BEPS - A summary of the key policy decisions

• could affect the interest rates of companies with low amounts of debt who are not being aggressive;
• could be difficult to apply if the foreign parent has no credit rating; and
• is inconsistent with our Double Tax Agreements (DTA) and will result in double taxation.

• be in line with the parent’s cost of borrowing on the assumption that the borrower is supported by its foreign parent in the event of a default; and
• be set on the basis that it is “vanilla” – disregarding any features or terms that could push up the interest rate.

However, the restricted transfer pricing rule has more flexibility compared with the interest rate cap, so it produces more appropriate outcomes in exceptional cases.

Many submitters accepted that the treatment of non-debt liabilities needs to change.

However, nearly all submitters said deferred tax liabilities should not be counted as a non-debt liability under this new rule. Australia carves out deferred tax from this adjustment.

Some submitters suggested that redeemable preference shares and certain classes of derivatives should also be carved out.

• would widen the PE definition in substance rather than just prevent its abuse. This could breach our DTAs and result in double taxation.
• would capture ordinary commercial arrangements and discourage foreign investment.

• A longer time bar increases uncertainty for taxpayers and could delay the timely resolution of disputes.
• Other complex areas of tax have a four year time bar.
• The taxpayer will be at risk of double tax in jurisdictions where the time bar has already passed.

Submitters argued that the information collection proposals should not proceed as the rules were unnecessary in light of enhanced international information sharing protocols (for example, country-by-country reporting), would be unworkable in practice, and would unfairly penalise the New Zealand resident who may not be able to get the information from their multinational group members.

Submitters also raised concerns about the new civil penalty, arguing against the increase from $12,000 to $100,000 because the New Zealand subsidiary may not control the relevant information.

Some submitters were supportive of New Zealand taking action in line with the OECD hybrids package, but many submitters were in favour of adopting a targeted or phased approach to the OECD hybrids package focused on countering hybrid arrangements that are of most concern to New Zealand.

Submitters also argued that the proposals would be complex and would raise the cost of capital in some instances.

Some submitters suggested that the rules should incorporate a de minimis to reduce compliance costs.

The Government has decided that the best approach is a comprehensive adoption of the OECD recommendations with suitable modifications for the New Zealand context.

The Government does not consider that a general de minimis is needed for the hybrid rules. (Although see below as to the specific de minimis for foreign trusts and limited partnerships.)

The Government has decided that foreign trusts will be included within the scope of the rules where their treatment outside of New Zealand means income of the trust is not taxed anywhere in the world.

A specific de minimis will be provided such that foreign trusts and limited partnerships are not subject to the rules if their foreign-sourced income does not exceed a certain threshold.

The application of this rule will be delayed until 1 April 2019 to allow parties affected by this rule more time to assess their options.

Foreign branches of New Zealand companies
New Zealand companies will not be able to claim deductions for foreign branch losses.

Submissions were sought on an active income exemption for branches.

In submissions and at subsequent consultation meetings, submitters were concerned about the proposal due to the relatively common structure of a New Zealand company with a simple foreign branch structure (and no ability to offset foreign losses).

Submitters generally supported an active income exemption for branches.

Submitters also thought a de minimis would be helpful to rule out SMEs with foreign branches.

An active income exemption for branches was decided to be outside the scope of the project. This led to a consideration of alternative options in consultation with submitters.

The Government has agreed to vary the OECD-recommended initial proposal so that taxpayers who have simple foreign branch structures that do not present a hybrid mismatch problem are not covered by the rules.

Submitters argued that bank regulatory capital should be excluded from the scope of the rules.

Submitters also argued that if bank regulatory capital is not excluded from the rules, then there should be grandparented treatment for existing regulatory capital.

The Government has decided that there will be no general exclusion for regulatory capital.

The Government has agreed with submissions in favour of grandparented treatment, meaning that for regulatory capital issued before 6 September 2016 (the date of the discussion document release) current tax treatment will continue until the next call date of the issue.