Permanent establishment anti-avoidance rule

OVERVIEW

The Bill proposes a new anti-avoidance rule for large multinationals (with over €750m of consolidated global turnover) that structure to avoid having a permanent establishment (PE) and therefore a taxable presence in New Zealand.

The proposed rule will deem a non-resident entity to have a PE in New Zealand if a related entity carries out sales-related activities for it here under an arrangement with a more than merely incidental purpose of tax avoidance (and the other requirements of the rule are met). This PE will be deemed to exist for the purpose of any applicable double tax agreement (DTA), unless the DTA incorporates the OECD’s latest PE article.

In addition, under the proposed amendments an amount of income will be deemed to have a source in New Zealand if that income can be attributed to a PE in New Zealand. If a New Zealand DTA applies to the non-resident, the definition of a PE in that DTA will apply for this purpose. If no New Zealand DTA applies to the non-resident, then a new domestic law definition of a PE will apply.

The Bill also proposes deeming an item of income to have a New Zealand source under our domestic legislation if New Zealand has a right to tax that item of income under a DTA.

The new source rules aim to both simplify the test for determining whether an item of income has a source in New Zealand, and ensure that all items of income New Zealand is entitled to tax under a DTA will be taxable under domestic law.

Submitters were generally supportive of the proposed PE anti-avoidance rule, but they were concerned about some aspects. Several submitters argued that the rule should not override New Zealand DTAs. Other submitters were concerned about its effect on foreign direct investment. The majority of the submissions requested amendments to clarify or narrow the scope of the proposed rule. Submitters also wanted detailed guidance to be provided about its application.

The proposed changes to the source rules attracted fewer submissions. The main concern was that the rules could apply too broadly. There was also some concern about introducing the rules given that they were not part of the OECD’s BEPS recommendations.

GENERAL

(Clause 34)

Issue: General support for the rules

Submission

(Chartered Accountants Australia and New Zealand, EY)

The above submitters generally support the introduction of the PE avoidance rules to protect New Zealand’s tax base.

However, the submitters had some concerns about the specific features of the amendments. The specific concerns are addressed below.

Recommendation

That the submission be noted.

Issue: Proposed rules will have a detrimental effect on foreign direct investment

Submission

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

The proposed rules will materially impact on the perceptions of New Zealand as an attractive and easy place to do business. If the proposed changes proceed, there is a risk that multinational groups will cease to operate in New Zealand. Further, if other countries adopt similar positions in their domestic legislation, many New Zealand exporters may find themselves with PEs overseas that they do not currently have. As a result, those exporters will pay tax overseas, thereby reducing the tax they pay in New Zealand.

Comment

There will be additional tax and compliance costs for some investors, but these are necessary to address the policy issues. Officials have used consultation to refine the proposals, minimise unintended impacts, and better target the BEPS concerns. This should reduce the additional compliance costs, although it will not eliminate them.

The higher tax payments resulting from the proposed measures may make New Zealand a less attractive investment location for multinationals engaged in BEPS arrangements. But these multinationals should not be allowed to exploit weaknesses in our tax rules to achieve a competitive advantage over more compliant multinationals or domestic firms. Furthermore, arbitrary reductions in tax, depending upon the opportunism of taxpayers, are likely to distort the allocation of investment into New Zealand. It also erodes the integrity of the system.

New Zealand is also undertaking these BEPS measures in line with most other OECD countries and the expected tax revenue increase is expected to be relatively small (compared with the total corporate tax base). Given this, we believe any impacts on foreign direct investment into New Zealand will not be material and implementing these measures remains in New Zealand’s best economic interests.

Officials also consider that it is highly unlikely that foreign companies will remove their existing personnel from New Zealand as a result of these proposals. Most of the affected foreign companies are dependent on having personnel in New Zealand to arrange their sales. Without personnel on the ground, they would not be able to service their New Zealand market. It is also unlikely that they would cease to operate in New Zealand altogether.

Given New Zealand’s size, whether or not other countries adopt similar BEPS measures is unlikely to be materially influenced by our proposals. For example, Australia and the UK had already introduced their diverted profits taxes (DPT) prior to the introduction of the BEPS Bill.

Recommendation

That the submission be declined.

Issue: Clear guidance should be provided in the Officials’ Report

Submission

(KPMG)

The Bill Commentary does not provide sufficient guidance on two aspects of the deemed PE rule. As such, the Officials’ Report should provide clear guidance of the following:

determining whether an activity is sufficiently connected to a sale in New Zealand; and
if so, determining whether that activity is preparatory or auxiliary.

Comment

The purpose of the Officials’ Report is to advise the Committee on the submissions received on the Bill. Accordingly, it is not an appropriate vehicle for detailed general guidance on the application of the proposed provisions. It is also not appropriate to pre-empt Parliament’s decision on whether to enact the measures.

Officials do recognise the importance of providing guidance on the PE anti-avoidance rule. This will be provided in a Tax Information Bulletin on enactment of the Bill.

Recommendation

That the submission be declined.

Issue: The proposed PE anti-avoidance rule is misconceived

Submission

(Chapman Tripp)

The proposed PE anti-avoidance rule is misconceived. It does not make sense to describe a multinational as “avoiding” a New Zealand PE when it sets up a legal entity here (subsidiary) that is resident in New Zealand and fully within the New Zealand tax net. This illustrates that any “PE avoidance” is, in reality, a transfer pricing issue as to the appropriate level of reward earned by the New Zealand subsidiary for New Zealand based activities.

Comment

The issue that section GB 54 is aimed at is the ability for a non-resident to avoid New Zealand tax on its sales to New Zealand customers through structures that prevent a PE from arising in respect of those sales. Where a non-resident incorporates a subsidiary to carry on sales support services, that subsidiary may not give rise to a PE for the non-resident. Accordingly, the non-resident’s sales are still not subject to New Zealand taxation despite the presence of the New Zealand subsidiary. Further, it is the presence of the subsidiary in New Zealand that allows the non-resident to avoid having a PE in law, even though one exists in substance. Therefore, the existence of a subsidiary in New Zealand, rather than preventing PE avoidance, in fact enables it in the kinds of arrangements we are concerned about.

In relation to transfer pricing, officials understand the submitter’s point to be that the correct application of transfer pricing principles to the arrangement between the non-resident and its New Zealand subsidiary should result in the correct amount of tax being payable in New Zealand. As a result, the PE anti-avoidance rule is unnecessary.

In response, officials note that the principles underlying transfer pricing and PE profit attribution, while similar, are not the same. The transfer pricing rules seek to determine an arm’s length price for transactions between related entities. The PE profit attribution rules seek to determine what part of an enterprise’s overall profit should be attributed to a PE in a particular country. The OECD guidance is clear that profit may still be attributable to a PE even after the correct application of the transfer pricing rules to any dependent agent (depending on the circumstances). In addition, deeming a PE to exist will allow Inland Revenue to charge NRWT on any royalties paid by the non-resident that relate to its New Zealand sales. This will not be possible under the transfer pricing rules.

Accordingly, application of the transfer pricing rules alone would not produce the appropriate amount of tax for New Zealand in many cases where a PE is being avoided

Recommendation

That the submission be declined.

Issue: Treaty override

(Clauses 4, 34)

Submission

(Chapman Tripp, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, KPMG, New Zealand Law Society, Russell McVeagh)

The proposed PE anti-avoidance rule would unilaterally override New Zealand’s DTAs. It would be inconsistent with article 27 of the Vienna Convention on the Law of Treaties, which provides that a party may not rely on its internal law as justification for failing to perform a treaty (Russell McVeagh).

This override would include DTAs with countries that have made a conscious decision not to adopt Article 12(1) of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), which prevents PE avoidance. The proposed rule effectively legislates into our domestic law the same outcomes that would arise under the MLI but for countries who have either not signed up to it or have not agreed to certain PE amendments.

This is an inappropriate treatment of New Zealand’s DTA partners and will likely result in protracted and costly disputes with other competent authorities.

Further, there is concern that implementing unilateral measures outside of the OECD’s BEPS Action Plan will lead to a real risk of double taxation. It may also cause our treaty partners to respond in kind, increasing the foreign tax payable by New Zealand businesses and thus reducing the New Zealand tax (as New Zealand would give a credit for the foreign tax).

The UK and Australian PE avoidance rules are different from proposed section GB 54, in that they arguably impose a different kind of tax that is not covered by DTAs.

The PE avoidance changes would be best achieved by bilateral negotiation where New Zealand is able to benefit from the negotiation.

Alternatively, the PE anti-avoidance rule should be amended to reflect bilaterally negotiated treaty provisions (New Zealand Law Society).

Comment

The OECD’s Commentary to the Model Tax Convention (the OECD Commentary) states that, as a general rule, there will be no conflict between domestic anti-avoidance provisions and the provisions of a DTA. It also confirms that states are not obliged to grant the benefits of a DTA if the DTA has been abused (noting that this should not be lightly assumed).

The proposed PE anti-avoidance rule is an anti-avoidance measure that only applies if there is a more than merely incidental purpose of tax avoidance. Accordingly, it should not conflict with New Zealand’s DTAs in the vast majority of cases.

The proposed PE anti-avoidance rule is also broadly consistent with the OECD’s recommended BEPS measures to prevent PE avoidance, which are contained in article 12(1) of the MLI (and now form part of the OECD Model Convention). An important difference is that the OECD’s PE avoidance provision only applies in respect of a DTA if both countries agree (as the OECD cannot force countries to adopt its recommendations). However, proposed section GB 54 will apply unilaterally to our DTAs.

We consider that the PE anti-avoidance rule should expressly override our DTAs. This is to simplify the application of the rule. Otherwise, it would be necessary to show that the application of the rule was consistent with a DTA in each particular case. This would be a time-consuming and resource intensive exercise. It would significantly undermine the practical effectiveness of the rule. We also note that both the UK and Australian PE anti-avoidance rules override their DTAs. The UK and Australia defend their rules on the basis that they are the kind of domestic anti-avoidance provisions permitted by the OECD Commentary.

Further international treaties only have legal effect in New Zealand (and other countries) to the extent they are incorporated into domestic legislation. It is not illegal for New Zealand to “override” its DTAs under domestic legislation, given that the DTAs only have legal effect to the extent provided for under that same domestic legislation.

We also consider that the PE rule should apply in respect of DTAs where the other country has elected not to include the widened PE definition from the MLI. The existing position is that anti-avoidance rules are generally consistent with DTAs. We do not consider that a country’s decision not to adopt the widened PE definition in the MLI changes this principle. In particular, we do not consider that such a decision evinces a common intent that a DTA can now be abused by the taxpayer of either jurisdiction.

We also note that the widened PE definition will be added to the OECD Model Convention, and so represents what the OECD considers to be the current best practice. Countries may also not want to adopt such a provision multilaterally under the MLI, but may be happy to agree to such a provision in bilateral negotiations with New Zealand (such as Australia). Accordingly, the decision not to adopt the widened PE definition under the MLI does not mean that the other country objects to such a provision in their DTA with New Zealand.

It would be very time consuming, however, for New Zealand to renegotiate all of its DTAs to include the OECD’s new PE provision. In fact, the OECD introduced the MLI because it recognised that bilateral renegotiation of DTAs would be too time consuming. Therefore, bilateral renegotiation is not a practical solution to the problem of PE avoidance.

In relation to double taxation, officials consider that the risk to be low, given the OECD’s statements that anti-avoidance rules (such as proposed GB 54) should be consistent with DTAs in the vast majority of cases. Further, the risk should only fall on taxpayers who try to avoid New Zealand tax. Finally, while undesirable, the risk of double taxation can also be seen as a disincentive to entering into PE avoidance arrangements (which we note are typically designed to achieve double non-taxation).

Australia’s PE anti-avoidance rule (the MAAL) is part of its income tax system, just like New Zealand’s proposed PE anti-avoidance rule (the MAAL is included in Part IVA of Australia’s Income Tax Act 1936). The MAAL relates to income tax, and does not impose a separate tax. Accordingly, the MAAL’s DTA override is directly comparable to proposed section GB 54. The UK diverted profits tax is stated to be a separate tax, however it is generally calculated under the same provisions as the UK’s income taxes. We note that DTAs also apply to taxes that are substantially similar to income taxes.

Recommendation

That the submission be declined.

Issue: Royalties and the deemed PE source rule

Submission

(KPMG, PwC)

The Government should consider whether potential double withholding tax on royalties attributed to a deemed PE is appropriate policy (PwC).

Proposed section YD 4(17C) deems income to have a New Zealand source if it is attributable to a PE in New Zealand.

As acknowledged by the Bill Commentary that, if a non-resident has a PE in New Zealand under the deemed PE anti-avoidance rule in proposed section GB 54, New Zealand could impose NRWT on royalty payments made by that non-resident to another non-resident.

Using the Australia/New Zealand DTA as an example, NRWT could be imposed under article 12(5), which states that royalties would be deemed to arise in New Zealand if a non-resident has a PE in New Zealand and the royalties are deductible in determining the profits attributable to the PE. This raises a broader concern that the proposed changes increase the risk of unintended consequences, such as double taxation.

Comment

It is important for royalties connected with a deemed PE under section GB 54 to be subject to NRWT. This is because many PE avoidance arrangements involve the payment of large royalties, which shift most of the profits from the sales into a low or no tax jurisdiction (with which New Zealand does not have a DTA). If these royalty payments were not subject to NRWT under proposed section GB 54, then the section would not be effective in preventing the avoidance of New Zealand tax.

It is true that double tax may arise as a result of section GB 54, as the other country may also charge withholding tax on the royalty and may not give a tax credit for the Zealand NRWT. Double taxation is undesirable. However, we consider that the risk of it occurring in this case is necessary for proposed section GB 54 to achieve its policy objective. In addition, we note that the risk should fall only on taxpayers who try to avoid New Zealand tax. In this regard, the royalty payment is often not subject to any foreign tax under the kinds of PE avoidance arrangements we are concerned about. This means that double tax would not arise for these arrangements. Finally, the risk of double taxation can also be seen as a disincentive to entering into PE avoidance arrangements (which we note are typically designed to achieve double non-taxation).

Recommendation

That the submission be declined.

Issue: Scope of the PE anti-avoidance rule

Submission

(Corporate Taxpayers Group)

If the PE anti-avoidance rule does proceed, the scope of the rule must not be widened. In particular:

the focus of the rule should be on artificial arrangements that have a purpose of altering the incidence of tax and that purpose is more than merely incidental; and
the application of the rule should be limited to “large multinational groups”.

Comment

Officials have no intention of widening the PE anti-avoidance rule beyond its current scope. The submission does not request a change to the Bill.

Recommendation

That the submission be noted.

APPLICATION OF THE RULE

(Clause 34)

Issue: Consolidated group turnover threshold is appropriate

Submission

(Chartered Accountants Australia and New Zealand)

The proposed threshold of consolidated group turnover (over €750 million) is sensible because the rule is complex and could be difficult for smaller entities to monitor.

Recommendation

That the submission be noted. The submission does not request a change to the Bill.

Issue: Threshold may still result in rule applying to smaller New Zealand resident entities

Submission

(Chartered Accountants Australia and New Zealand)

Proposed section GB 54 will still apply to smaller New Zealand resident entities that have overseas ownership where the turnover for the total group exceeds the threshold (€750 million of consolidated group turnover). We understand that the EU has estimated that there may be up to 6,000 such multinationals globally. A large number of these will have a presence in New Zealand, but this presence will often be small. There is, therefore, an additional compliance cost for overseas owned businesses that may have relatively small New Zealand operations.

Comment

The rule only applies if the non-resident has a related party in New Zealand that carries on sales-related activities. The existence of such a related party implies a material level of economic activity in New Zealand. Accordingly, the requirement for a related party has the practical effect of requiring a more than minimal level of economic activity in New Zealand. In addition, we would not expect the rule to impose significant compliance costs on a non-resident, unless their current structure has been entered into for a purpose of avoiding tax.

Recommendation

That the submission be declined.

Issue: Application dates unclear

(Clauses 2, 4, 34, 46, and 47)

Submission

(Corporate Taxpayers Group, EY, New Zealand Law Society, PwC)

The application dates for sections GB 54 and YD 5B are unclear and should be explicitly referred to in the legislation to address any confusion. In addition, it is not clear when the proposed amendments to section BH 1 (clause 4) and section YD 5 (clauses 46 and 57) are to take effect.

These provisions should apply for income years starting on or after 1 July 2018. This would make their application dates consistent with the dates for the other PE related amendments.

Comment

Officials agree with these submissions. Proposed sections GB 54 and YD 5B, and the amendments to sections BH 1 and YD 5, should apply for income years beginning on or after 1 July 2018.

Recommendation

That the submission be accepted.

Issue: Proposed application dates do not allow sufficient time for multinationals to restructure

(Clauses 3, 34)

Submission

(Corporate Taxpayers Group, New Zealand Law Society)

In the Commentary to the Bill, the Government implicitly encourages taxpayers to restructure their New Zealand operations. However, the proposed application dates in the Bill do not recognise that restructures, particularly in the context of large multinationals, generally take a reasonable amount of time and resources to implement.

The Bill should contain provisions for transitional periods to be implemented alongside the proposed new rules. Alternatively, the proposed application dates should be delayed to give multinationals an opportunity to restructure, rather than expecting them to effectively start restructuring into an environment where there is yet no certainty on the applicable rules. (New Zealand Law Society).

Comment

We do not consider that the problem of the current ability for multinationals to avoid having a PE should be allowed to persist for future income years. This is especially the case given that proposed section GB 54 only applies to avoidance arrangements.

However, applying the new rule to multinationals that are already in the process of restructuring in response to it may not be the best use of the Commissioner’s resources. Accordingly, Inland Revenue will take any current restructuring process into account when it investigates or assesses a multinational following the introduction of the proposed rule.

Recommendation

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

ROLE OF THE FACILITATOR

(Clause 34)

Issue: Support for non-resident supply of goods or services to New Zealand rule

Submission

(Chartered Accountants Australia and New Zealand)

The criterion that a non-resident must make a supply of goods and services to a person in New Zealand, either directly or under an arrangement that includes the intermediary on-supplying the goods to another person in New Zealand is appropriate.

The submitter understands from the Commentary to the Bill that the proposed amendment is intended to include (but not be limited to) situations where the non-resident’s sale to the third party is wholly dependent on the customer agreeing to purchase the goods. This is appropriate.

Recommendation

That the submission be noted. The submission does not request a change to the Bill.

Issue: Introducing the concept of a ‘facilitator’ is a good step forward

Submission

(Dr Victoria Plekhanova)

The introduction of the concept of a ‘facilitator’ is a good step forward towards the protection of the New Zealand corporate tax base from erosion.

Recommendation

That the submission be noted. The submission does not request a change to the Bill.

Issue: The proposed PE rules should be consistent with the OECD Action Plan

Submission

(Russell McVeagh)

The proposed PE anti-avoidance rule applies when a non-independent facilitator in New Zealand brings about the supply by a non-resident to New Zealand customers (proposed paragraphs GB 54(1)(a) – (c)).

These provisions should be made consistent with Action 7 of the OECD Action Plan and article 12(1) of the MLI. This means that the facilitator should be required to “habitually conclude contracts, or habitually play the principal role of leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise” before a PE can arise. Otherwise, the proposed PE avoidance rule will be much broader than the OECD’s measure.

Comment

Proposed paragraphs GB 54(1)(a) – (c) are wider than the OECD’s test in article 12(1) of the MLI. However, the proposed PE anti-avoidance rule in section GB 54 is subject to several other requirements. In particular, the arrangement must have a more than merely incidental purpose of tax avoidance. This requirement is not included in article 12(1) of the MLI and it significantly narrows the scope of s GB 54. We expect the PE anti-avoidance rule in s GB 54 (including all of its requirements) and article 12(1) of the MLI will have a broadly similar scope, although there will be differences in some cases. Therefore, the wording in article 12(1) together with the other requirements of s GB 54 would excessively narrow the scope of the proposed rule.

Recommendation

That the submission be declined.

Issue: Facilitator rule should cover sales only

Submission

(Chartered Accountants Australia and New Zealand)

The rule that the facilitator in New Zealand must carry on an activity for the purpose of bringing about the supply should cover sales only, and not extend to activities that do not relate to a specific sale such as warehousing, marketing, and advertising.

The legislation excludes preparatory or auxiliary activities and the distinction is clearly articulated in the Commentary to the Bill. The Commentary to the Bill states that “only activities designed to bring about a particular sale to an identifiable person should potentially result in a deemed PE.” We therefore believe the rule is sufficiently targeted to the activities it intends to catch.

Comment

We agree with the submitter’s interpretation of the relevant provisions and the policy intent. We note that no amendment is requested by the submitter.

Recommendation

That the submission be noted.

Issue: The legislation should further clarify the kind of activities intended to be caught by the rule

Submission

(PwC)

The legislation is still unclear as to the kind of activities that need to be carried on by a facilitator before proposed section GB 54 may apply.

The Bill Commentary is helpful in acknowledging that:

Only activities designed to bring about a particular sale to an identifiable person could potentially result in a deemed PE.
Activities which do not relate to a particular sale (such as advertising and marketing) would not be sufficient to trigger a deemed PE.
After sale activities (i.e. technical support) would not trigger a deemed PE, given they have occurred after the supply has been made.
Ordinary distributor arrangements are not within the scope of the proposed rule.

However, the draft legislation does not adequately reflect this policy intention (with the exception of the final point above). The legislation should be narrowed to more clearly reflect what the Commentary states to be the intended effect.

Comment

It is not feasible to individually address in the legislation all the multifarious circumstances in which the proposed rule may or may not apply. Instead, the legislation attempts to set out clear and easily understandable principles that can be applied to determine whether an activity is inside or outside the scope of the rule. Officials intend to provide guidance on how these principles apply (including specific examples) shortly following enactment of the Bill.

In relation to the specific issues raised in the submission (excepting the last point):

In proposed section GB 54(1)(a), the legislation refers to a specific supply which is made under an arrangement to a recipient. This supply is defined as the “facilitated supply”. Under proposed section GB 54(1)(b), the facilitator needs to carry out an activity for the purpose of bringing about the facilitated supply to the recipient. We consider the reference to the “facilitated supply” means that a particular supply is being referred to.
For section GB 54 to apply, the particular supply must be made to a recipient under a single arrangement. This means the recipient must be identifiable. However, where an intermediary is involved, it is not clear that the final recipient must be identifiable to the facilitator. Accordingly, we recommend that section GB 54(1)(a)(ii) be amended so that the recipient of the supply be known to the facilitator at the time the non-resident’s supply is made to the intermediary.
The facilitated supply and the facilitator’s activity must be made under the same arrangement. An activity that did not relate to a particular facilitated supply (such as advertising or marketing) would not be made under the same arrangement as the facilitated supply itself. In addition, there would not be an identifiable recipient of the supply. Accordingly, these activities would not trigger a deemed PE under the current drafting.
After sales activities would occur after the sale. While the promise to provide the after sale support may have helped convince the recipient to acquire the goods or services, the actual activity of providing the after sale services would not be for the purpose of bringing the prior sale about. Accordingly, after sale activities would not trigger a deemed PE under the current drafting.

Recommendation

That the submission be accepted in part, by amending section GB 54(1)(a)(ii) so that when an intermediary is involved, the recipient of the supply must be known to the facilitator at the time the non-resident’s supply is made to the intermediary.

Issue: Does the facilitator include employees visiting New Zealand?

Submission

(PwC, EY)

Is the facilitator (proposed section GB 54(1)(b) intended to capture employees of the non-resident visiting New Zealand? The submitters assume not, as the non-resident would not have a PE if the OECD’s expanded PE definition was applied instead.

In particular, section GB 54(1)(b) should not apply to “fly in, fly out” arrangements, where non-residents do not have any permanent presence in New Zealand (either directly or through a related party) but instead send personnel to New Zealand on temporary trips.

Comment

There is no black letter rule in DTAs which provides that fly in, fly out employees or representatives cannot give rise to a PE for a non-resident (we note there is no requirement in our DTAs for a dependent agent’s activities to be connected with a fixed and permanent place in New Zealand in order for them to give rise to a PE). Whether a PE arises is always a question of fact and circumstance. There may be some circumstances in which a fly in, fly out employee or representatives does give rise to a PE. Fly in, fly out employees and other representatives of the non-resident should therefore not be automatically excluded from section GB 54. Otherwise, a PE could still be avoided in a fly in and fly out arrangement.

The specialist advisor to the Finance and Expenditure Select Committee (Specialist Advisor) has suggested we clarify proposed section GB 54(1)(a) by stating that the facilitator includes an employee of the non-resident. We agree with this suggestion.

Recommendation

That the submission be declined. However, proposed section GB 54(1)(a) should be amended to provide that the facilitator includes an employee of the non-resident.

Issue: Physical location of the facilitator

Submission

(EY)

Proposed section GB 54(1)(b) should clarify that the facilitator must be physically located in New Zealand when the activities are performed. The current wording could be interpreted to mean that a facilitator could carry on activities remotely and still be caught by the section. We recommend the wording in the section is aligned to that in the Commentary.

Comment

Section GB 54(1)(b) requires that the facilitator carries out the facilitation activities in New Zealand. This requires the facilitator to have a presence in New Zealand in order to carry out the activities here. If the facilitation service was carried out remotely, for example over the internet from Australia, then we consider the activities would not be carried out in New Zealand. Instead they would be carried out in Australia, as this is where the personnel actually carrying out the activity would be located.

We also note that the reference in section GB 54(1)(b) to activities carried on in New Zealand is similar to the reference to a business being carried on in New Zealand in section YD 5(2). There is overseas case law that the relevant business activities actually need to be physically carried out in the relevant country – it is not enough if all the of the business activities are carried on remotely (Grainger v Gough [1896] AC 325; McDermott Industries (Aust) Pty Ltd v FCT 2005 ATC 4398). Finally, section YD 5(3) also refers to business activities carried out in New Zealand (with no reference to the physical location of the taxpayer). It is clear in this context that the business activities must actually be performed in New Zealand. Accordingly, it would be inconsistent with the application of other, similar provisions if remote activities were treated as carried on “in New Zealand” under section GB 54(1)(b).

In addition, the intention is for section GB 54(1)(b) to apply both where the facilitator is located in New Zealand (e.g. a New Zealand incorporated company), and where the facilitator is a non-resident with a New Zealand presence (e.g. a branch). If the provision required the facilitator to be physically located in New Zealand, the application of the rule could be unclear where the facilitator was a foreign company operating through representatives in New Zealand.

Recommendation

That the submission be declined.

Issue: Criterion for commercial dependence of non-resident is appropriate

Submission

(Chartered Accountants Australia and New Zealand)

We support the criterion that the facilitator will be commercially dependent on the non-resident if it derives 80% of its income from the non-resident (proposed section GB 54(c)(ii)). This test will be easier to apply than a more subjective test of “commercial dependence” and this will reduce compliance costs for businesses.

Recommendation

That the submission be noted. The submission does not request a change to the Bill.

Issue: The facilitator should not include commercially dependent entities, or the measurement should be clarified

Submission

(Chapman Tripp, EY, New Zealand Law Society)

The facilitator should not include commercially dependent but non-associated entities.

A test that is based on the facilitator’s income will be difficult for the non-resident to apply. The facilitator’s income could vary due to decisions or circumstances made outside the control of the non-resident. It would be unfair for a non-resident’s tax position to be affected by decisions made by unrelated parties.

Alternately, more clarity should be provided about the test, such as the time period over which it should be measured. The time period should be set to equal the life of the facilitator’s business thus far, so that facilitators that are truly independent when considered over the long run are not inadvertently included (New Zealand Law Society).

In addition, there should be protection for the non-resident if the facilitator provides inaccurate information or fails to provide the information in time (EY).

Comment

It is important that facilitators include commercially dependent entities. Otherwise, a non-resident could continue to avoid a PE in New Zealand by substituting a wholly-owned subsidiary for a nominally independent facilitator that is under the non-resident’s de facto control.

Officials consider that the 80% test is an appropriate threshold to measure commercial dependence. We would not expect facilitators to fall in and out of the threshold in the ordinary course of their business.

In addition, the presence of an associated or commercially dependent facilitator is only one of several requirements that must be met in order for proposed section GB 54 to apply. In particular, the facilitator must be part of an arrangement with a more than merely incidental purpose of tax avoidance. This requirement would not be met where the facilitator was engaged for commercial purposes only.

Officials therefore consider the commercial dependence provision should remain. However, we agree that the period over which the 80% test is to be measured be specified. We recommend that the 80% test should be required to be met for the current income year and the previous income year. This should prevent facilitators from accidentally meeting the commercially dependent test due to unusual circumstances in a particular year, and so give more certainty about the test’s application. Requiring the test to be met for the previous income year will also put the non-resident on notice that the facilitator may be commercially dependent on it in the current income year.

Further, it means that a facilitator will not be commercially dependent in its first year of operation. This is appropriate, as a facilitator will be are trying to establish its client base in its first year and might have only a single client during this period.

Recommendation

That the submission be accepted in part, by requiring that the 80% test in proposed section GB 54(1)(c)(ii) be required to be met for both the current income year and the previous income year.

Issue: The 80% assessable income test should be a necessary but not sufficient criterion in the commercially dependent test for a facilitator

Submission

(Chapman Tripp)

Section GB 54 is intended to reflect the dependent agent PE provision in DTAs, with a similar “independent agent” provision. However the OECD’s independent agent exclusion is more flexible and permits an agent to be independent even where it has only one principal. Accordingly, proposed section GB 54 should allow an agent to demonstrate that it is not commercially dependent even if it derives more than 80% of its income from the non-resident.

Comment

Determining whether an agent is commercially dependent is inherently subjective and uncertain. For this reason, the decision was made to use the 80% test. Allowing an agent to demonstrate that it is not in fact commercially dependent would re-introduce that subjectivity and uncertainty. The divergence from the OECD’s test for independence in this regard is deliberate and desirable in officials’ view.

Officials also note that the facilitator must be part of an arrangement that has a more than merely incidental purpose of avoiding tax in order for s GB 54 to apply (amongst other requirements). This requirement is not present in the DTA’s test for a dependent agent.

Recommendation

That the submission be declined.

PURPOSE OF AVOIDANCE TEST

Issue: More than merely incidental purpose criterion is appropriate

Submission

(Chartered Accountants Australia and New Zealand)

The proposal that an arrangement must have a more than merely incidental purpose of avoidance is appropriate, as it is an anti-avoidance rule.

Recommendation

That the submission be noted. The submission does not request a change to the Bill.

Issue: Proposed purpose of avoidance test too broad

Submission

(Chapman Tripp, New Zealand Law Society)

The purpose of avoidance test in proposed paragraphs GB 54(1)(h) and (i) is too broad and could catch ordinary commercial arrangements.

Comment

The test requires a more than merely incidental purpose of tax avoidance. This is a common test appearing in other specific anti-avoidance tests throughout the Act (e.g. section GB 35(2)). It is also a component of the general anti-avoidance test in section BG 1. There is a significant body of case law on the merely incidental test. This has typically required a degree of artificiality and contrivance before the test can apply (see the decision of Woodhouse P in Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (CA)). In particular, the test has not been held to apply to ordinary commercial arrangements (i.e. arrangements undertaken for commercial purposes). Accordingly, officials do not agree that the purpose of avoidance test would capture ordinary commercial arrangements.

The test may apply to tax avoidance arrangements that have been adopted by numerous taxpayers, and so may have come to be viewed as ordinary in certain quarters (for example, the conduit tax arrangements adopted by several banks and subsequently found to be tax avoidance by the courts). However, the application of the test to such arrangements is appropriate in officials’ view.

Recommendation

That the submission be declined.

Issue: The phrase “merely incidental” needs legislative clarification

Submission

(KPMG)

The meaning of the phrase “merely incidental” needs to be clearly established in the legislation.

The case law on the phrase “merely incidental” for section BG 1 is intended to apply to the test in proposed section GB 54. Based on case law, in practice, this test considers whether there are sufficient commercial reasons for the arrangement so that its tax effects are consequential on those reasons being achieved. It is not a test of whether the tax “avoided” is an absolute large number or not. We consider this should be made explicit in the legislation.

Comment

The phrase “merely incidental” has been subject to a large body of case law and has been extensively interpreted by judges. Officials do not want to upset that previous case law by introducing legislative elements to the test.

Under this case law, the size of the tax benefit achieved under the arrangement will not on its own establish whether a tax avoidance purpose is merely incidental. Nevertheless, it may be a strong evidential factor a court will consider in reaching a view on whether a tax avoidance purpose is more than merely incidental. If the tax benefits are very large, it may be difficult to establish that the tax benefits follow naturally from, or are necessarily and concomitantly linked to, some other purpose (Hadlee v Commissioner of Inland Revenue [1989] 2 NZLR 447 (HC) at [470]; Westpac Banking Corporation v Commissioner of Inland Revenue (2009) 24 NZTC 23,834 at [597]).

Accordingly, the significance of the amount of tax avoided has been appropriately considered under the existing case law.

Recommendation

That the submission be declined.

Issue: Parliamentary contemplation test should apply

Submission

(Chapman Tripp)

The parliamentary contemplation test should be retained for proposed section GB 54. There is no principled reason why, if a taxpayer can successfully show that their arrangement uses tax provisions in a way that was contemplated by Parliament, they should still be caught by section GB 54. There is no risk to the revenue of retaining the parliamentary contemplation limb, as the taxpayer has the legal onus of showing that their arrangement is not tax avoidance.

The parliamentary contemplation limb is critical in determining what is, and what is not, tax avoidance. Without that test, the avoidance test will become even more uncertain than it currently is – the relevance of existing case law on avoidance will often be unclear, as particular statements by the courts could be interpreted to apply only to the parliamentary contemplation limb, or only to the merely incidental limb, or to both limbs.

Comment

The parliamentary contemplation test provides that an arrangement must use the relevant tax provisions in a manner not contemplated by Parliament before it can be a tax avoidance arrangement. If an arrangement does use the provisions in a manner not contemplated by Parliament, then the arrangement will be subject to the general anti-avoidance test (GAAR) in section BG 1 only if it also has a more than merely incidental purpose of tax avoidance. Accordingly, the parliamentary contemplation is the first part of the two part test which determines whether section BG 1 applies.

The parliamentary contemplation test arises out of the need to reconcile Parliament’s purpose for the specific tax provisions (which may have been intended to confer a benefit in the circumstances) with its purpose for section BG 1 (see Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115 at [102]). The proposed PE anti-avoidance rule is a specific anti-avoidance provision, rather than a GAAR. The circumstances in which the PE anti-avoidance rule applies have been carefully circumscribed and the intention is simply for the rule to apply, when the specified criteria are met. Given this, there is no need or scope for the reconciliation of the PE anti-avoidance rule with any other provisions in the Act in terms of Parliament’s purpose. Accordingly, retaining the parliamentary contemplation test would not be appropriate.

Recommendation

That the submission be declined.

Issue: Parliamentary contemplation test could still apply

Submission

(Chartered Accountants Australia and New Zealand, KPMG)

There remains a risk that the parliamentary contemplation test could still apply when arrangements are considered under proposed section GB 54.

If the intention is for the parliamentary contemplation test to be excluded, this should be clear in the legislation.

Comment

The parliamentary contemplation test is related to the definition of “tax avoidance arrangement” or “tax avoidance” used by section BG 1. Officials consider that by avoiding these definitions, it should be sufficiently clear that the parliamentary contemplation test is not intended to also apply. This intent is also buttressed by the Commentary, which makes it clear that the parliamentary contemplation test is not to apply.

In addition, as discussed above, there is no need or scope for the reconciliation of the PE anti-avoidance rule with any other provisions in the Act in terms of Parliament’s purpose. Accordingly, the parliamentary contemplation test is not appropriate in the context of section GB 54.

Recommendation

That the submission be declined.

Issue: Purpose of avoidance test should use similar wording to section BG 1

Submission

(Russell McVeagh)

The PE anti-avoidance test in proposed section GB 54(1)(h) should be drafted more consistently with the definition of tax avoidance arrangement in the existing GAAR (section BG 1), with the modification that in considering whether a purpose or effect of tax avoidance is more than incidental, it is permissible to consider any avoidance of foreign tax as well as New Zealand tax. Otherwise, there is no justification for not using the existing anti-avoidance drafting that has been interpreted by the courts.

Comment

As noted above, sections GB 54(1)(h) and (i) deliberately do not use the definition of a “tax avoidance arrangement”. This is so the parliamentary contemplation component of the section BG 1 anti-avoidance test does not apply. The reasons for this are set out in our response to Chapman Tripp’s submission on the issue. In addition, the other specific anti-avoidance provisions of the Act which refer to a more than merely incidental purpose generally do not use the phrase “tax avoidance arrangement” (see, for example, sections HA 41(8), GB 31(1), GB 35(2) and GB 42(2)).

Section GB 54(1)(i) refers to a more than merely incidental purpose of tax avoidance. This concept has been extensively considered by the courts in relation to section BG 1 and its predecessors. Officials expect this case law to be equally applicable under section GB 54(1)(i).

Recommendation

That the submission be declined.

Issue: Avoidance test should require further indicia of avoidance

Submission

(EY, KPMG, Chartered Accountants Australia and New Zealand)

Some of the uncertainty in the merely incidental test could be addressed by including the requirements contained in the UK’s or Australia’s DPT.

In particular, the DPT does not apply where:

there is a similar tax result in the foreign jurisdiction (the applicable foreign tax rate is greater than 80% of Australia’s corporate tax rate); or
the Australian activity is sufficiently remunerated; or
there is sufficient economic substance to the arrangement.

These tests are more straightforward indicators of whether the rule should apply or not. Without such indicia there is a risk of the rule applying more widely than intended.

Comment

Officials do not recommend introducing specific criteria which must be met before the purpose of avoidance test is met. The PE anti-avoidance rule in both the UK and Australia do not require such additional criteria in their purpose of avoidance limbs (although the UK rule includes additional criteria in an alternative limb to its main avoidance test).

The anti-profit shifting rules in the Australian and the UK DPTs do require that the arrangement lacks economic substance, or that the non-resident is subject to less taxation in its home jurisdiction than the source jurisdiction in relation to the arrangement.

We prefer not to introduce further requirements such as these because it can be difficult to determine whether the non-resident does face a lower tax impost in their overseas jurisdiction – as this could be affected by matters such as the availability of tax losses or credits and special tax relief. In addition, officials would still be concerned if a PE (and therefore tax) was being avoided in New Zealand, even if the non-resident did face a similar tax impost in its home jurisdiction. In this regard, taxpayers often prefer to pay tax in their home jurisdiction – for example, Australia’s imputation system incentivises companies in Australia to pay Australian tax, as the payment of Australian tax (unlike the payment of foreign tax) gives rise to franking credits which can be used by the company’s shareholders to offset the tax payable on dividends received. We therefore recommend against a requirement for the non-resident to be subject to a lower foreign tax impost.

In relation to the economic substance test, we expect this to already form part of the current purpose of avoidance test. Woodhouse P in Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (CA) commented on the relevance of economic substance to the merely incidental test at [535]:

When construing s 99 and the qualifying implementations of the reference in subs (2)(b) to “incidental purpose” I think the questions which arise need to be framed in terms of the degree of economic reality associated with a given transaction in contrast to artificiality or contrivance or what may be described as the extent to which it appears to involve exploitation of the statute while in direct pursuit of tax benefits.

We prefer that the degree of economic substance of any arrangement be taken into account in this way, where it can be weighed against other factors, rather than being included as a strict black or white requirement. Including such an economic substance requirement would also further complicate the provision and require the repetition of much analysis relevant to the merely incidental test.

Finally, we note the requirement for the Australian entity to be sufficiently remunerated is a de minimis rule rather than an indicia of avoidance (it provides that the Australian group must derive at least AUS$25 million of annual Australian income for the DPT to apply). The desirability of a de minimis test is discussed elsewhere in this report.

Recommendation

That the submission be declined.

Issue: Savings provision for no avoidance in other country

Submission

(Chartered Accountants Australia and New Zealand)

The Government should consider introducing a savings provision to allow the non-resident to prove that there is no tax avoidance in the other country.

One of the criteria in the proposed rule (in proposed section GB 54(1)(h)) is that the arrangement has a purpose of avoiding foreign tax. We do not believe the existence of foreign tax avoidance should be the subject of dispute in New Zealand courts. An exception should be introduced that allows the non-resident to provide assurance that no tax has been avoided in the foreign country. The exception should specify what the non-resident would need to provide to confirm that no tax has been avoided.

Comment

Proposed section GB 54(1)(h) is not directed towards preventing foreign tax avoidance. It is directed towards preventing New Zealand tax avoidance only. The reference to foreign tax is only intended to prevent any argument that an arrangement’s avoidance of New Zealand tax was only incidental to its avoidance of foreign tax. For this reason, the proposed section requires either the avoidance of New Zealand tax or the avoidance of both New Zealand tax and foreign tax.

Given this, it would not be appropriate to allow an exception to the rule where no foreign tax has been avoided.

Recommendation

That the submission be declined.

Issue: Avoidance of foreign tax

Submission

(KPMG)

The reference in proposed section GB 54(1)(h) to the avoidance of foreign tax does not make sense. In order to determine that foreign tax has been avoided, it is presumably necessary to consider whether the foreign country considers the arrangement to be tax avoidance. This is a potentially circular test – if there is foreign tax avoidance, it can be expected that this would be counteracted by the other country. If not, by definition, it is not tax avoidance but an expected and allowed result. This illustrates the difficulty of the proposed rule, which substitutes New Zealand’s view of what is acceptable for another country’s view. For this reason, the issue of PE avoidance is better dealt with by explicit agreement with New Zealand’s treaty partners.

Comment

The words “tax avoidance” are not used in section GB 54(1)(h) – the section only requires there to be an arithmetic reduction in foreign tax payable. Section GB 54(1)(h) has been drafted this way to specifically exclude any question of whether the reduction of tax is acceptable or not. Section GB 54(1)(h) therefore does not involve any question of whether that reduction in foreign tax (or New Zealand tax for that matter) is acceptable. Accordingly, it does not involve New Zealand substituting its view of what is acceptable from another country’s view.

It is also worth noting that, if section GB 54 applies, it will only have effect in relation to New Zealand tax. It will not require, or otherwise affect, the payment of any foreign tax. Section GB 54 therefore prevents the avoidance of New Zealand tax only. The reference to foreign tax is only intended to prevent any argument that an arrangement’s avoidance of New Zealand tax was only incidental to its avoidance of foreign tax.

Recommendation

That the submission be declined.

ADMINISTRATIVE MATTERS

Clause 34

Issue: Clarifying guidance required

Submission

(EY, PwC, KPMG, Deloitte)

It is very important for Inland Revenue to publish clarifying guidance and examples detailing the circumstances in which proposed section GB 54 is to be applied. This should make it clear that the rule is to be applied on a case by case basis, with careful attention paid to the particular circumstances of each non-resident.

Comment

Officials will provide detailed guidance in a Tax Information Bulletin shortly following enactment of the Bill, which will explain the rule’s application. This guidance will address the examples contained in PwC’s and KPMG’s submissions. It will also cover which PE rule applies in which circumstances.

Recommendation

That the submission be accepted. The submission does not require any amendment to the Bill.

Issue: Guidance on attribution of profits to PEs

Submission

(Chapman Tripp, KPMG, New Zealand Law Society, PwC)

There is insufficient guidance as to how the PE profit attribution principles apply. Inland Revenue should provide detailed guidance on the method New Zealand will use to attribute profits to a PE. Although there is OECD guidance on the method of attribution of profits to PEs, it is not sufficient to rely on this guidance for the purposes of proposed section GB 54.

Comment

Officials agree that guidance should be provided as to the profit attribution principles New Zealand currently uses as New Zealand follows an earlier version of the OECD’s current authorised approach. Shortly following enactment of the Bill, officials will publish appropriate guidance, including the parts of this OECD guidance which New Zealand currently uses. However, officials do not intend to provide detailed guidance given that New Zealand simply follows a version of the OECD’s own detailed guidance on the attribution of profits.

Officials note that the OECD guidance on profit attribution should apply equally to formal PEs and deemed PEs under proposed section GB 54. Accordingly, officials do not consider that additional guidance needs to be provided on the attribution of profits in the context of section GB 54.

Recommendation

That the submission be accepted. The submission does not require an amendment to the Bill.

Issue: Compliance obligations for new rule

Submission

(EY)

When seeking to apply the new rules, the Commissioner should give weight to the compliance obligations for business. For a multinational business, changes to a domestic operating model is a highly significant exercise and may take a number of years. This is a particular issue for Australian-owned businesses, which will generally have a 30 June balance date, and so will be required to apply the new rule immediately.

Comment

Inland Revenue will take any restructuring process into account when it investigates or assesses a multinational following the introduction of the proposed rule.

Recommendation

That the submission be accepted, subject to officials’ comments. The submission does not require an amendment to the Bill.

Issue: Post-implementation review

Submission

(PwC)

There should be a post-implementation review of the proposed PE avoidance rule within three years of its enactment. At that time, the Government should consider whether the proposed rule has resulted in unintended consequences for business and Inland Revenue, such as multinationals exiting their investments in New Zealand.

Comment

Officials will monitor the implementation of the proposed PE rule to determine whether it is achieving its intended purpose and whether it is having unintended consequences.

Recommendation

That the submission be accepted, subject to officials’ comments. The submission does not request a change to the Bill.

OTHER MATTERS

(No specific clause reference)

Issue: Profit attribution

Submission

(PwC)

New Zealand’s current approach to attributing profits to a PE should be reconsidered to better reflect the substance of the economic activity carried out in New Zealand.

New Zealand follows an earlier version of the current authorised OECD approach (AOA) to profit attribution. This earlier version only permits actual costs incurred by the non-resident to be attributed to a non-resident PE. The amount of profit subject to New Zealand tax can therefore be disproportionate compared to the economic activity of the PE because, for example, value attributed to intellectual property generated offshore may be taxed in New Zealand. This approach is also inconsistent with the proposed transfer pricing changes, which are intended to base the transfer pricing rules on economic substance rather than legal form.

Alternatively, Inland Revenue needs to assist taxpayers by releasing more detailed guidance in this area as to how the appropriate economic outcome can be achieved within the existing framework.

Comment

New Zealand’s approach to the attribution of profits to PEs is consistent with the approach of Australia and the majority of OECD member countries, who have not adopted the AOA. This approach is embedded in our treaty network and accepted by all our treaty partners.

At an international level, different approaches to the attribution of profits take different views as to what constitutes economic activity. Each approach results in a proportionate outcome based on that view.

Under the New Zealand approach, economic activity includes the exploitation of intangible property in New Zealand and recognises the PEs ownership of the exploited intangible property, as appropriate. It does not tax overseas generated intangible property that has no connection to New Zealand. This is considered to be an appropriate and proportionate outcome for the New Zealand economic activity.

With respect to consistency, the attribution of profit to PEs and transfer pricing apply the arm’s length principle to two fundamentally different constructs and therefore full alignment is not an objective, either domestically or internationally. We note, however, that the proposed transfer pricing changes will result in a closer alignment of these rules. This is because the proposed changes will allow certain inter-company contractual arrangements, which do not exist in a profit attribution scenario, to be set aside.

As discussed in our response to an earlier submission, Inland Revenue plans on publishing guidance on the attribution of profits to PEs.

Recommendation

That the submission be declined.

Issue: A DPT should not be dismissed

Submission

(New Zealand Council of Trade Unions)

DPTs have been implemented in Australia and the United Kingdom. They are levied at a penal rate and aimed at incentivising multinationals to pay the right amount of tax under the standard rules. The effect of the Bill should be monitored for a limited time and a DPT should be reconsidered if the legislation is not working.

Comment

The Government has not ruled out the adoption of a DPT in the future.

Recommendation

That the submission be noted. The submission does not request a change to the Bill.

Issue: A DPT should be adopted

Submission

(Public Health Association of New Zealand)

The Bill should mandate action on what is referred to in the UK and Australia as ‘diverted profits’. Although the idea of ‘diversion’ is euphemistic and the reality should be conceptualised as ‘tax avoidance’, an approach to this issue should be adopted similar to that adopted in both the UK and Australia in their DPTs. This is basically a rebuttable penalty approach to tax avoidance: that is, tax authorities may consider, on the basis of external evidence, that tax avoidance has occurred, but this assumption can be rebutted.

Comment

The Government has decided to adopt the measures in the Bill instead of a DPT. However the Government has not ruled out the adoption of a DPT.

Recommendation

That the submission be declined.

Issue: New Zealand should adopt a ‘facilitation from abroad’ rule

Submission

(Dr Victoria Plekhanova)

Proposed section GB 54 does not tackle a situation when a foreign firm is conducting or facilitating cross-border direct sales of goods and services to customers in New Zealand through its foreign subsidiary but not paying tax on income from these sales either in the country where the firm’s foreign subsidiary is incorporated (because the customers are in New Zealand) or in New Zealand (because sales were direct and were not facilitated in New Zealand).

If the Government is prepared to accept the political and (possibly) economic risks of overriding DTAs and wants to protect the New Zealand corporate tax base from BEPS activities, section GB 54 should include a ‘facilitation from abroad’ rule. Under this rule, a direct cross-border supply of goods or services to the recipient or the intermediary in New Zealand should be deemed as a business carried on in New Zealand if this supply was conducted by a non-resident firm and facilitated from a country other than the country of this firm’s incorporation.

New Zealand should also encourage Australia and its other trading partners to consider adopting their own ‘facilitation from abroad’ rule and to enter into an agreement for the mutual recognition of each other’s taxing rights based on this rule.

Comment

Under the current international tax framework, a non-resident is generally not subject to tax on its business profits unless it has a presence (e.g. a PE) in New Zealand. Section GB 54 is intended to prevent the avoidance of our current PE provisions. It is not intended to depart from the current international tax framework in substance.

If a supply is facilitated by a non-resident from another country outside of New Zealand, then there is still no physical presence in New Zealand. It would depart from the substance of the current international PE rules if we taxed a non-resident on its New Zealand business profits in these circumstances (where neither the non-resident nor the facilitator had a presence in New Zealand). Accordingly, we consider the submission is outside the scope of proposed section GB 54.

The submission does, however, raise an interesting point concerning the potential use of overseas facilitators to achieve double non-taxation. Officials will consider this further and decide whether it should be addressed in a subsequent policy project.

Recommendation

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

Issue: Interaction between the PE anti-avoidance rule and the Transpacific Partnership

Submission

(New Zealand Council of Trade Unions)

The Committee should ask officials whether provisions of the proposed ‘Comprehensive and Progressive Transpacific Partnership’ (CPTPP, formerly the TPPA) will create any difficulties in deeming or requiring tax presence or PE. For example, Article 10.6 of the CPTPP states:

Local Presence: No Party shall require a service supplier of another Party to establish or maintain a representative office or any form of enterprise, or to be resident, in its territory as a condition for the cross-border supply of a service.

Comment

Officials consider that the CPTPP does not create any difficulties in relation to the PE anti-avoidance rule contained in the BEPS Bill.

Article 10.6 of the CPTPP only prevents New Zealand from actually requiring a non-resident to establish a presence in New Zealand. The proposed PE anti-avoidance rule in the BEPS Bill does not require the non-resident to establish an actual presence here – it simply allows New Zealand to tax the non-resident as if it did have a PE. In addition, Article 29.4 of the CPTPP provides that the CPTPP does not affect taxation measures, subject to certain specified exceptions. Article 10.6 is not included in those exceptions. Accordingly, it does not apply in relation to the tax measures in the BEPS Bill.

We have also reviewed the parts of the CPTPP that do apply for tax purposes. None of these should affect the proposed PE anti-avoidance rule in section GB 54. The main reason for this is that relevant CPTPP provisions generally require “national treatment” for imported goods and services. This means that a non-resident should not be subject to less favourable tax treatment than a resident. The proposed PE anti-avoidance rule basically removes the current exclusion of certain non-residents (i.e. those avoiding a PE in New Zealand) from New Zealand tax. The result of this is that such non-residents will be subject to essentially the same tax treatment as New Zealand residents. Accordingly the rule does not result in less favourable treatment for a non-resident compared with a resident.

The submission does not request a change to the Bill.

Recommendation

That the submission be noted.

Issue: The PE concept is outdated

Submission

(Chartered Accountants Australia and New Zealand)

The OECD uses the concept of a PE to tax business profits. The model is becoming increasingly less relevant in the information age and to the sharing economy. Officials should work with their OECD counterparts to design a model that is more appropriate for 2020.

Comment

Officials agree with this submission. The OECD is currently discussing these issues as part of its project on taxing the digital economy. New Zealand officials are participating in these discussions. An interim draft report was published by the OECD on 16 March 2018.

Recommendation

That the submission be accepted. The submission does not request a change to the Bill.

PERMANENT ESTABLISHMENT SOURCE RULE

(Clauses 44 – 48)

Issue: The PE attribution rule is clear and workable

Submission

(Chartered Accountants Australia and New Zealand)

The proposal that income will have a New Zealand source if it is attributable to PE in New Zealand is clear and workable. We would like to thank officials for listening to earlier submissions.

Recommendation

That the submission be noted. The Submission does not request a change to the Bill.

Issue: PE source rule should not proceed

Submission

(Chapman Tripp, New Zealand Law Society)

The PE source rule in proposed section YD 17(C) should not proceed for a number of reasons. This rule provides that income will have a source in New Zealand if it is attributable to a PE in New Zealand.

First, the measures proposed in the Bill are intended to reflect New Zealand’s response to BEPS. However, the introduction of a PE source rule is not proposed or endorsed by the OECD BEPS project.

Second, the Commentary to the Bill states that the proposed PE source rule is intended to reduce the compliance and administrative burden of determining a non-resident’s tax liability for its sales to New Zealand customers. However, this in itself is not a strong enough reason to effectively depart from international norms by introducing standalone rules.

Third, given the focus of the rule is to ensure that an appropriate proportion of non-residents’ income from sales to New Zealand customers is attributed to the sales activities carried out in New Zealand for the purpose of facilitating those sales, the proposed changes to the transfer pricing rules should be sufficient to address these concerns. The intended target of the rule can be adequately dealt with by applying the revised OECD Transfer Pricing Guidelines.

Fourth, it is not obvious that New Zealand should take an OECD restrictive rule that is designed to restrict a state’s taxation power and use it as an affirmative taxing rule to expand New Zealand’s base.

Fifth, proposed section GB 54 was modelled on the Australian MAAL, but Australia did not also introduce a new PE source rule.

Comment

The primary purpose of the PE source rule is not to capture non-residents’ sales income from sales to New Zealand customers where sales activities are carried out in New Zealand for the purpose of bringing those sales about (although it will apply in respect of any PE deemed to exist under proposed section GB 54). The purpose is to align New Zealand’s source rules with our taxing rights under our DTAs. This has always been the stated intention of the rule (see the March 2017 Discussion Document on the rule and the Bill Commentary).

This alignment will improve compliance and administration (so there is only a single test for determining whether New Zealand may tax a non-resident on business income that is covered by a DTA). It also ensures that New Zealand is able to tax non-residents under our domestic rules where we have agreed a right to do so with the non-resident’s home jurisdiction under a DTA.

Further, income attributable to a PE is internationally recognised as being sufficiently connected with the source state to be taxable there. Accordingly, we consider that our source rules would be deficient if they did not allow for such income to be taxed here. In addition, the proposed PE source rule is fully consistent with international taxation norms – given that it effectively legislates one of them into our domestic legislation.

The rule is not part of the OECD’s BEPS recommendations (but it is not inconsistent with it either). The OECD’s BEPS recommendations were, however, not intended to restrict a nation’s right to enact legislation not specifically covered by the recommendation. Otherwise, it would not be permissible for New Zealand to enact any non-BEPS related legislation. In addition, the amendment makes New Zealand’s domestic laws more consistent with the OECD’s international tax framework.

Australia already has a rule which deems income attributable to a PE to have an Australian source (although it is included in their DTAs, which are then incorporated into their domestic legislation). Accordingly, it was not necessary for Australia to introduce such a rule when it introduced the MAAL because such a rule already existed.

Finally, the application of transfer pricing rules is not sufficient to address concerns with the taxation of PE’s in New Zealand. The reasons for this are explained in relation to an earlier submission in this report.

Recommendation

That the submission be declined.

Issue: PE source rule too broad

Submission

(Chapman Tripp, NZLS)

The target of the rule is non-residents’ sales income from sales to New Zealand customers where sales activities are carried out in New Zealand for the purpose of bringing those sales about.

The rule as it is currently drafted is much broader and overreaches its target. For example, it may have the effect of transforming foreign dividends into New Zealand source income. It may also inadvertently capture a non-New Zealand resident’s income from sales to non-New Zealand customers. This result was not intended or contemplated when the rule was drafted. Further, it is not supported by the policy rationale used to justify the result for the intended target and was not part of the consultation process on the Bill.

Drafting changes are required to narrow the impact of the rule to that intended.

Comment

As explained above, the proposed source rule aims to ensure that New Zealand is able to tax non-residents under our domestic rules where we have agreed a right to do so with the non-resident’s home jurisdiction under a DTA.

Officials understand that the submitters’ primary concern in this particular submission is that non-residents may be inappropriately taxed on their foreign sourced income under the proposed PE source rule, section YD 4(17C). Dividend income paid by non-resident companies in respect of shares connected with a New Zealand PE is specifically identified as an issue. Income from sales to non-residents is identified as another.

Foreign dividends

Officials acknowledge the concern in relation to dividends. When designing the new source rule, officials did not specifically consider the scenario of foreign dividends being attributable to a PE in New Zealand. Understanding of this issue is also not widespread and more taxpayers may have wished to submit on the issue had it been specifically identified.

Officials’ current view is that foreign dividends paid to a non-resident through a New Zealand PE should be exempted from New Zealand tax. Officials tentatively consider that it may be appropriate to apply the same active/passive distinction in this context as applies in the CFC rules, though these rules currently apply only to New Zealand residents. This would mean that only foreign dividends paid from active income (e.g. income from carrying on an ordinary business) would be excluded from the PE source rule.

However, incorporating an active/passive test into the rule would add significant complexity and is something that would require further analysis and consultation. Officials therefore consider it should not be included at this stage. Instead, officials recommend a broad exemption for dividends from foreign companies in the proposed rule, with a view to undertaking a separate policy project on the possibility of introducing an active/passive test and other potential limitations in the future. For consistency, the deemed source rule (proposed section YD 4(17D)) should also be redrafted to exclude foreign dividends attributable to a PE.

Finally, the dividend exemption should apply only where the foreign company is part of the business structure of the PE. It should not apply where the shares in the foreign company are held for investment purposes. For example, the New Zealand PE of an overseas share trader should continue to be taxed on the dividends it receives on its offshore shares.

The Specialist Advisor was concerned that tax could be avoided for foreign companies owned by the PE (that is, companies whose shares would be added to the PE’s tax balance sheet in calculating the profit attributable to it) if the dividends are not taxable. This could occur if there was no commercial tension between the PE and the foreign companies (so that transactions between the PE and the companies could be on non-arm’s length terms) but the transfer pricing rules did not apply to require an arm’s length price to be substituted for tax purposes. For example, profit could be shifted from the PE to the foreign companies by inflated payments, and then returned to the PE’s owner as a tax free dividend.

We agree with the issue raised by the Specialist Advisor. We note that the concern is primarily in relation to the appropriate application of the transfer pricing rules. We are recommending amendments to the transfer pricing rules so that they apply appropriately as part of this Bill. We refer the Committee to our comments on those recommended amendments.

Foreign sales income

In relation to foreign sales, where these are attributable to a PE in New Zealand under the OECD’s guidelines, officials consider that they should have a New Zealand source. This will allow New Zealand to tax the value contributed by the New Zealand PE’s activity to the sales income (which would normally represent a proportion of the total sales income). In this regard, we note that New Zealand resident taxpayers are subject to tax on their foreign sales income. We do not see a reason to exempt New Zealand PEs from the same tax exposure, especially given we are entitled to tax the income under the DTAs we have agreed with other countries. In addition the PE’s home jurisdiction often would exempt the PE’s income from the foreign sales because it is attributable to New Zealand. For example, an Australian company’s income from a New Zealand PE (including from foreign sales) would generally not be taxed in Australia (see section 23AH of the Income Tax Assessment Act 1936 (Australia)). As such, if New Zealand did not tax the PE’s foreign sales income, double non-taxation could arise.

Finally, we expect that foreign sales derived by a non-resident through a New Zealand PE would already have a source in New Zealand under the existing source rules. In particular, under existing section YD 4(2), income has a source in New Zealand if it is derived from a business wholly or partly carried on in New Zealand. Accordingly, we doubt that proposed section YD 4(17C) actually broadens the current source rules in respect of foreign sales.

Accordingly, officials do not accept the submission in relation to foreign sales.

Recommendation

That the submission be accepted in part. Dividends from foreign companies should not have a New Zealand source under the proposed new rules in sections YD 4(17D) and YD 4(17C), provided the shares in the foreign company are not revenue account property for the PE.

Issue: PE income apportionment rule

Submission

(Corporate Taxpayers Group)

Section YD 5B is unnecessary and should be removed.

Section YD 5B provides an apportionment rule for income attributable to a PE under proposed section YD 17(C). It uses very similar wording to the test in most of New Zealand’s DTAs, by providing that the amount of income with a New Zealand source under section YD 17(C) is the amount that would be income if the PE was a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the head office.

However, section YD 5B only provides for income to be apportioned. This differs from the corresponding article in New Zealand’s DTAs, which requires net profits to be apportioned to the PE. While deductions for expenditure apportioned under a DTA are subject to standard deductibility rules, they are subject to the overriding effect of the DTA. This may result in a different outcome compared to PEs arising under domestic rules.

Existing sections YD 5(2) and YD 5(3) already achieve the same result as the PE apportionment provision of New Zealand’s DTAs. This is because they require both gross income and deductions to be apportioned so that the net income or net loss of the PE is consistent with an arm’s length return. Accordingly, existing sections YD 5(2) and YD 5(3) should determine the apportionment of income attributable to a PE under s YD 17(C), and section YD 5B should be removed.

The Specialist Advisor has recommended that proposed section YD 5B, if it is to be retained, should require the apportionment of income and expenditure in the same manner that existing section YD 5 does.

Comment

Sections YD 5(2) and YD 5(3) use different wording from the profit apportionment test in DTAs, so it is not clear that they will produce the same result as the DTA in all cases. The intent of section YD 5B was to replicate as closely as possible the wording of the DTA, so that the profit attribution calculation under the DTA could also be used to determine the amount of the income with a New Zealand source for domestic law purposes (thus avoiding the need for two separate calculations).

Officials therefore prefer to retain section YD 5B. However, we accept that the references to both income and expenditure in sections YD 5(2) and YD 5(3) make it clearer that the apportionment under those sections should produce an arm’s length amount of profits. Accordingly, we recommend that section YD 5B be amended to require the amendment of both income and expenditure.

Recommendation

That the submission be accepted in part, by amending section YD 5B to require the apportionment of both income and expenditure.

Issue: PE rule is not an anti-fragmentation rule

Submission

(Chartered Accountants Australia and New Zealand)

The current drafting makes it clear that the rule is not an anti-fragmentation rule and is intended only to attribute and apportion income where required.

Recommendation

That the submission be noted. The submission does not request a change to the Bill.

Issue: Reference to the OECD Commentary will mean continuous law change

Submission

(Chapman Tripp, New Zealand Law Society)

The Government has proposed that the latest version of the OECD Commentary should be used as a guide to the interpretation of the proposed new PE definition, rather than the version applying when the Bill is enacted or the version applying when the relevant amount of tax became payable.

However, the accepted position for DTAs is that changes to the Commentary made after the date of a DTA are only relevant if they clarify or amplify the previous Commentary. Changes which represent a fundamental change in interpretation are not relevant. In relation to transfer pricing, it is also proposed that any revisions to the OECD guidelines be reviewed before they become part of the statutorily authorised guidelines.

Any revisions to the OECD Commentary on the meaning of a PE should be reviewed to ensure they are appropriate for New Zealand before they become applicable in determining the meaning of a PE under the domestic definition in section YD 4B.

The reference to the OECD Commentary “as amended from time to time” is inappropriate as it will have the effect of changes to the OECD Commentary being incorporated into New Zealand domestic law and retrospectively applied to tax positions that were taken before those changes were made.

OECD’s classification of a change as being either a so-called clarification (which can be applied retrospectively) or a change in interpretation (which can only be applied prospectively) is not necessarily reliable and is based on the political drivers of the myriad of countries that make up the OECD. Relying on that classification in our domestic law as protecting taxpayers against retrospective law changes is insufficient. In addition, no such changes will have been endorsed by New Zealand Parliament.

The Specialist Advisor also raised a concern with the retrospective application of the Commentary and any uncertainty as to which version applies. She considers that changes to the Commentary which change the interpretation of a DTA should not apply if they are made after the date the taxpayer takes its tax position.

Comment

The proposed new section YD 4B does not apply to any of New Zealand’s DTAs. It only applies to the domestic law definition of a PE, which in turn only applies where there is no applicable DTA. Given that section YD 4B is not part of an agreement with another jurisdiction, the Government has more flexibility in determining which version of the Commentary should apply.

There is a general presumption that changes to the Commentary are clarifications. Accordingly, most changes will be relevant retrospectively. However, the OECD does not indicate whether its changes to the Commentary are clarifications or changes in interpretation. Accordingly, if only clarifications to the Commentary were taken into account under section YD 4B(4), it would be uncertain which parts of the Commentary would be relevant.

In addition, officials consider that reviewing and legislating for every change to the Commentary relating to PEs would not be a good use of resources in light of the significance of the issue (noting that it only applies for residents of countries with whom New Zealand does not have a DTA).

However, officials agree that taxpayers should not be retrospectively affected by changes in the Commentary. Accordingly, officials recommend that proposed section YD 4B(4) be amended so the relevant Commentary be the version applying at the beginning of the income year in respect of which the relevant tax was payable.

Recommendation

That the submission be accepted in part.

DTA SOURCE RULE

(Clause 44)

Issue: General support for the deemed source rule

Submission

(Chartered Accountants Australia and New Zealand)

The deemed source rule deems an item of income to have a source in New Zealand under our domestic legislation if New Zealand has a right to tax the item of income under a DTA. We understand the rationale for the proposed amendment and it appears reasonable.

Recommendation

That the submission be noted.

Issue: Deemed source rule is a bad faith change

Submission

(KPMG, PwC)

The deemed source rule deems an item of income to have a source in New Zealand under our domestic legislation if New Zealand has a right to tax the item of income under a DTA. This rule should be deleted as it is unnecessary and fundamentally changes New Zealand’s approach to interpreting DTAs, where the domestic law position should be established before a DTA is applied (PwC).

The Bill Commentary states that the measure is intended to ensure that a non-residents’ sales income from a PE has a New Zealand source. However, this is already achieved by proposed section YD 4(17C). In addition, the current measure goes much further than this by deeming all income which New Zealand can tax under a DTA to have a New Zealand source. The Commentary is therefore misleading in its description of the effect of the proposed rule. (KPMG)

Further, expanding New Zealand’s taxing rights beyond situations that our treaty partners agreed to may adversely affect New Zealand’s position and standing internationally. For example, some payments (i.e. payments for services or use of equipment) to non-residents will now be classed as royalties, when they would not under our current domestic law definition. It is also likely that the unilateral nature of the amendment will create further disputes with New Zealand’s treaty partners – particularly in the context of the royalties article. (KPMG)

As such, rather than unilaterally adopting new section YD 4(17D), the better approach would be for New Zealand to agree to such a rule with its treaty partners. If New Zealand’s treaty partners have already accepted this change, that acceptance should be published. If not, and the new source rule is to proceed, New Zealand should notify its DTA partners of the intended law change and allow them to consider their position for NZ’s DTAs. (KPMG)

Alternately, the deemed source rule should only apply in respect of DTAs entered into or modified after enactment of the rule. The main concern is that the proposed rule will unilaterally amend the scope of New Zealand’s DTAs. By deferring the application to new or modified DTAs, the rule cannot be said to “ambush” our DTA partners. (KPMG)

Comment

We do not agree that the deemed source rule is a bad faith change in relation to our treaty partners. The deemed source rule does not override any of our DTAs or unilaterally change them. Instead it simply ensures that our domestic law allows New Zealand to tax income which the other party to a DTA has agreed we have a right to tax. It is therefore a purely domestic law change implementing what the DTA allows.

Given the other party to the DTA has agreed we may tax this income, we doubt they would consider it bad faith for us to actually do so. For this reason, we also consider there is no need to notify any of our DTA partners in relation to the change or limit the application of the proposed rule to DTAs entered into or modified after the enactment date.

In relation to the Commentary, we note that the effect of the proposed measure is clearly spelled out under the heading “key features”. In particular, the Commentary states:

The Bill proposes inserting new subsection (17D) into section YD 4. The subsection will deem an item of income to have a source in New Zealand if we have a right to tax the item of income under a DTA. Subsection (17D) is intended to ensure that if a DTA applies in respect of an item of income, that item of income will automatically have a New Zealand source.

As to the royalties submission, the proposed deemed source rule merely widens the current domestic law definition of ‘royalty’ by applying the wider DTA definition of ‘royalty’, which was mutually agreed during DTA negotiations. As such, officials do not think that it will adversely affect New Zealand’s position and standing internationally. Further, the new rule will apply only to payments from New Zealand, and will therefore not have any extra-territorial effect.

Recommendation

That the submission be declined.

Issue: Drafting issues

#	Section	Submitter	Submission	Response
1.	GB 54(1)(d)	Corporate Taxpayers Group	Proposed section GB 54(1)(d) states that “the activity is more than preparatory or auxiliary to making the supply”. It would be more grammatically correct if it stated “the activity is more than preparatory or auxiliary to the making of the supply”.	We agree with the submission. However, we recommend that the section be simplified so it states “the activity is more than preparatory or auxiliary to the supply”.
2.	GB 54(1)(c) and (d)	KPMG	The order of paragraphs GB 54(1)(c) and (d) should be swapped. The current paragraphs (b) and (d) establish the required connection of the activity to New Zealand. They should logically be together.	We consider that, in applying section GB 54(1), it is more logical to apply the test in paragraph (c) before the test in paragraph (d). This is because the first question should be whether there is a relevant facilitator. If there is, then the next question is whether that particular facilitator’s activities are more than preparatory or auxiliary. Paragraphs (b) and (c) together determine whether there is a relevant facilitator. Accordingly, they should appear sequentially, and before paragraph (d).
3.	GB 54(1)(h)	EY	In proposed section GB 54(1)(h) the word “purpose” should be replaced with “purpose or effect”.	We agree with this submission. The relevant part of section BG 1 refers to “purpose or effect”. Accordingly, section GB 54(1)(h) should also refer to “purpose or effect” so it is clear that the case law on the “more than merely incidental” test under s BG 1 also applies in respect of section GB 54(1)(h).
4.	GB 54	KPMG, PwC	“Supply” is listed as a defined term for proposed section GB 54. We consider this is incorrect given the use of the term “facilitated supply” in the section and given “supply” is defined in section YA 1 as applying for the purposes of sections GC 6, 9, and 10 only. “Supply” in section YA 1 needs amending to include a reference to proposed section GB 54.	We agree with this submission. The word “supply” should be defined in section YA 1 for the purposes of section GB 54. The word should have the same meaning as it has under the Goods and Services Tax Act 1985.
5.	GB 54(2)	Chapman Tripp	It is not clear from the wording of proposed section GB 54 whether all activities of the relevant facilitator will be attributed to the deemed PE or whether only the activities that are referred to in section GB 54(1)(b) will be attributed. Amendments should be made to clarify that it is the latter.	Proposed section GB 54(2) states that the activities of the facilitator referred to in subsection (1)(b) are attributed to the deemed PE. Officials consider this to be sufficiently clear.
6.	GB 54(1)(a)(i)	PwC	The meaning of when a person is “in New Zealand” needs to be clarified. What if a customer happens to be travelling to New Zealand?	Officials consider that the meaning of when a person is “in New Zealand” is sufficiently clear. In addition, section GB 54(1)(b) requires the facilitator to carry on, in New Zealand, an activity for the purpose of bringing about the particular supply. Accordingly, section GB 54 would not apply if a customer was coincidentally in New Zealand at the time of the supply but all of the sales activities were carried on outside New Zealand. On the other hand, if the customer is in New Zealand at the time of supply and the selling activity takes place here, officials consider that the sale is in fact made in New Zealand. Consequently, New Zealand should be able to tax a portion of the sales income where the other requirements of proposed section GB 54 are met.
7.	GB 54(1)(e)(ii)	PwC	It is impractical for a taxpayer to know the date on which a DTA began to be negotiated unless Inland Revenue provides this information. Should this refer to the date of signature instead?	Officials agree with this submission. The reference should be to the date the DTA comes into force.
8.	GB 54(2)	PwC	The heading of proposed section GB 54(2) is “Income and activities attributed to a permanent establishment”. However section GB 54(2) only refers to the attribution of activities. The reference to “income” may suggest that section GB 54 is intended to directly cause income to be attributed to a PE, whereas the Commentary states that whether income is attributable depends on the other provisions of the DTA and the Act.	Officials agree with this submission. The heading should be renamed to better reflect the content of the section.
9.	YD 4(17C) and YD 4(17D)	Officials	Section YD 4(17C) provides that income has a New Zealand source if it is attributable to a PE in New Zealand. Section YD 4(17D) provides that income has a source in New Zealand if New Zealand has a right to tax the income under a DTA. These sections are intended to apply only to non-residents. To clarify this, the proposed sections should be amended so it refers to income derived by a non-resident.	That the submission be accepted.

Recommendation

That the officials’ recommendations, as shown above, be accepted.