is New Zealand’s response to the “BEPS Action Plan” released by the OECD in October 2015. It primarily addresses BEPS action 2 (hybrid mismatches), 4 (interest deductions), 7 (permanent establishment) and 8-10 (transfer pricing).
In a nutshell, the Bill contains rules to combat BEPS practices by:
- preventing tax advantages from hybrid mismatch arrangements that exploit differences between countries’ tax rules
- limiting interest deductions for loans from related parties
- preventing artificial arrangements to avoid having a taxable presence (a permanent establishment) in New Zealand, and
- combating transfer pricing payments to shift profits into offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore.
Australia’s progress on BEPS
So where is Australia up to in the implementation of our BEPS Action Plan?
Hybrid mismatches (Action 2) – In November 2017, the Australian Government released draft legislation modelled on the OECD approach (albeit with some local adjustments) to neutralise the effects of hybrid mismatch arrangements. It adopts a universal rule that denies an exemption for non-portfolio distributions received by an Australian company where those distributions are deductible by the payer, and a second rule denying imputation benefits for shareholders where a distribution paid by an Australian company has been deducted by the payer in a foreign country. For further information see 2017 WTB 49  and 2017 WTB 50 .
Interest deductions (Action 4) – So far, it seems that Australia will retain its existing thin capitalisation rules (Div 820 of ITAA 1997) to ensure that multinationals don’t allocate an excessive amount of debt to their Australian operations. For instance, a debt to equity ratio of 1.5:1 (equivalent to 3/5) has applied since 2014 (when Australia last tightened its capitalisation rules). This means, that debt deductions are disallowed if the amount of debt to fund an Australian subsidiary exceeds the allowed maximum amount of debt determined by the ratio.
Permanent establishment (PE) (Action 7) – Amendments to Pt IVA have been enacted to combat multinationals using artificial schemes to avoid the attribution of profits to their PEs in Australia. Read more in 2015 WTB 40 -.
Australia has also signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “MLI”). The MLI will modify Australia’s DTAs to implement many of the BEPS Actions. A Bill to give these modifications the force in Australia is expected during 2018. See 2015 WTB 25  for more.
Sign in to Checkpoint to read Associate Tax Writer, Luis Vazquez’s analysis of the New Zealand BEPS Bill in Taxation Today, issue 114 (out in March). For more information about the latest BEPS best practices to inform your global tax strategy, visit our dedicated website today.