Changes to combat international tax structuring
Perceived tax avoidance by multinational companies has been attracting significant media and public attention. There is widespread concern that corporate structures and financing arrangements are being used to minimise worldwide tax bills.
A common example to illustrate the problem is where a business operates through companies in both New Zealand and Australia, and there is a loan between the two. By using certain type of debt instruments, interest payments can be structured as tax deductible in New Zealand, but non-assessable in Australia. This results in a mismatch between the two companies / countries and a net reduction in their total tax payable.
The Organisation for Economic Cooperation and Development (the ‘OECD’) has released a series of recommendations designed to close such tax loopholes and make tax more equitable across the globe.
The New Zealand Government intend to adopt the recommendations, however they recognise that our domestic policies will only be effective if the OECD recommendations are implemented worldwide. The Government is therefore closely following the changes adopted by the UK, EU and Australia before the new rules are passed into legislation here. However, the US and other Asian countries are currently reluctant to adopt the OECD recommendations, so it will be interesting to see how the international markets react.
The proposed changes to NZ’s tax rules are complex, however they aren’t just relevant for global giants. The rules will need to be understood by all New Zealand businesses that engage in cross-border transactions, even relatively small New Zealand businesses operating outside New Zealand.
Some of the key changes proposed to be implemented in New Zealand include:
Denial of a tax deduction for a payment to an overseas related entity, where the payment is not treated as taxable income in the foreign country.
Where foreign dividends received by a NZ company are normally non-taxable, they will become taxable if there has been a tax deduction for the dividend payment in the overseas country.
On a practical level, this is most likely to affect:
NZ businesses with loan or share arrangements with businesses in other countries;
NZ branches of foreign companies, or NZ companies with overseas branches;
NZ companies, partnerships and trusts with overseas owners or investors, or with foreign investments.
The proposed changes are not simple and have the potential to cause major headaches for New Zealand businesses looking to overcome the technical and practical difficulties of doing business on the international stage.