Waikato Business News February/March 2018

WAIKATO BUSINESS NEWS February/March 2018
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Changes afoot to combat profit shifting
This time last year, we discussed the New
Zealand Government’s intentions to adopt
recommendations from the Organisation for
Economic Cooperation and Development
(OECD) in relation to BEPS(Base Erosion
and Profiting Shifting).
The new Government endorsed
these proposals in
December by introducing
the Taxation (Neutralising Base
Erosion and Profit Shifting) Bill
into Parliament.
If enacted as proposed, the
provisions could come into
effect from July 1 this year or
in the case of the new deemed
permanent establishment rules,
from the date of enactment.
Base erosion and profit
shifting (BEPS) encompasses
tax planning strategies used to
exploit gaps and mismatches
between countries’ tax rules to
shift profits to low or no-tax jurisdictions.
Although the provisions introduced
in the December bill
are aimed at large multinationals,
they could affect any business
that engages in cross-border
transactions.
The provisions proposed in
the Bill will prevent multinationals
from using:
- Artificially high interest rates
on loans from related parties;
- Cross jurisdiction hybrid
mismatch arrangements to
achieve an advantageous tax
position;
- Artificial arrangements to
circumvent having a taxable
presence (or ‘permanent establishment’)
in New Zea-
land; and
- Related-party transactions
to shift profits offshore in a
manner that does not reflect
the economic activity undertaken
in each jurisdiction.
We briefly outline these key
proposals below.
The Bill proposes to implement
a ‘restricted transfer pricing
rule’ to price related-party
debt (for borrowings more than
$10m). It will require borrowings
from an offshore-related
party to be priced using a credit
rating one notch lower than the
ultimate parent’s credit rating,
and any features not typically
found in third-party debt must
be removed.
As currently drafted, the
legislation is complicated and
complying with it could result
in high compliance costs and
cross-border interest rate mismatches.
Hybrid mismatches typically
arise where a payment is
deductible in one jurisdiction,
but the receipt is not taxable in
another. The new rules will either
deny deductions or trigger
taxable income. If enacted when
proposed, New Zealand will be
the second country globally to
adopt these rules, which could
result in transitional cases where
the New Zealand rules apply,
until the other country has enacted
the rules.
The Bill will change the way
thin capitalisation ratios are calculated
which could lead to further
restrictions on the deductibility
of interest and excessive
debt levels. For example, the
debt percentage under the thin
capitalisation regime is currently
calculated based on an entity’s
interest-bearing debt relative
to its gross assets. The Bill
will require an entity’s asset value
to be reduced by the amount
of its “non-debt liabilities”, such
as trade payables.
A deemed permanent establishment
(PE) rule targeted at
large multinational groups who
have a total global turnover of
more than €750 million will be
introduced. If a member of the
group conducts sales activities
in New Zealand on behalf of a
non-resident, the non-resident
is deemed to have a PE in New
Zealand thereby triggering a
New Zealand tax liability. These
rules will apply regardless of
any applicable Double Tax
Agreement (DTA), unless the
DTA incorporates the OECD’s
latest PE article, which has a
similar scope.
Finally, the BEPS Bill extends
the reach of the transfer
pricing regime and will enable
Inland Revenue to adopt a more
stringent approach.
The concept of a “control
group” – a group that acts together
or in concert to effectively
control a taxpayer – will be
introduced.
New Zealand companies
owned by investors in the same
control group will become subject
to the transfer pricing regime.
IRD will also be able to disregard
or displace legal arrangements
where the commercial rational
and economic substance
are uncommercial. The onus of
proof will also shift to the taxpayer
to prove arrangements are
on an arm’s length basis, rather
than the Inland Revenue having
TAXATION AND THE LAW
> BY HAYDEN FARROW
Hayden Farrow is a PwC Executive Director based in the
Waikato office. Email: hayden.d.farrow@nz.pwc.com
to disprove it.
Inland Revenue has estimated
that the new proposals could
raise $200 million per year, but
they are extremely complex,
far-reaching and will affect numerous
businesses.
With the proposed enactment
date less than five months
away, there is not much time for
taxpayers to prepare.
We recommend becoming
familiar with the proposed provisions
and evaluating how they
will impact your business.
The comments in this article
of a general nature and should
not be relied on for specific cases.
Taxpayers should seek specific
advice.
New provisional tax option
for small business
Provisional tax is about to be made a
whole lot easier for small businesses.
Inland Revenue (IR) is urging businesses
with annual turnover under $5 million
to talk with their accounting software provider
or tax agent about a new option that allows
them to pay provisional tax only when they are
making a profit.
The Accounting Income Method or AIM
makes managing cash flows simpler because
provisional tax payments are based on the
business’ actual results.
Inland Revenue’s deputy commissioner for
transformation Greg James says IR has created
a product that takes away the guesswork.
“The beauty of AIM is that your tax payments
are in line with your business cycles and
if you go into loss you can collect your refund
of overpaid provisional tax immediately.”
A series of webinars are being hosted to explain
how it all works.
Three accounting software providers will
be offering AIM as part of their package –
MYOB, Reckon and Xero.
“You don’t have to be a tax genius to make
the calculation,” Mr James says. “The accounting
software does all the work.
“We think this could make life easier for
tens of thousands of small businesses but now
is the time to check if it suits your circumstances.
We suggest they talk it over with their
tax professional or software provider.”
Find out more and sign up for an AIM webinar
at www.ird.govt.nz/AIM