Minister of Revenue Michael Woodhouse says the Government will issue proposals early in 2017 aimed at ensuring foreign-owned companies can't shift excessive profits out of New Zealand using debt.
Woodhouse made these comments in a speech to the Chartered Accountants Australia and New Zealand annual conference.
He said the Government was aware of some multinationals trying to structure their affairs so they don't have taxable presence in New Zealand, despite being involved in significant economic activity here. But engaging in disputes with multinationals can be a long and protracted affair, Woodhouse said, and not a good use of taxpayers' money.
"Instead we are considering measures that will make it harder for multinationals to avoid having a taxable presence in New Zealand if they are involved in significant economic activity here. We are also looking at measures to make it easier to assess and collect tax from multinationals that do not cooperate with Inland Revenue," Woodhouse said.
"We are also closely watching what Australia and the UK are doing in regards to Diverted Profits Tax [sometimes referred to as the Google tax]. Officials have provided some advice to the Government and we will look to say more on this in the near future."
Woodhouse noted that one of the simplest ways of shifting taxable profits from one jurisdiction to another is by loading a foreign-owned firm with excessive debt. He said New Zealand's thin capitalisation rules limit the amount of debt foreign-owned firms can have in New Zealand, and overall these rules are serving the country well.
"However, a small number of foreign-owned firms appear able to take excessively high interest deductions," Woodhouse said.
"For example, the interest rates on some related-party loans appear to be unreasonably high. We are therefore considering measures that would bolster our rules, to ensure that foreign-owned firms cannot shift excessive profits out of New Zealand using debt."
"I expect to release proposals on these matters early in the new year," Woodhouse added.
Woodhouse's full speech is below. And here's a timetable for planned tax consultation and events.
Hon Michael Woodhouse Minister of Revenue 17 November 2016
Speech Opening Address to the Chartered Accountants Australia and New Zealand annual conference
Thank you for inviting me to give the opening address today.
Your organisation plays an influential role on New Zealand’s tax policy settings through your input into the work programme and through your submissions to public consultation so I value the opportunity to come and speak to you all.
Today I would like to share with you some of the main points contained in the recently updated tax policy work programme.
The work programme has been agreed to by Cabinet as the Government’s tax focus to the end of 2017.
What I am going to discuss today is not a completely new work programme, but an update to take into account recent developments and to ensure that tax policy officials are working on the highest priority items for the remaining period of the programme to the end of 2017.
As always, this iteration of the policy work programme has not been developed in isolation.
Various items originated with the private sector.
I appreciate the input that CA ANZ has provided to Inland Revenue, including advice on the work programme on items of highest concern to you and those you represent.
While it is not possible to include all of the issues you have raised on the work programme, we are listening and some of those issues are planned to be addressed in the busy period ahead.
I appreciate the commitment that your organisation has demonstrated towards maintaining and improving New Zealand’s tax policies.
It is this commitment that has contributed to New Zealand having an effective and well regarded tax system.
However, I am aware that the number of different measures that are being consulted on as well as limited times to respond creates real pressures.
In the busy upcoming months I will be asking Inland Revenue officials to, as much as is reasonably possible, communicate and sequence consultation to spread this workload.
To help you plan, the tax policy website will show details of the work programme and will include a calendar of 2017 indicating general timings.
Of course sometimes it is simply not feasible to conduct full consultation.
For instance, it would not be possible to move quickly to close a recently identified loophole and, at the same time engage in wide consultation to address that loophole.
But the Government remains completely committed to GTPP because it is very important and strive as much as possible to maintain open dialogue for our mutual benefit.
Good consultation involves officials and the tax community being prepared to listen to each other.
It involves officials explaining reasons for possible changes and listening to concerns and suggestions for improvement.
At the end of the day, even the best consultation will not necessarily lead to agreement on everything.
It will however, expose reasons for disagreement and make sure that final decisions are well informed.
And GTPP is a vital part of developing good tax policy by allowing frank dialogue between government and the private sector.
That dialogue is essential in running our tax system which collects the revenue needed while minimising the effect on business.
In part, this is a function of the GTPP consultation process. But another key reason is our clear and coherent broad-base, low-rate tax settings.
New Zealand taxes a very broad definition of consumption under its GST and a very broad definition of income under its company and personal income taxes.
It helps in ensuring that people are not discouraged from making sensible decisions working longer or harder or about upskilling or taking on higher pay but more demanding jobs.
A broad base also helps the tax system to be as fair as possible and minimise the chance that the well advised can step around the tax system and obtain a tax break that is not intended. -
And keeping taxes broad, also allows tax rates to be kept as low as possible, promoting fairness, efficiency and economic growth.
It is important that we maintain our BBLR framework to minimise pressure for increasing tax rates or the introduction of new but inefficient taxes.
In recent times there have been some significant pieces of work in this area.
On 1 October new rules for applying GST to cross border services including e-books, music, videos and software purchased from overseas websites came into effect.
I understand that so far there have been over 80 offshore suppliers of remote services register for GST.
This is the latest evolution of our broad-based tax and is an example of the government working with the private sector to produce sound tax policy which is fair for all.
Similarly, changes are before Parliament that will assist closely held companies. These include simplifying the look through company rules and a number of changes to the dividend rules.
Generally, some matters in the work programme are raised by the private sector.
A number of taxpayers for instance, have raised concerns about how the current dividend rules can apply to demergers by Australian-listed companies.
The Government tends to agree with that view.
I’m sure you are all familiar with the issue, but in brief, demergers involve the division of a corporate group rather than a distribution of income – a shareholder’s economic ownership does not change.
Demergers, which do not involve the distribution of income to shareholders, should not in principle give rise to a dividend for tax purposes.
Although the current dividend tax treatment raises issues for all demergers, in practice problems mainly arise with demergers by Australian-listed companies.
That is why we will be introducing an exclusion from the dividend taxation rules for certain demergers by Australian listed companies.
The main benefit of the proposal is to prevent the inappropriate taxation of New Zealand shareholders in Australian listed companies that are involved in a demerger.
I have asked that this item be fast-tracked and officials will consult with stakeholders on the detail of the proposed amendment before its introduction in the tax bill scheduled for introduction early next year.
Also in that bill will be something else raised by the private sector.
Two recent High Court cases on the application of the voting interest test for corporate trustees could result in overreach when it comes to measuring the ownership of companies including their association.
This overreach is a particular problem for professional firms including accountants who are acting as independent trustees for their clients’ companies.
We are proposing to reinstate the previous policy position to ensure these companies are not associated.
Officials are planning to consult with stakeholders shortly on these proposals.
Moving onto the second major theme of work, international taxation issues have also been a recurring feature in tax policy work programmes over the years and we have already made considerable progress.
I think that it places us ahead of the game in some key areas.
We’ve progressively tightened our thin capitalisation rules and non-resident withholding tax rules and introduced minimum bank equity rules.
New Zealand has signed an agreement for increased sharing of information between revenue authorities — the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports.
It’s one of the OECD’s BEPS Action Plan recommendations.
So countering BEPS strategies is not a new-found enthusiasm for the Government.
It’s something we’ve been working away at steadily to strengthen.
While we are starting from a very strong position in comparison with a number of other countries, we still have work to do in this area and I will just run you through some of those.
New Zealand’s transfer pricing legislation was first introduced 21 years ago and at the time was fit for purpose. It was needed to protect our tax base and ensure any payments between associated entities are at an arm’s length rate.
While I believe our transfer pricing rules are robust, there’s no denying that the ground has shifted somewhat with practices having evolved since then. That is why it’s important to take another look and see whether our rules can be made even stronger.
The OECD’s new transfer pricing guidelines are now considered to be the benchmark and will prevent companies reducing their tax by using artificial transactions between associated parties which would not normally occur between third parties.
Transfer prices and conditions that don’t align with the actual substance of the multinational’s economic activities will be modified by the rules.
Another area of work relates to the question of permanent establishments.
For cross-border transactions, our basis for taxing activity occurring here, like those of tax jurisdictions around the world, depends on whether the company has a physical presence here.
We are aware of some multinationals that try to structure their affairs so they do not have taxable presence in New Zealand, despite being involved in significant economic activity here.
Engaging in disputes with multinationals can be a long and protracted affair – not a good use of taxpayer dollars.
Instead we are considering measures that will make it harder for multinationals to avoid having a taxable presence in New Zealand if they are involved in significant economic activity here.
We are also looking at measures to make it easier to assess and collect tax from multinationals that do not cooperate with Inland Revenue.
We are also closely watching what Australia and the UK are doing in regards to Diverted Profits Tax. Officials have provided some advice to the Government and we will look to say more on this in the near future.
One of the simplest ways of shifting taxable profits from one jurisdiction to another is by loading a foreign-owned firm with excessive debt.
New Zealand has thin capitalisation rules that limit the amount of debt foreign-owned firms can have in New Zealand.
Overall, I consider that our rules are serving us well. However, a small number of foreign-owned firms appear able to take excessively high interest deductions.
For example, the interest rates on some related-party loans appear to be unreasonably high.
We are therefore considering measures that would bolster our rules, to ensure that foreign-owned firms cannot shift excessive profits out of New Zealand using debt.
I expect to release proposals on these matters early in the new year. I acknowledge the extra effort it will place on you, but I am intending to release these as a single package so that the various aspects can be viewed together as a cohesive whole.
Another part of the OECD/G20 project on base erosion and profit shifting (BEPS) involves a series of recommendations made in relation to hybrid mismatch arrangements.
The Government believes that the problem of hybrid mismatches requires a globally co-ordinated response. For this reason, the Government released its discussion document on hybrids in September proposing that New Zealand adopt the OECD BEPS recommendations on hybrid mismatches.
We are closely monitoring the progress of the UK and Australia in this area, as well as the developing EU approach to hybrid mismatches.
Officials will consider carefully the submissions that have come in and we expect to take further steps in this area next year.
The last thing I want to mention with regard to international tax issues is the fact that many BEPS techniques rely on abuse of tax treaties, so the BEPS Action Plan recommended a number of changes to strengthen them.
It would be very time consuming for individual countries to implement these amendments on a treaty-by-treaty basis, so the OECD has developed a multilateral tax treaty that will amend a worldwide network of several thousand bilateral tax treaties all at once.
Ninety-six countries (including New Zealand) have been involved in the development of the multilateral instrument and we expect to be able to sign it next year.
The final major strand of work in the work programme is of course the Government’s modernisation programme of tax administration.
In the business transformation work, the Government is continuing to progress the business tax package announced in Budget 2016.
One of the Government’s objectives is for businesses to spend more of their time focusing on growing their businesses rather than fulfilling tax requirements.
Inland Revenue’s business transformation programme is vital in achieving this goal and the key is the smarter use of software – integrating the tax process into normal day to day business operations.
We know from a recent survey that the median time SMEs spent within their business on tax compliance was 25% less than in 2013, while the cost of doing the work had reduced by 24%.
This follows similar reductions in the 2013 survey, when compared with the 2009 survey and is a great validation of the work IR continues to do to make tax obligations easier for businesses.
That same survey also tells us that people who use accounting software to prepare and send their GST returns to Inland Revenue are experiencing significant a compliance cost reduction. The Government is proposing a similar approach for employers and PAYE proposals will be developed for inclusion in a tax bill expected to be introduced early in 2017.
The Bill will also contain investment income information proposals.
Meanwhile, a discussion document on changes to the Tax Administration Act is due to be released next month. It will address a range of issues that I think may be of particular interest to you. Those include the care and management provision to allow the Commissioner some greater administrative flexibility in limited circumstances, significantly reducing the fees for obtaining a binding ruling at least for SMEs, allowing post-assessment binding rulings, and extending the scope of the rulings regime.
And proposals for changes to the administration of social policy and the administration of individuals’ taxation are likely to be released later in 2017.
I’ll wind up my speech now by saying that New Zealand’s tax system is up there with the best, but it cannot be static and must keep up with societal and economic changes.
This work programme has been updated to focus on the priority projects. I know there is a lot to get through, but I hope you will take the opportunity to review the full details of the policy work programme on IR’s policy website and that you will continue to engage in the consultation process in a productive way.
I hope you have an enjoyable conference. Thank you.