In June 2018, reforms intended to address BEPS became law in New Zealand with the enactment of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (BEPS Act). Given the complexity of some of the reforms, the New Zealand Inland Revenue has taken the unusual step of issuing, and seeking feedback on, draft guidance regarding the application of the new rules.
New Zealand BEPS-related reforms
On August 3 2017, the New Zealand government announced its final policy decisions on proposals to address BEPS (see 'New Zealand's BEPS proposals go beyond OECD's recommendations' in the August 2017 edition of International Tax Review for our summary of the policy decisions.) The BEPS Act includes measures that:
Address hybrid mismatch arrangements;
Address arrangements that avoid creating a permanent establishment;
Further limit related-party interest deductions; and
Further strengthen the transfer pricing rules and Inland Revenue's enforcement powers more generally.
The BEPS Act reforms have been controversial in many respects, with concerns raised during the legislative process that the reforms go beyond what is necessary to implement the OECD's BEPS recommendations, and in certain respects depart from international norms, including provisions of New Zealand's double taxation agreements.
The reform process for the BEPS Act has also been controversial. This has been partly due to the ambitious legislative timetable which meant there were only a few days between enactment and certain measures taking effect on July 1 2018.
Inland Revenue's draft guidance regarding the BEPS Act
The Inland Revenue typically publishes guidance after the enactment of tax legislation. For the BEPS Act, the Inland Revenue has taken the unusual step of publishing draft guidance and seeking public feedback on that draft guidance.
One example of an explanation provided in the draft guidance concerns a rule which requires certain borrowers to assume (for transfer pricing purposes) the credit rating of the company in its worldwide group with the most long-term senior unsecured debt (i.e. not necessarily the parent). The draft guidance acknowledges that long-term senior unsecured debt is not defined in the BEPS Act and suggests that in many circumstances a borrower "will be able to consider non-current liabilities on each [group] member's balance sheet". Such an interpretation would be a pragmatic application of the rule, especially for a borrower that is part of a large worldwide group. The guidance, however, goes on to caution that such an approach "may not be sufficient to differentiate between long-term senior unsecured debt and other instruments as subordinated or secured debt…".
The above example illustrates the practical issues taxpayers face in complying with the BEPS Act. Because the new legislative provisions are so detailed and prescriptive, the Inland Revenue's guidance will necessarily be of limited value in some cases. Submissions on the draft guidance closed on September 28 2018.