Base erosion and profit shifting (BEPS) update
On 27 June 2018, the government enacted the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018. The Act represents the accumulation of extensive work conducted by officials following the finalisation of the Organisation for Economic Co-operation and Development’s (OECD’s) BEPS framework in late 2015. Measures in the Act seek to prevent multinationals from achieving tax advantages by using:
- artificially high interest rates on loans from related parties to extract profits out of New Zealand
- hybrid mismatch arrangements that exploit differences between countries’ tax rules to achieve an advantageous tax position
- artificial arrangements to avoid having a permanent establishment (PE) for tax purposes in New Zealand, and
- related-party transactions to shift profits into offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore.
The Act also amends New Zealand's thin capitalisation regime.
Multinational Enterprise Compliance Focus
Inland Revenue’s 2019 Multinational Enterprise Compliance Focus summarises New Zealand’s implementation of BEPS measures and highlights focus areas for future activity. Key messages include:
- a continued focus on a range of international tax issues, including transfer pricing and restricted transfer pricing, hybrids, and thin capitalisation
- increasing exchange of information between governments, including sharing tax rulings, country-by-country reporting and other information
- a clear desire to see taxpayers being proactive in seeking agreements in advance with Inland Revenue
- an emphasis on pragmatic and proportionate solutions with a focus on reducing compliance costs for both the taxpayer and Inland Revenue, and
- a strong focus on Inland Revenue’s relationships with significant enterprises.
The Compliance Focus also provides:
- a list of risk factors that are likely to prompt further scrutiny from Inland Revenue
- post-BEPS 'Top 10' recommended actions for taxpayers, and
- checklists for corporate tax governance and transfer pricing documentation.
Research and development (R&D) tax credit
On 7 May 2019, the government enacted the Taxation (Research and Development Tax Credits) Act 2019. The Act introduces a 15% tax credit on eligible R&D expenditure and is intended to raise the amount of R&D undertaken in New Zealand to 2% of gross domestic product (GDP) by 2028.
Key features of the regime include:
- 15% tax credit applied against income tax liability.
- Expenditure parameters: 50,000 New Zealand dollars (NZD), capped at NZD 120 million.
- 10% of overall eligible R&D expenditure can be conducted overseas.
- Limited cash refundability for certain loss-making entities.
- New definition of R&D, with exclusions for specific activities and costs.
- Eligible internal software expenditure, capped at NZD 25 million.
- Current Callaghan Innovation Growth Grant recipients and associated entities are ineligible to claim.
Businesses claiming R&D tax credits must keep records that demonstrate that the activities undertaken meet the definition of an R&D activity. The documentation will be relied upon during the claim approval and review processes to determine whether eligible R&D is being undertaken. These records should be kept contemporaneously.
Goods and services tax (GST) on low-value imported goods
The Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2018 applies GST to low-value goods that are located outside New Zealand at the time of supply and delivered to a New Zealand address. Businesses that make more than NZD 60,000 of taxable supplies to New Zealand in a 12-month period must register for New Zealand GST and remit GST of 15% on the sale of low-value goods. Low-value goods are defined as goods valued at or below NZD 1,000.
The Act also applies to electronic marketplaces (EMPs) and re-deliverers. This means that EMPs are responsible for registering and remitting GST on sales to New Zealand of low-value goods that are made through their platform. Re-deliverers are used by consumers when the supplier or marketplace does not offer shipping to New Zealand. The Act requires re-deliverers to register and return GST in respect of goods that they re-deliver to a New Zealand address.
These changes came into effect from 1 December 2019.
Customs and excise duties
The Customs and Excise Act 2018 was enacted in March 2018 and represents a monumental step towards replacing and modernising the current customs legislation. Some of the key substantive changes affecting importers, exporters, and manufacturers include:
- moves to streamline the GST at the border for business importers
- a more flexible disputes regime
- ability to declare a provisional value for imported goods in specified cases
- ability to obtain rulings on more matters, including valuation, and
- more clarity on administrative penalties.
Double tax agreements (DTAs)
New Zealand is currently negotiating new and updating DTAs with a number of other countries, including Luxembourg and the United Kingdom.
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI)
The OECD’s MLI was signed by New Zealand on 7 June 2017. The MLI enables signatory countries to quickly update existing DTAs to include articles on PE avoidance, treaty abuse, dispute resolution, and hybrid mismatches. As of 1 July 2019, the MLI had the effect of updating New Zealand’s DTAs with Australia, France, Japan, Poland, Sweden, and the United Kingdom.
New DTA with China
On 1 April 2019, New Zealand and the People’s Republic of China signed a new DTA to replace the 1986 agreement. The new DTA contains a more modern set of provisions, similar to those introduced to a number of New Zealand’s other tax treaties under the MLI.
The key changes include the extension of the PE definition, the requirement of a dual resident company to obtain mutual agreement of the competent authorities as to the jurisdiction of its residence, and a reduction of the withholding rates on certain dividends.
The effective date of the new DTA is yet to be confirmed. However, both countries will need to perform relevant domestic procedures and exchange diplomatic notes before the agreement comes into force. The earliest effective date would be 1 January 2020.
Employee share schemes
In March 2018, the government enacted the Taxation (Annual Rates for 2017/18, Employment and Investment Income, and Remedial Matters) Act 2018. The Act introduced new rules for the taxation of employee share schemes to align the tax treatment of employee share schemes with cash-based remuneration.
The new rules:
- include a new definition of employee share scheme that means the rules apply to share benefits provided to past, present, and future employees and shareholder-employees
- determine a new taxing point for certain kinds of employee share schemes, and
- provide a new deduction rule for employers providing employee share scheme benefits and simplify the rules for certain exempt employee share schemes, as well as provide a greater level of exempt benefits and more flexibility in the design of these schemes.
With some exceptions, the rules came into effect from 29 September 2018.
Tax Working Group
On 21 February 2019, the Tax Working Group (the Group) released its final report (the Report) after undertaking further rounds of engagement and consultation following the release of an interim report in September 2018.
The Report included 99 tax reform recommendations to the government regarding the New Zealand tax system, including the recommendation of a capital gains tax.
On 17 April 2019, the government responded to the Group’s final recommendations, announcing it would not be adopting any of the recommendations relating to the extension of a capital gains tax. The government also announced it will not be introducing environmental taxes, such as water taxes or fertiliser tax.
In the absence of pursuing the introduction of a capital gains tax, the government announced it will consider other ways to improve fairness, including tightening the land speculation rules and land banking, which will involve the consideration of a vacant land tax.
The government has endorsed a number of the Group’s recommendations as high priority work programme items. These include reintroducing building depreciation for seismic strengthening, a review of loss-trading and loss continuity rules, and further measures to improve tax collection and encourage compliance.
A refreshed tax policy work programme reflecting these priorities was released in August 2019.