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Taxation Neutralising Base Erosion and Profit Shifting Bill

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Inland Revenue’s administrative powers to investigate large multinationals

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INLAND REVENUE’S ADMINISTRATIVE POWERS TO INVESTIGATE LARGE MULTINATIONALS

Overview

It can be difficult and resource intensive for Inland Revenue to investigate multinationals with complex tax structures. Inland Revenue is at a significant evidential disadvantage, as the multinational possesses the information required to prove Inland Revenue’s case. Further, some of the information may be held by the non-resident offshore, making it difficult or impossible for Inland Revenue to obtain it. This can allow a multinational to stymie an Inland Revenue investigation through non-cooperation, particularly through withholding the information required by Inland Revenue to perform the investigation.

Inland Revenue has strong existing powers for requesting information under section 17 of the Tax Administration Act 1994. These powers require New Zealand taxpayers to provide any requested information or documents that are in their knowledge, possession or control (including in an offshore company that a New Zealand taxpayer controls). However in many cases, the relevant information needed to investigate a multinational’s New Zealand tax position may be held by an entity such as in an offshore holding company or head office. As a consequence, it can be more difficult for Inland Revenue to investigate multinationals compared to other taxpayers. The Bill therefore proposes extending the scope of these existing powers so they allow Inland Revenue to request information that is held by any member of a large multinational group.

The Bill also provides the ability for Inland Revenue to apply various sanctions on large multinational groups which do not co-operate with requests for information. These include criminal and civil penalties (a fine of up to $100,000). They make it easier for Inland Revenue to assess the multinational’s tax position based on the limited information that is available to the investigators and to prevent the multinational from subsequently using information that was requested but not provided to Inland Revenue as evidence to support its case in a subsequent court proceeding.

The Bill also allows Inland Revenue to make a wholly-owned New Zealand subsidiary of a large multinational group liable to pay any unpaid taxes owed by other members of the multinational group.

Submitters were strongly opposed to all of these proposals to extend Inland Revenue’s administrative powers for investigating large multinationals. They considered that it would be difficult in practice to require the New Zealand operations of a large multinational to obtain information from non-resident group members. They suggested that Inland Revenue should instead use its multilateral agreements whereby it can seek help from foreign tax authorities to obtain the information or collect tax from the non-resident businesses. Submitters also considered it would not be fair to impose penalties or require the New Zealand operation to pay tax due to the actions of a non-resident group member.

Submitters sought limitations and procedural safeguards such as court orders to constrain Inland Revenue and ensure the powers were applied in a reasonable manner.

Clause 50

Issue: Inland Revenue’s ability to request information held by offshore group members

Submissions

(ASB, BNZ, Chapman Tripp Corporate Taxpayers Group, New Zealand Bankers’ Association, Russell McVeagh, Westpac, Chartered Accountants Australia and New Zealand, KPMG)

Inland Revenue already has the power to request assistance from other jurisdictions in respect of the collection of taxpayer information in a cross-border context. (ASB, BNZ, Chapman Tripp Corporate Taxpayers Group, New Zealand Bankers’ Association, Russell McVeagh, Westpac)

The proposal is a significant overreach and should not proceed. Offshore jurisdictions often have privacy and secrecy rules which prevent disclosure of certain information (including, for example, information held about bank customers in the relevant jurisdiction). New Zealand, itself, has such privacy law requirements. The proposals risk placing the large multinational group in the untenable position of either breaching such offshore jurisdiction privacy or secrecy laws or breaching proposed section 17(1CB). (ASB, BNZ, Chapman Tripp, New Zealand Bankers’ Association, Westpac)

The amendments may be impossible to comply with and are not necessary given existing powers. (Corporate Taxpayers Group)

A similar proposal has been rejected previously at the Select Committee stage in 2002. (Corporate Taxpayers Group)

There appears to be no international precedent to support the scope of the amendments in proposed section 17(1CB). (Russell McVeagh)

Comment

To combat BEPS, Inland Revenue needs to be able to properly investigate and challenge the tax positions taken by multinationals. One of the main practical difficulties that Inland Revenue has encountered in conducting these investigations is a lack of willingness by some multinationals to provide information.

When investigating BEPS, the multinational has a significant information advantage over tax authorities as it possesses the information that is required to determine whether its own tax position is correct, or if a higher amount of tax should have been paid under the relevant international tax rules.

The required information is often held by an offshore group member of the multinational, rather than in a New Zealand company or office. This includes legal contracts, transfer pricing documentation and evidence about commercial and economic activities carried on by offshore entities. For example, it is common for multinationals to prepare and retain transfer pricing documentation within a specialist transfer pricing unit in their head office.

Inland Revenue does not consider it is reasonable to allow multinational corporations to locate information that is relevant to investigating their New Zealand tax position in a jurisdiction where it is legally (e.g. because of a tax haven having secrecy laws) or practically difficult for Inland Revenue to access that information. We note that this ability is not available to businesses that are based in New Zealand. Such businesses are required to keep their tax records in New Zealand (section 20 of the Tax Administration Act 1994) and must provide to Inland Revenue any requested information that is in their knowledge, possession or control (section 17), including when the information is in offshore branches or subsidiaries that they control (section 17(1C)).

Why can’t New Zealand just use its tax treaties?

New Zealand has a network of tax treaties which allow Inland Revenue to ask for assistance from the relevant foreign tax authority to obtain the information or collect tax from the non-resident businesses. However, just because New Zealand has an ability to request assistance from a foreign tax authority under a tax agreement, it does not mean that the request will be agreed to, or actioned effectively by the foreign tax authority.

In practice, relying on tax treaties to request information from other tax authorities is not always adequate. Some countries do not have very effective tax laws or tax administration. In other cases, the foreign tax authority may be slow or reluctant to respond to reasonable requests for information. And the practical reality is that, in order to action the request from Inland Revenue requires the foreign tax authority to divert some of its own resources away from administering its own tax system. Helping New Zealand to collect tax will be a lower priority than collecting tax for its own government.

For these reasons we consider it is still necessary to provide Inland Revenue with a direct ability under New Zealand’s Tax Administration Act, to request information or documents that are held by, or accessible to, a group member that is located outside New Zealand.

How should we limit potential conflicts with foreign secrecy and privacy laws

Submissions have argued that in some cases, if the multinational supplied the requested information to Inland Revenue, they could be in breach of a secrecy or privacy law of a foreign country.

Most countries are repealing their secrecy laws in order to meet new standards for exchange of information established by the Global Forum on Tax Administration over the last ten years. In any case, most secrecy laws are related to bank information so there would be few examples of secrecy laws that would prevent a multinational from supplying their own information to one of their New Zealand members, who could then provide the information to Inland Revenue. In rare cases there may be an unavoidable conflict with a foreign secrecy law. For example, a tax haven could have a secrecy law that makes it illegal to provide certain information to a foreign government.

In response to submitters concerns about foreign privacy laws, officials recommend an amendment to limit the provision in the Bill so it requires the requested information to relate to an investigation of the multinational groups’ tax position (rather than relating to an investigation of a natural person, such as a bank customer, who is not part of the multinational group). For multinational tax investigations the relevant information sough will be about companies rather than natural persons – so the proposed change should greatly reduce the risk of breaching foreign privacy laws. It will often be possible for a multinational to redact privacy-related information and still comply with the request.

Finally the risk of breaching a foreign privacy or secrecy law already exists when the relevant information about a foreign company or natural person is held in New Zealand (such as a New Zealand office or data centre). This is because such information can be requested by Inland Revenue under the existing section 17 power.

For example, existing section 17(1C) of the Income Tax Act 2007 states that “a law of a foreign country that relates to secrecy must be ignored” when the information is held by a non-resident that is controlled by a New Zealand resident. Similarly, section 17A states that a person cannot be excused from complying with a court order to provide information simply because providing the information would “subject the taxpayer to a fine, penalty or conviction.” In this regard, the proposed provision simply extends these existing issues to large, foreign-controlled multinationals.

Practicality

Inland Revenue considers that the proposed rules will be practical for multinationals to comply with. The new power only applies to large multinational groups. Inland Revenue understands that these groups typically have processes whereby information requests from tax authorities are escalated and approved by their head office (this can include cases where the relevant information is already held in New Zealand). The head office will have the authority to require the other group members to provide the information.

The proposal that was previously rejected by Select Committee in 2002 had a much broader scope as it applied to any person who was associated with a New Zealand resident. In contrast, the proposal in this Bill only applies to members of large multinational groups (with more than €750m of global consolidated revenues) and will be targeted at information relating to investigating the multinational’s own tax position. In addition, BEPS and the ability to large multinationals to frustrate tax investigations was less of a concern in 2002.

Recommendation

That the submissions be declined.

Clause 50

Issue: Limitations and safeguards on Inland Revenue’s ability to request information held by offshore group members

Submissions

(Corporate Taxpayers Group, Chartered Accountants Australia and New Zealand, KPMG)

There should be a legislative process that the Commissioner must follow before she uses this extension to her powers. (Chartered Accountants Australia and New Zealand)

The Commissioner should be required to have regard to other sources of information before using the proposed new power. (Chartered Accountants Australia and New Zealand)

There should be an ability to object to information demand notices on the basis that the information is not available or does not exist. (KPMG)

Inland Revenue should be required to advise the taxpayer when information is sought from another group member. (Chartered Accountants Australia and New Zealand)

If amendment to section 17 proceeds, Inland Revenue should require a court order to use these powers. (Corporate Taxpayers Group)

Additional safeguards should be put in place to prevent misuse of the new information powers such as an ability to object on the basis that the information is not available or does not exist. (KPMG)

The new powers should apply only to future tax years (as opposed to investigations of tax returns that were filed prior to the Bill’s enactment). (Chartered Accountants Australia and New Zealand)

Comment

The proposed extension of Inland Revenue’s existing information request powers to information held offshore by large multinational groups is needed to allow Inland Revenue to investigate multinationals that are not co-operating with a tax investigation. In this context, adding procedural limitations to the legislation will lead to these uncooperative multinationals bringing forward challenges on procedural issues to block or unduly delay the investigation.

It would also mean that these large multinational groups would have a greater ability to resist providing information to Inland Revenue, compared with other New Zealand taxpayers. This is because the proposed provision is based on the existing section 17 powers under the Tax Administration Act 1994 which applies to information held by New Zealand taxpayers and does not include such limitations.

Inland Revenue should be able to request the information without requiring prior court approval. Requiring a court order would undermine the practicality of requesting the information and would impose delays and additional court costs. The affected taxpayer can dispute Inland Revenue’s decision to issue the information request notice, using the usual tax disputes process, which includes court proceedings, if they consider that the request is unlawful or is being incorrectly applied.

Officials consider the new powers are necessary, but should not be limited to investigating income tax returns filed after the date of enactment as this would make it more difficult for Inland Revenue to investigate multinationals in respect of any tax avoidance or BEPS activity they engaged in during the income years prior to the enactment of the Bill.

Recommendation

That the submissions be declined.

Clause 51

Issue: Limitations on Inland Revenue’s ability to impose the consequences in section 21BA when a multinational does not provide the requested information

Submissions

(Corporate Taxpayers Group, Chartered Accountants Australia and New Zealand, EY, New Zealand Law Society, PwC)

Sections 21BA(1)(b), (c) and (d) apply when the “Commissioner considers…”. These provisions should fall to the court or Authority to determine, as opposed to the Commissioner. (EY, New Zealand Law Society)

Given the breadth of the power, and the possible sanctions for non-compliance, any use of that power should be delegated on a very limited basis (for example, to Deputy Commissioners). (Westpac, Chartered Accountants Australia and New Zealand)

Any assessment based on the operation of this expanded power must be soundly based at law. The Commissioner should issue guidance as to when information will be misleading, incomplete or otherwise inadequate. (Chartered Accountants Australia and New Zealand)

Section 21 should be repealed and section 21BA drafted to have general application, as there are fewer safeguards under section 21. This would ensure that the process and consequences in respect of a taxpayer's non-response to (or provision of an inadequate response to) an information request are consistent. (Corporate Taxpayers Group, PwC)

Comment

Proposed section 21BA allows Inland Revenue to apply sanctions to large multinational groups which do not adequately co-operate with a request for information as part of a tax investigation. It does this by allowing Inland Revenue to assess the multinational’s tax position based on the limited information that is available to the investigators and by preventing the multinational from using information that was requested but not provided to Inland Revenue as evidence to support its case in a subsequent court proceeding. In order to provide a judicial check on the evidence exclusion rule, proposed section 21BA(4) of the Bill allows a court to decide that requested information can be admitted as evidence. This means that the court, rather than Inland Revenue, ultimately decides whether the evidence is excluded from the court proceedings.

The proposed provision applies to large multinational groups who do not co-operate with a tax investigation. In this context, adding procedural limitations to the legislation will lead to these uncooperative multinationals bringing forward challenges on procedural issues to block or unduly delay the investigation. Requiring a court order to apply section 21BA would undermine the practicality of applying the provision and would impose delays and additional court costs.

Officials note that the proposed section 21BA is consistent with the existing section 21 power that applies to requests for information relating to deductible payments to non-residents which can be applied by Inland Revenue without requiring prior court approval.

Inland Revenue considers that the consequences that can be imposed under the proposed provision are necessary to ensure that uncooperative multinationals do not gain an unfair advantage by refusing to provide information.

The proposed provision allows Inland Revenue to make an assessment based on the limited information it has available. Inland Revenue already has a general power to make default assessments, but officials consider it useful to clarify that an assessment can be made in this specific context. It also prevents the multinational from introducing evidence in subsequent court proceedings if Inland Revenue has specifically asked for that information as part of the earlier investigation. Officials consider that both of these consequences are reasonable as they help to partly mitigate the incentives for multinationals to refuse to co-operate with a tax investigation.

Officials agree that operational delegation of the power should be limited and that any resulting assessment should be soundly based on the law and the information that is available to the Commissioner. This will be clarified in the guidance materials on this provision.

Officials agree that it may be appropriate to expand the scope of section 21BA so that it replaces the existing section 21 which applies to deductible payments to offshore persons. However, it may be better to do this as part of a later tax bill to allow submissions to be made on the drafting for this change.

Recommendation

That the submissions be declined.

Clause 51

Issue: The scope of section 21BA should be narrowed

Submission

(New Zealand Law Society)

Proposed section 21BA(1) should be redrafted to state explicitly that it applies only to investigations relating to the transfer pricing or permanent establishment matters stipulated in paragraph (c).

The wording in section 21BA(1)(c) referring to “whether or not in the knowledge, possession, or control of the member” is problematic as even if good faith efforts to fulfil the request have been made, there could nevertheless be unfair results for the taxpayer, upon whom the onus rests in tax disputes.

Comment

Inland Revenue’s investigations of large multinationals can cover a range of issues beyond transfer pricing and permanent establishment issues so it would not make sense to limit section 21BA to just these two topics. For example, Inland Revenue may need information to support an investigation of a multinational on tax avoidance, thin capitalisation rules, hybrid rules, controlled foreign company rules or non-resident withholding tax.

The reference to “whether or not” the information is held by the group member is necessary to ensure that Inland Revenue is not prevented from making an initial assessment of the multinational’s tax position in cases where the required information or documents have been lost or do not exist yet. For example, in a case where the multinational has been asked for transfer pricing documentation but has not prepared the documentation, Inland Revenue may need to make an assessment in the absence of this documentation. It also means that if the multinational subsequently prepares the documentation (or collects the necessary information) they can be prevented from presenting this evidence in subsequent court proceedings.

Recommendation

That the submissions be declined.

Clause 51

Issue: Evidence exclusion rule when the requested information has not been provided

Submissions

(EY, New Zealand Law Society, PwC)

The evidence exclusion rule in section 21BA(3) is too harsh. Proposed section 21BA(4)(a) should be removed entirely, or at a minimum, rewritten to have a more general focus on the reasonableness of the efforts undertaken by the taxpayer to locate and assess the relevance of the requested information. (PwC)

Section 21BA(4) should be amended to permit the court or Authority to directly scrutinise the Commissioner’s decision under section 21BA(1). The test should be expressed in general language, such as whether it is in the interests of justice that the evidence should be admissible. (EY, New Zealand Law Society)

It is not clear why all of the criteria listed in subsection (4) must be satisfied in every instance before the exception can apply. Each criterion should provide a separate ground to have the information admitted. At present it does not allow for admissions following good faith attempts by the taxpayer to obtain and provide the requested information which could be in the interests of justice but may not satisfy the other requirements. (New Zealand Law Society)

The proceedings referred to in section 21BA(3) should relate to the same issue under which section 21BA(1) is engaged. (EY, New Zealand Law Society)

Comment

Officials consider it is necessary to provide criteria for the court to apply when considering whether evidence that has been excluded under section 21BA(3) should be admitted during the court proceedings. The criteria in section 21BA(4) has been designed to protect taxpayers from disproportionately burdensome information requests from Inland Revenue. It does so by allowing evidence to be readmitted when the scope of the original request would require an unreasonable amount of time and resources to obtain, relative to the significance of the potential tax at stake and admitting the evidence is necessary to avoid a manifest injustice.

Removing some of these criteria or applying them independently of each other would provide the court with too little guidance as to the circumstances as to when the evidence should not be excluded.

Replacing the proposed criteria with a more general requirement that admitting the evidence was in the interests of justice would likely lead to the evidence being admissible in nearly all cases. This would effectively eliminate the effectiveness of the proposed provision in providing an incentive for the multinational to co-operate with the information request as they already have an information advantage over Inland Revenue, and are unlikely to face any real evidence exclusion risk if the dispute goes to court.

At the time that Inland Revenue requests the information it may not yet be known what specific tax issues may be disputed in any subsequent court proceedings. In other cases, an investigation may start off focused on one issue such as the transfer pricing of a transaction but Inland Revenue may subsequently discover other issues such as tax avoidance. This makes it impractical to limit the evidence exclusion rule based on the issue that initially prompted a request to be made. Inserting such a limitation would likely lead to further disputes about whether the information should be excluded based on differing views as to the nature of the issues being investigated. It could also increase taxpayer compliance costs by encouraging Inland Revenue to make broader requests that cover a wide number of potential tax issues or multiple requests for the same information as new issues are identified.

Recommendation

That the submissions be declined.

Clause 51

Issue: Deadlines for responding to a request for information under new section 21BA

Submissions

(Corporate Taxpayers Group, KPMG)

It is unclear what period of time needs to have elapsed prior to the Commissioner issuing the first information demand notice. This point needs to be clarified in the legislation. (KPMG)

Inland Revenue should be able to provide taxpayers with an extension of the respective deadlines for responding to notices in section 21BA. (Corporate Taxpayers Group)

Comment

Under the current bill proposal, Inland Revenue can issue the first information demand notice without having to wait a specific amount of time. This is appropriate as the first notice starts the three month deadline by which the taxpayer has to respond with the requested information.

If the information was not provided or was inadequate, Inland Revenue can then issue a second notice to the taxpayer. The taxpayer then has a further one month deadline from the date of the second notice to provide a satisfactory response. After that one month deadline has expired, the taxpayer can be assessed based on the information available to Inland Revenue and any requested information that was not provided can be excluded from being used by the taxpayer as evidence to support their case in a subsequent court proceedings. In this context, officials do not consider it is necessary or efficient for the legislation to provide a specific deadline before the first notice can be issued.

The proposed section 21BA is intended to be used by Inland Revenue as a last resort to try to obtain information that has been requested from a large multinational that is refusing to co-operate with a tax investigation. In this context, officials consider that providing an ability in the legislation to extend the relevant three and one month deadlines, is likely to lead to these uncooperative taxpayers advancing arguments in a dispute as to why they should have qualified for an extension of time, and should therefore not be subject to the consequences of the provision.

Where a taxpayer begins to adequately co-operate with the investigation, Inland Revenue can return to using its ordinary investigation and disputes process, as opposed to making an assessment of tax under the proposed section 21BA(2).

Recommendation

That the submissions be declined.

Clauses 54 and 55

Issue: Criminal penalties for not providing information requested about an offshore group member

Submissions

(ASB, Corporate Taxpayers Group, EY, Russell McVeagh, New Zealand Bankers’ Association, Westpac, New Zealand Law Society, Chapman Tripp, Chartered Accountants Australia and New Zealand, KPMG, Public Health Association)

Taxpayers should not be exposed to criminal penalties for the acts/omissions of another group member over whom they have no control. (ASB, Corporate Taxpayers Group, EY, Russell McVeagh)

It is inappropriate to impose a criminal penalty in a scenario, where the information requested places the large multinational group in a position of having to breach another jurisdiction’s laws. (New Zealand Bankers’ Association, Westpac)

There should be a defence against criminal prosecution where the taxpayer can establish that they made genuine and reasonable requests for the information from the overseas entity. (EY)

It should be a defence under sections 143 and 143A that the member charged with the offence did not have the knowledge that the requested information was in the knowledge, possession or control of another member of the group. (New Zealand Law Society)

Comment

The current Bill has two types of penalties that can be imposed on large multinational groups that do not provide information that has been requested by Inland Revenue:

  • A proposed civil penalty which involves a fine of up to $100,000; and
  • The existing criminal penalties in sections 143 and 143A of the Tax Administration Act 1994 which the Bill proposes expanding to cover cases where the information is held by another group member of the large multinational group.

Officials agree that it is not appropriate to apply a criminal penalty to a New Zealand person where the failure has actually been caused by an associated offshore person. Officials therefore recommend that the criminal penalties should be removed from the Bill, subject to retaining a civil penalty.

Recommendation

That the submissions be accepted, subject to officials' comments.

Clause 53

Issue: Civil penalties for not providing information requested about an offshore group member

Submissions

(Westpac, Chapman Tripp, Chartered Accountants Australia and New Zealand, KPMG, Public Health Association)

Imposing a civil penalty liability that exceeds the available criminal sanctions is equally inappropriate – particularly if its intent is to avoid the need for Inland Revenue to bring criminal proceedings. There are no equivalent civil penalties in the Act relating to comparable failures. (Westpac)

If a civil penalty is to be retained, there should be defences available for where the taxpayer has taken reasonable steps to comply with the Inland Revenue's notice. (Westpac)

The proposed section 139AB needs to be expanded upon to include a “reasonable efforts” defence as provided under similar civil penalty provisions in sections 142I(4) and 142H(2), to recognise the potential delays or difficulties for a New Zealand company to collect information held by an overseas associated party. (Chapman Tripp)

The Commissioner should not have the power to levy a penalty if a taxpayer fails to provide information that does not exist. (Chartered Accountants Australia and New Zealand)

The penalties should apply in exceptional circumstances. (KPMG)

Penalties for failure to provide requested information should be imposed for each day on which failure occurs, rather than to a maximum of $100,000 (Public Health Association)

Comment

It is necessary to retain a civil penalty as otherwise there would be little incentive for a multinational to comply with an information request. Although Inland Revenue is able to apply shortfall penalties to tax that is owed, these shortfall penalties rely on Inland Revenue having sufficient information on which to make an assessment – in most cases it will need to source this information from the multinational.

Inland Revenue will only seek to apply the civil penalty in cases where a large multinational group is not making a reasonable effort to co-operate with a tax investigation. Inland Revenue will have discretion as to whether to apply this penalty and the amount of the penalty (up to $100,000). This discretion is intended to encourage multinationals to take steps to try to comply with the request or explain to Inland Revenue why the relevant information does not exist or cannot be accessed.

Because there is already flexibility for Inland Revenue to vary the amount of the penalty, officials do not consider it necessary to automatically increase the penalty based on each day that the information has not yet been provided. However, the proposed civil penalty in section 139AB does not currently have a due date. Officials recommend a due date be added to the Bill and that this be at least 30 days after the taxpayer has been notified they are liable to pay the penalty.

Officials consider that including an explicit “reasonable efforts” defence in the legislation could lead to additional disputes around what is considered “reasonable” as this concept is subjective and the threshold will vary based on the overall circumstances of the case (such as the amount of tax at stake, the difficulty in obtaining the information and what other information may have been provided).

Recommendation

That the submissions be declined.

Clause 53

Issue: Civil penalty should be imposed by a Court, rather than Inland Revenue

Submission

(Ministry of Justice)

As part of their role in advising on penalties in new legislation, the Ministry of Justice provided the following submission to Inland Revenue officials.

The Ministry of Justice’s view is that the civil penalty proposed in the Bill would be more appropriately established as a pecuniary penalty that can be imposed by a court. The reasons for this are:

  • A judicial and independent decision-maker is more appropriately placed than the Commissioner (being the party affected by the failure) to fairly assess whether a penalty is appropriate in the circumstances and what quantum of penalty reflects the gravity of the multinationals’ failure to comply with the Commissioner’s request
  • A penalty imposed as a result of civil proceedings would increase the legitimacy of the outcome (by ensuring procedural rights are observed) and reduce the potential for claims of abuse of process (e.g. the potential for the Commissioner to directly penalise failures in respect of repeated requests for information the multinational is unable to provide).
  • Far greater penalties can potentially be available to the courts under a pecuniary penalties provision than could be imposed directly by the Commissioner. This would increase the likelihood of meaningfully deterring multinationals from obstructing the Commissioner.

Comment

Inland Revenue considered this option but ultimately recommends that the Commissioner of Inland Revenue be able to impose a civil penalty on multinationals that do not provide the requested information, without requiring court approval. This would be consistent with all of the existing civil penalties under the Tax Administration Act 1994, which are imposed by the Commissioner but can be disputed by the taxpayer.

The penalty applies to multinationals that are not co-operating with a tax investigation. Requiring a court to impose the penalty would undermine the practicality of applying the penalty. This would reduce the effectiveness of the penalty in providing an incentive for multinationals to co-operate and provide the information that Inland Revenue needs to investigate their tax position.

In the absence of this contextual information about the income tax dispute, it will be very difficult for a court to determine if the penalty is appropriate and what quantum of penalty should be applied. For this reason Inland Revenue considers the current position is much more practical as it allows a court to consider the appropriateness of the proposed civil penalty (along with any other tax penalties) at the end of the disputes process, as part of the same court proceedings as the substantive income tax dispute.

A requirement to take court proceedings at the beginning of the investigation in order to apply a civil penalty would be contrary to an overall aim of the tax disputes process which is to try to efficiently resolve disputes without needing to go to court.

It would also prolong the dispute. In particular, uncooperative taxpayers would bring forward further challenges on procedural issues. This would make it necessary to “stop the clock” on the time bar to ensure that uncooperative multinationals could not use the court proceedings to reduce the number of years which could be adjusted by Inland Revenue.

Recommendation

That the submission be declined.

Clause 38

Issue: Collecting any unpaid tax owed by large multinational group from a New Zealand member of that group

Submissions

(ASB, Bryce Jensen, Corporate Taxpayers Group, Russell McVeagh, New Zealand Bankers’ Association, Chartered Accountants Australia and New Zealand)

Proposed section HD 30 is an unjustified override of fundamental corporate law principles and should not proceed. The Group is unaware of (and Inland Revenue has not provided any evidence of) any difficulty in collecting tax owing from a multinational group. Further, Inland Revenue already has the power to request assistance from other jurisdictions in respect of the collection of tax in a cross-border context. (Corporate Taxpayers Group)

There appears to be no international precedent for a revenue authority having the power to enforce the tax obligations of one company against another group company (Russell McVeagh)

The proposed new power is also unnecessary. For example, the Convention on Mutual Administrative Assistance in Tax Matters to which 116 countries are signatories (including New Zealand and all its major trading and investment partners), provides mechanisms for revenue authorities to cooperate in the collection of tax. (Russell McVeagh)

The proposal is an inappropriate lifting of the corporate veil and for which there is little evidence provided in the Commentary to the Bill, or elsewhere, that a significant problem with collecting unpaid New Zealand tax liabilities of large multinationals exists. Such a proposal could, potentially, impose substantial obligations on a New Zealand entity resulting in a significant adverse financial impact for that entity. Proposed section HD 30, has the potential to make New Zealand entities a guarantor of overseas group entities. This would place banks at risk of not satisfying prudential regulations. (ASB, New Zealand Bankers’ Association)

The proposed rule should not be used in situations where it would put the locally owned group member into financial jeopardy. Normal Inland Revenue debt collection processes should be followed in application of this proposed rule. (Chartered Accountants Australia and New Zealand)

If the principal member of the group fails to comply with their tax obligations due to some unexpected circumstances, a grace period could be provided. (Bryce Jensen)

Comment

Because many non-resident companies have no direct presence in New Zealand it can be difficult for Inland Revenue to recover tax debts from multinationals. Officials therefore consider the proposed provision is necessary to recover from a New Zealand group member, an amount of tax that is owed, but has not been paid by a non-resident member of the same multinational group. It is reasonable to apply the rule where the non-resident and the New Zealand subsidiary are part of the same wholly-owned group, as they are part of a single economic entity.

Officials note that the UK’s diverted profits tax can be collected from any group member that is related (51 per cent or more commonly owned) to the company that owes the diverted profits tax.

Accordingly officials recommend that the proposed rule be retained. However, the rule should only apply if the non-resident fails to pay the tax itself (see recommendations to the following submission). This should mitigate some of the submitters’ other concerns about risk assessment and guarantor issues.

The proposed provision will only apply when Inland Revenue notifies the representative group member. This provides flexibility for Inland Revenue to not apply the provision in situations where it would put the locally owned group member into financial jeopardy or to provide a grace period, if necessary.

Recommendation

That the submissions be declined.

Clause 38

Issue: Scope of proposed section HD 30 should be clarified

Submissions

(ASB, Corporate Taxpayers Group, New Zealand Banker’s Association, PwC, EY, New Zealand Law Society)

"Tax obligations" is too broad and uncertain; the scope should instead be confined to enforcement of an unsatisfied tax liability of a group member. (ASB. Corporate Taxpayers Group, New Zealand Banker’s Association)

Section HD 30 should be redrafted so it explicitly limits the Commissioner’s power to appointing New Zealand resident group members as agents for the tax owing by another group member (as opposed to non-resident group members). (PwC)

Amendments should be made to the Tax Administration Act to ensure that the recipient of the section HD 30 notice has dispute rights. (EY, New Zealand Law Society)

If proposed section HD 30 does proceed, its scope should be more focussed and procedural protections included. Its scope should be limited to satisfying a tax liability of a non-resident Entity, which cannot be enforced, that is part of the same wholly-owned large multinational group. A court order should be required as a prerequisite to imposing on one company responsibility for another company's tax liabilities. (Corporate Taxpayers Group)

Comment

Officials agree that several drafting changes should be made to narrow the scope of the provision:

  • The reference to “tax obligations” is too broad and should be limited to unpaid taxes
  • Unpaid taxes should only be collected from a New Zealand resident group members and non-resident group members who have a permanent establishment in New Zealand

The proposed provision is designed to apply in situations where a large multinational group has either refused to pay tax which is owed to Inland Revenue or has liquidated or migrated the relevant company in order to prevent the tax from being collected. In this context, requiring Inland Revenue to secure a court order to collect the tax from another company which is part of the same wholly-owned group could encourage further disputes about whether the proposed collection provision can be applied.

For these reasons, officials do not recommend requiring Inland Revenue to obtain a court order to issue the notice in the first place. However, officials agree that a consequential amendment should be made to the Tax Administration Act 1994 to ensure that that the recipient of the section HD 30 notice can dispute that decision (including in a court).

Recommendation

That the submissions be accepted, subject to officials’ comments.

LIFE REINSURANCE

Clause 9

Issue: Unilateral change to DTAs

Submission

(Chartered Accountants Australia and New Zealand, EY, Financial Services Council, KPMG, Teresa Farac)

The proposed amendments should not proceed as they unilaterally affect the operation of, and possible outcome under, some of New Zealand’s DTAs.

The changes could result in other countries retaliating by imposing additional overseas tax on New Zealand based businesses (Chartered Accountants Australia and New Zealand); give rise to operational difficulties for New Zealand life insurers (Financial Services Council); and give rise to double taxation with no ability to rely on the relevant DTAs (Financial Services Council).

One submitter was concerned that the proposed amendments involve a domestic law override of a negotiated agreement (Chartered Accountants Australia and New Zealand).

The life reinsurance source rules should instead be changed by way of renegotiating the relevant DTAs.

Comment

Officials consider it unlikely that other countries will retaliate by imposing additional tax on New Zealand based businesses as a result of the amendments. The amendments merely ensure that section DR 3 of the Income Tax Act 2007 applies to reinsurance arrangements with Canada, Russia, Japan, and Singapore as intended to deny a deduction where a reinsurance premium is not taxable in New Zealand.

Officials also consider that the proposed drafting change to new section DR 3(2) (see below) will ensure that New Zealand life insurers are not faced with any operational difficulties. As a result of this drafting change, proposed section DR 3(2) will only require New Zealand life insurers to know the non-resident reinsurer’s country of residence and whether the non-resident is from Canada, Russia, Japan, or Singapore – which should be clear from the reinsurance contract. New Zealand life insurers should therefore not be faced with any operational difficulties when applying the provision in practice.

Officials disagree with the submission that the amendments could give rise to double taxation with no DTA relief. The proposed amendments are intended to address the possible double non-taxation that could arise where life reinsurance policies are offered or entered into in New Zealand between a New Zealand resident life insurer and a reinsurer resident in Canada, Russia, Japan, or Singapore. While the reinsurance premiums paid to the non-resident reinsurer may have a New Zealand source under our domestic legislation, the application of New Zealand’s DTAs with these countries denies New Zealand the right to tax those premiums unless the reinsurer is operating via a permanent establishment (which is often not the case). The proposed amendments therefore ensure that our domestic law life reinsurance rule in section DR 3 of the Income Tax Act 2007 can apply to these countries as intended.

Further, the proposed amendments do not override New Zealand’s DTAs with Canada, Russia, Japan, or Singapore. The proposed amendments merely ensure that where a reinsurance premium has a New Zealand source under our domestic law, but a DTA applies to deny New Zealand the right to tax those premiums unless the reinsurer is operating through a PE, we can deny the deduction. There is nothing in these DTAs that prohibits New Zealand from denying a deduction to New Zealand residents.

As the process for renegotiating DTAs is lengthy and it would take many years before the relevant DTAs have all been bilaterally renegotiated, officials consider the Bill to be the appropriate vehicle for implementing the proposed amendments.

Recommendation

That the submission be declined.

Issue: Grandparenting

Submission

(Deloitte, EY, Financial Services Council, KPMG, Teresa Farac)

Life reinsurance agreements are typically long term and New Zealand life insurance companies will usually not be in a position to renegotiate such agreements part way through their term. There is particular concern that the cost of the proposed measures would fall unfairly on New Zealand life insurers (and potentially their policyholders if passed on through premium pricing), given their likely inability to renegotiate their reinsurance contracts. The proposed changes would therefore unfairly penalise New Zealand reinsured life insurance companies and should not proceed.

If the proposed amendments do proceed, however, they should apply only to new life reinsurance contracts entered into on or after 1 July 2018, meaning the life reinsurance contracts entered into prior to 1 July 2018 are grandparented.

Grandparenting should also apply:

  • to contracts where the reinsurer, subsequent to entry into the reinsurance contracts, changes its tax status by losing its permanent establishment in New Zealand; and/or
  • if a life reinsurer changes tax residence during the term of an existing reinsurance contract to Canada, Russia, Switzerland[7], or Singapore; and/or
  • to new contracts where New Zealand life insurers could not be reasonably expected to have knowledge of the tax residence of the life reinsurers.

Comment

Officials agree that a New Zealand life insurance company may not always be in a position to renegotiate a reinsurance agreement part way through its term. As life reinsurance agreements are usually long term (and often open-ended), however, officials do not consider grandparenting an appropriate option. Rather, officials consider the better approach is to delay the application of the proposed rule for a period of 12 months. Officials consider that 12 months is an appropriate length of time for New Zealand life insurers to renegotiate their reinsurance agreements and factor in the tax change.

Recommendation

That the submission be declined, subject to officials’ comments.

Issue: Publish detailed commentary on each DTA

Submission

(KPMG)

New Zealand should publish detailed commentary on each DTA so it is transparent why particular Articles have been accepted.

Comment

Consistent with international practice, New Zealand treats its DTA negotiations as confidential. As such, it would not be appropriate for New Zealand to publish commentary on each of its DTAs. Publication of such a commentary would also require agreement from the other jurisdiction which would not always be possible. Instead, submitters should refer to the OECD’s Model Tax Convention on Income and Capital and its accompanying Commentary for any detailed guidance on particular Articles, both of which are publically available.

Recommendation

That the submission be declined.

Issue: Lack of knowledge

Submissions

(Corporate Taxpayers Group, Deloitte, EY, Teresa Farac)

The proposed amendment disallows a deduction for a life insurer based on information from another taxpayer’s (the reinsurer’s) tax position. The proposed changes place an onerous and unfair burden on New Zealand life insurers to have completeness of information regarding a non-resident’s tax position, including the place of tax residence and/or whether the non-resident reinsurer has a New Zealand permanent establishment.

Comment

Officials consider that this issue can be fixed by deleting subparagraph (a) of proposed section DR 3(2). This amendment will mean that the New Zealand life insurer will not need to have knowledge of the non-resident reinsurer’s tax affairs in New Zealand. All it will need to know is the non-resident reinsurer’s country of residence and whether the non-resident is from Canada, Russia, Japan or Singapore – which should be clear from the reinsurance contract.

Recommendation

That the submission be accepted, subject to officials’ comments.

Issue: Drafting

Submission

(Matter raised by officials)

The current heading of section DR 3 of the Income Tax Act 2007 should be replaced to reflect the proposed amendments in the Bill. Section CW 59C should consequently be amended to cross-reference the proposed new heading of section DR 3.

Recommendation

That the submission be accepted.

 

[7] Officials wish to note that the territories affected by the proposed amendments are Canada, Russia, Japan, and Singapore. Switzerland was erroneously listed as an affected territory in the Bill Commentary.