Chapter 1 - Introduction
1.1 In common with many other countries, New Zealand taxes non-residents on their New Zealand-sourced income. New Zealand companies owned by non-residents pay income tax on their net profits in the same way that all New Zealand taxpayers do. Income from interest, dividends and royalties, known as non-resident passive income, earned in New Zealand directly by non-residents is subject to non-resident withholding tax (NRWT).
1.2 Applying income tax and NRWT in this way is intended to ensure an appropriate level of taxation on non-resident investors.
1.3 Without non-resident withholding tax, non-residents would be able to shift profits out of New Zealand, paying little or no tax. This would not be consistent with New Zealand’s tax policy settings and would clearly be an unfair outcome for New Zealand.
1.4 However, since the NRWT rules were first formulated, financial transactions have evolved and become more sophisticated. Taxpayers have developed various mechanisms for deferring or circumventing NRWT.
1.5 The Government announced in November 2014 that it would undertake consultation aimed at updating and strengthening New Zealand’s NRWT rules on related party debt. This issues paper identifies a number of issues with the application of the current NRWT rules and suggests a number of complementary changes to address these concerns.
Preventing arbitrage of NRWT rules with financial arrangement rules
1.6 Officials suggest that for certain related party debt structures that would have generated financial arrangement income of a non-resident if that non-resident was subject to the financial arrangement rules, an NRWT liability will be triggered and determined by reference to the financial arrangement rules rather than the existing rules.
Preventing associated persons accessing the AIL rules
Back-to-back loans and other forms of indirect funding
1.7 We suggest that NRWT (rather than approved issuer levy (AIL)) be paid when New Zealand-sourced interest is paid to a third party if it is part of an arrangement for that third-party lender to be provided funds by a non-resident associated person of the New Zealand borrower.
Persons acting together
1.8 We suggest that NRWT (rather than AIL) be paid when New Zealand-sourced interest is paid to a non-resident who is not associated with the borrower, but is part of a group of persons who are acting together and would be associated with the borrower if they were a single entity. This would be similar to the non-resident owning body changes recently introduced to the thin capitalisation rules.
Eligibility for AIL
1.9 In order to deal with issues that have arisen with the improper substitution of AIL for NRWT on interest to related persons, officials wish to explore limiting the ability to pay AIL to loans where there is a much lower risk of undisclosed association. The suggestion in this paper is to limit AIL to loans which are either to or from a financial intermediary or raised from a group of 10 or more non-associated persons.
Restricting the branch exemptions
Offshore branch exemption
1.10 Officials suggest limiting the existing offshore branch exemption so that interest paid by the offshore branch of a New Zealand resident is subject to NRWT or AIL to the extent that the interest is paid on money which is lent to a New Zealand resident.
Onshore branch exemption
1.11 We suggest limiting the existing onshore branch exemption from NRWT so that it applies only to interest that is received by a non-resident in connection with a business carried on through a fixed establishment in New Zealand. Where a non-resident operates a New Zealand branch, New Zealand-sourced interest income not connected with their New Zealand branch would be non-resident passive income (NRPI), subject to NRWT or AIL.
Banking related-party lending
1.12 We suggest allowing members of New Zealand banking groups to access the AIL rules on interest payments to their non-resident associates. This recognises that the owners of New Zealand banks are themselves margin lenders, whose funding in the main is sourced from unrelated lenders. The tax system would be improved by providing them with a transparent way to borrow from offshore with an appropriate level of tax, rather than leaving them to rely on the offshore and onshore branch exemptions, neither of which has a policy which supports its use in this context.
1.13 New Zealand aims to ensure that tax rules are not unduly complex or impose excessive compliance costs. The suggested NRWT changes in this issues paper are aimed primarily at companies using complex and sophisticated transactions to circumvent the NRWT rules. In order to help ensure fairness and practicality, taxpayers are invited to make a submission on any aspect of matters discussed in this paper.
1.14 Subject to consultation, amendments to the NRWT rules could be included in the next tax bill which is currently scheduled for introduction in late 2015.
How to make a submission
1.15 Officials invite submissions on the proposed reforms and points raised in this issues paper. Submissions should be addressed to:
NRWT: related party and branch lending
C/- Deputy Commissioner, Policy and Strategy
Inland Revenue Department
PO Box 2198
Or email [email protected] with “NRWT: related party and branch lending” in the subject line. Electronic submissions are encouraged. The closing date for submissions is 16 June 2015.
1.16 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for Inland Revenue and Treasury officials to contact those making the submission to discuss the points raised, if required.
1.17 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their release. The withholding of particular submissions, or parts thereof, on the grounds of privacy, or commercial sensitivity, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider that there is any part of it that should properly be withheld under the Act should clearly indicate this.