Edition 5, December 2016
Tax Watch
December 2016
Welcome to Tax Watch, our
round-up of New Zealand tax
developments affecting your
business.
This month we take a look at the recent
Cabinet paper which suggests the
government will release a new
discussion document in early 2017
suggesting the possible introduction of
a tailored package for the New Zealand
tax environment. We also look at the 3
tiered approach to transfer pricing
documentation which has been
developed in light of Action 13 of the
BEPS Action Plan.
Government Measures to
Combat Multinational Tax
Abuses
With the recent release of a Cabinet
paper, the Government has stated that
the introduction of a diverted profits
tax (or “DPT”) would be an
inappropriate response for base
erosion and profit shifting (“BEPS”)
issues in New Zealand.
The New Zealand tax system is very
robust with the result that the majority
of multinationals are compliant and we
do not suffer wholesale tax leakage. A
DPT would not be the right approach
for New Zealand, which faces different
tax challenges than the UK and
Australia who are adopting specific anti
avoidance DPT regimes.
Instead, the Government’s approach
seems to repackage existing
international tax policy as a “tailored
package”.
Time to dust-off inter-company
agreements, if any!
In light of Action 13 of the BEPS Action
Plan, a 3 tiered approach to transfer
pricing documentation has developed.
For affected entities, this requires a
master file, a local file and county by
country reporting.
Complementing this, the Multilateral
Competent Authority Agreement on the
Exchange of Country-by-Country
Reports (which New Zealand is a party
to), requires that these reports be
automatically exchanged by treaty
partners.
Geoff Blaikie
Head of Tax
Tel: +64 4 495 7399
[email protected]
Aaron Quintal
Partner - Tax
Tel: +64 9 300 7059
[email protected]
David Snell
Tax Watch Editor
Executive Director - Tax
Tel: +64 4 470 8602
[email protected]
Tax Watch, Edition 5, December 2016
EY | 2
Government Measures to Combat Multinational
Tax Abuses
With the recent release of a Cabinet paper, the
Government has stated that the introduction of a
diverted profits tax (or “DPT”) would be an inappropriate
response for base erosion and profit shifting (“BEPS”)
issues in New Zealand.
The New Zealand tax system is very robust with the
result that the majority of multinationals are compliant
and we do not suffer wholesale tax leakage. A DPT would
not be the right approach for New Zealand, which faces
different tax challenges than the UK and Australia who
are adopting specific anti avoidance DPT regimes.
Instead, the Government’s approach seems to repackage
existing international tax policy as a “tailored package”.
At face value, the Cabinet paper does reflect a subtle
shift in Government policy from the beginning of the
year, where the Minister of Revenue was more content to
rely solely on the actions of the OECD through its BEPS
projects. Now, the Government states that it intends to
counter multinational transfer pricing and permanent
establishment avoidance through a specific package
which “takes certain features of a DPT and combines
them with the OECD BEPS measures”.
The reality is that little or nothing of the “specific
package” referred to in the Cabinet paper is new, nor is it
in any way inconsistent with the BEPS approach. Many of
the proposals, such as those aimed at preventing
avoidance of a taxable presence (permanent
establishment) status, and the amendments to transfer
pricing legislation, have been either common knowledge
for some time or anticipated changes as part of the BEPS
project.
The Government’s proposed “tailored package”
repackages existing international tax policy. The
proposals do not extend beyond implementation of the
OECD’s BEPS action items.
However, the repackaged policy makes political sense in
countering the appearance of inaction by the
Government. In reality, the ‘bark is worse than the bite’.
The Government knows it has its policy settings right:
implementing BEPS proposals will produce a better
outcome for New Zealand than unilateral approaches
such as a DPT.
However, and as usual, the devil will be in the detail and
to this end a Government Discussion Document is
foreshadowed for early 2017 that will set out the
specifics of these plans.
What should multinationals be doing in response?
Perhaps the biggest threat to companies is in relation to
transfer pricing matters with new legislation that will
shift the onus of proof onto the taxpayer. This means
that comprehensive transfer pricing documentation is
practically mandatory.
If you have any concerns over your intercompany
agreements and/or wish to speak to a member of the EY
international tax team or EY Law Corporate &
Commercial Law team, please contact our advisors:
Andy Archer
Partner – International Tax Services
Tel: +64 274 899 336
Mark Loveday
Partner – International Tax Services
Tel: +64 274 899 336
Time to dust-off inter-company agreements, if
any!
In light of Action 13 of the BEPS Action Plan, a 3 tiered
approach to transfer pricing documentation has
developed. For affected entities, this requires a master
file, a local file and county by country reporting.
Complementing this, the Multilateral Competent
Authority Agreement on the Exchange of Country-byCountry Reports (which New Zealand is a party to),
requires that these reports be automatically exchanged
by treaty partners.
Country-by-country reports will provide IRD with a lot of
relevant information and are likely to trigger a barrage of
transfer pricing inquiries.
The starting point for any inquiry will always be the
relevant agreements supporting the transactions under
scrutiny. This may seem trite but our experience is that a
large number of affected taxpayers do not always have
intergroup agreements in place or, where there are formal
agreements, these do not necessarily ensure that:
-
the contractual terms are a correct reflection of what
is happening operationally; and
-
they support the transfer pricing position taken in
each jurisdiction they relate to.
Multinational Groups (“MGs”) will be required to lodge
local files containing copies of their main inter-company
agreements. Due to information sharing between tax
authorities, IRD are likely to have access to the inter
group agreements entered into by a New Zealand
taxpayer as part of big MGs.
There is no room for complacency here. Although there is
a reverse burden of proof in the New Zealand transfer
pricing regime, this is only triggered when it is the value of
the arms’ length transaction that is in issue. Where the
issue goes to the nature of the actual service being
provided, the taxpayer needs to demonstrate the
substance of the transaction. The onus is on the taxpayer
to show the substance of what has been agreed to.
Although there is no legal requirement to have all
agreements in writing (except in relation to land), in the
absence of a written agreement any evidential burden is
difficult to discharge.
Inter group parties need to have agreements. These do
not need to be as detailed as third party agreements but
they should, as a minimum, address the key matters
agreed upon by the parties.
We encourage taxpayers to identify the agreements they
are party to which are likely to be filed in another
jurisdiction. We recommend these agreements be
reviewed from both a contractual and a substantive
perspective. The bottom line question is does the
agreement correctly set out the framework for the
position taken in New Zealand and the jurisdiction of the
counter-party? If not, why not? Does the agreement
need to be amended to ensure it is fit for purpose?
If you have any concerns over your intercompany
agreements and / or wish to speak to a member of the EY
transfer pricing team or EY Law Corporate & Commercial
Law team, please contact our advisors:
Mark Loveday
Partner – International Tax Services
Tel: +64 274 899 336
Alejandro Ces
Senior Manager – International Tax Services
Tel: +64 21 919 708
Kirsty Keating
Leader, EY Law
Tel: +64 274 899 090
Sinead Hart
EY Law, Senior Associate
Corporate and Commercial Law Leader
Tel: +64 274 899 852
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory
services. The insights and quality services we deliver help build trust
and confidence in the capital markets and in economies the world
over. We develop outstanding leaders who team to deliver on our
promises to all of our stakeholders. In so doing, we play a critical
role in building a better working world for our people, for our
clients and for our communities.
EY refers to the global organisation, and may refer to one or more,
of the member firms of Ernst & Young Global Limited, each of which
is a separate legal entity. Ernst & Young Global Limited, a UK company
limited by guarantee, does not provide services to clients. For more
information about our organisation, please visit ey.com.
© 2016 Ernst & Young, New Zealand.
All Rights Reserved.
APAC No. NZ00000790
M1426689
ED MMYY
This communication provides general information which is current at the time of production.
The information contained in this communication does not constitute advice and should not be
relied on as such. Professional advice should be sought prior to any action being taken in
reliance on any of the information. Ernst & Young disclaims all responsibility and liability
(including, without limitation, for any direct or indirect or consequential costs, loss or damage
or loss of profits) arising from anything done or omitted to be done by any party in reliance,
whether wholly or partially, on any of the information. Any party that relies on the information
does so at its own risk. Liability limited by a scheme approved under Professional Standards
Legislation.
ey.com