Taxation (Neutralising Base Erosion and Profit Shifting) Bill

Taxation (Neutralising Base Erosion and Profit Shifting) Bill

Government Bill

3—1

Explanatory note

General policy statement

The Taxation (Neutralising Base Erosion and Profit Shifting) Bill introduces amendments to the following enactments:

  • Income Tax Act 2007

  • Tax Administration Act 1994.

Base Erosion and Profit Shifting (BEPS) activities are used by some multinationals to pay little or no tax anywhere in the world. The Bill proposes a package of measures to counter the particular BEPS strategies observed in New Zealand.

BEPS strategies distort investment decisions, allow multinationals to benefit from unintended competitive advantages over more compliant or domestic companies, and result in the loss of substantial corporate tax revenue. More fundamentally, the perceived unfairness resulting from BEPS jeopardises citizens’ trust in the integrity of the tax system as a whole.

In brief, the proposed measures in this Bill will prevent multinationals from using:

  • artificially high interest rates on loans from related parties to shift profits out of New Zealand (interest limitation rules);

  • artificial arrangements to avoid having a taxable presence (a permanent establishment) in New Zealand;

  • transfer pricing payments to shift profits into their offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore; and

  • hybrid and branch mismatches that exploit differences between countries’ tax rules to achieve an advantageous tax position.

These and some other policy measures contained in this Bill are further described below.

Interest limitation rules
Pricing related party debt

When borrowing from a third-party, there are commercial pressures for the borrower to try to obtain as low an interest rate as possible—for example, by providing security on a loan and by ensuring their credit rating is not adversely affected by the amount being borrowed.

These same pressures do not exist for related party loans, as an interest payment from a New Zealand subsidiary to a multinational parent is not a true expense from the perspective of the multinational’s shareholders. Indeed, it can be profitable to try to increase the interest rate on related-party debt—for example, to shift profits out of New Zealand into a low tax country. This is because the interest paid to the parent is deductible to the subsidiary, thereby reducing its taxable income in New Zealand.

There are 2 main ways to push up the interest rate charged on related party debt:

  • First, the foreign parent can excessively debt fund the New Zealand subsidiary, to depress the subsidiary’s credit rating and make it look more risky as an investment, and therefore justify a higher interest rate.

  • Second, a foreign parent can add terms and conditions into the debt instrument itself to justify a higher interest rate. For example it can subordinate the debt or make the debt have a long duration—both of which would increase the interest rate compared to if they were dealing with each other at arms’ length.

To address profit-shifting, the Bill proposes new rules which will limit the interest rate on related party debt. It does this by setting specific rules and parameters to:

  • establish the credit rating of the New Zealand borrower; and

  • determine (in combination with the credit rating rule) the amount of interest on the debt.

The proposed new rules will require that a group credit rating will apply to the New Zealand borrower—being the foreign parent’s credit rating minus 1 notch unless the borrower’s own credit rating is equal or higher than its foreign parent’s credit rating—in cases where there is a high BEPS risk. A high BEPS risk is when the New Zealand borrower has:

  • a high level of debt in New Zealand (more than 40% of its assets); or

  • high interest costs; or

  • borrowed through a low or no tax jurisdiction.

Taxpayers are also able to choose to use the group credit rating as a safe harbour to reduce compliance costs.

In other cases where the presumed credit rating does not apply, the proposed new rules will allow the borrower’s standalone rating to be used, taking into account any implicit parental support. Under this approach there is still a strong presumption that the New Zealand borrower would be supported by its foreign parent when it is part of a multinational group—and therefore is a less risky borrower compared to an unrelated New Zealand entity.

Where a New Zealand borrower has a high BEPS risk but no identifiable parent they will be required to use a restricted credit rating—being the borrower’s own credit rating if they had no higher than 40% debt and the credit rating cannot be lower than BBB−.

Aside from making the borrower appear riskier with excessive debt funding, the other way interest rates can be inflated is by imposing conditions on the lending that would not normally be found in standard third party debt.

The Bill therefore proposes rules that will generally require the following terms and conditions to be disregarded when pricing related party loans:

  • loan terms of more than 5 years;

  • subordination; and

  • other exotic features (such as interest payment deferral and convertibility to equity at the option of the borrower) that are generally not seen with third-party lending.

However, in some cases the New Zealand borrower may have borrowed from related parties using the same terms and conditions as their third party debt. In such cases, they will be able to retain equivalent conditions when pricing their related party loans, so long as the relevant third party loans comprise at least 25% of their total related party debt. This reflects the fact that when borrowing from a third party, there are commercial pressures to try to obtain a low interest rate, so the borrower is unlikely to agree to unnecessary conditions that increase the interest rate.

Allowable debt levels

The Income Tax Act 2007 includes some existing thin capitalisation rules that limit the amount of debt that a foreign-owned subsidiary can claim deductions for interest paid. Interest deductions are generally denied to the extent the debt exceeds 60% of the subsidiary’s assets.

The Bill proposes several changes to make the existing thin capitalisation rules more effective.

The most significant change is a proposal to reduce the measure of “assets” by subtracting “non-debt liabilities” (that is, liabilities other than interest-bearing debt). Examples of non-debt liabilities are trade credits, provisions, out-of-the-money derivatives and interest free loans. Australia’s thin capitalisation rules require a similar adjustment for non-debt liabilities.

The concern with the current treatment of non-debt liabilities is that it allows companies to have higher levels of debt (and therefore higher interest deductions) relative to the capital invested in a company by its shareholders. For example, at present if a company purchases some inventory on deferred payment terms, the amount of debt allowed under the thin capitalisation rules will increase (because the new inventory has increased its assets but its interest bearing debts have stayed the same).

The Bill also proposes a revised anti-avoidance rule targeted at taxpayers who repay a loan immediately before a measurement date.

The Bill also proposes tighter rules for valuing assets. The existing measure of assets typically uses the values reported in the company’s published financial statements, with an alternative option to use the current market value of an asset instead. The Bill proposes placing tighter conditions on the current market value option so it is available only if the valuation is made or verified by an independent expert valuer.

The Bill also proposes a tighter limit on the ability for companies owned by a group of non-residents to use related-party debt. It does this by preventing these companies from using the existing 110% limit for their related party debt so that they cannot claim any interest deductions on related party debt to the extent to which the company’s debt level exceeds 60% of its assets minus non-debt liabilities.

The Bill proposes 2 exemptions from the thin capitalisation rules to reduce the burden on taxpayers in cases where there is little risk of BEPS. The first exemption is an extension of the de minimis in the outbound rules to the inbound rules, whereby the thin capitalisation rules will not apply if a taxpayer has interest deductions of less than $1m and does not have any owner-linked debt.

The second exemption applies to infrastructure contracts entered into with the central government or Crown entities. This exemption allows all of an infrastructure project’s third party debt to be deductible even if the debt levels exceed the normal thin capitalisation limits, provided the debt only has recourse against the assets associated with the infrastructure project and the income arising from those assets. The purpose of this rule is to improve the competitiveness in the bidding process for Public Private Partnership (PPP) procurement contracts by allowing investors that are subject to the thin capitalisation rules to make bids on a level playing field with investors that are not subject to the thin capitalisation rules.

Permanent establishment rules

New Zealand has 40 Double Tax Agreements (DTAs) with other jurisdictions. Where one of these DTAs applies, New Zealand is only able to tax a non-resident on its income from sales to New Zealand customers if the non-resident has a permanent establishment in New Zealand.

The problem is that some multinationals are able to structure their operations so that their New Zealand sales and associated profits are booked in an offshore entity which under current rules is not considered to have a permanent establishment in New Zealand, despite the fact that, in substance, the sales are generated by New Zealand-based salespeople. As a consequence New Zealand is unable to apply income tax to the multinational’s New Zealand sales.

The OECD has recently updated their model tax treaty to address this issue and New Zealand is adopting this into many of our DTAs by signing the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.

However, a domestic law change is necessary to cover cases where the relevant DTA does not yet include the OECD’s new recommendation.

The Bill therefore proposes a new anti-avoidance rule that will deem a multinational to have a permanent establishment in New Zealand if:

  • the non-resident supplies goods or services to a person in New Zealand;

  • the non-resident is part of a multinational group that is required to file Country-by-Country reports (i.e. the multinational group has more than EUR €750m of consolidated global turnover);

  • related entity (either associated or commercially dependant) carries out an activity in New Zealand in connection with that particular sale for the purpose of bringing it about, unless the activity is only preparatory or auxiliary; and

  • the arrangement has a more than merely incidental purpose of tax avoidance.

Australia and the UK have already implemented similar permanent establishment avoidance rules in their domestic laws.

The new permanent establishment avoidance rule will not apply if the relevant DTA includes the OECD’s new BEPS-related updates to the permanent establishment definition.

Source rules

New Zealand can only tax non-residents on income that has a New Zealand source under the source rules of the Income Tax Act 2007. The Bill proposes several amendments to expand and strengthen the rules for taxing New Zealand-sourced income:

  • An amount of income will be deemed to have a source in New Zealand if New Zealand has a right to tax that income under any applicable DTA. This ensures that whenever New Zealand negotiates taxing rights under a DTA that we can also tax this income under our source rules. This is the same position which Australia takes under its DTAs, and the proposed rule already applies to all income covered by our DTA with Australia.

  • In cases where a non-resident business is a resident of a jurisdiction that New Zealand does not have a DTA with, a new definition of permanent establishment may apply to deem any business income earned through a New Zealand permanent establishment to have a New Zealand source. This new definition of permanent establishment is outlined in schedule 23 of the Bill. It is based on the permanent establishment definition in New Zealand’s model DTA and includes the BEPS-related updates recommended by the OECD.

  • A potential weakness of the life insurance source rules is addressed by ensuring that no deductions are available for the reinsurance of life policies if the premium income on that policy is not taxable in New Zealand, including where the income is not subject to New Zealand tax by operation of a DTA.

Transfer pricing rules

Transfer pricing rules guard against multinationals using related party payments to shift profits offshore by requiring these payments to be consistent with an arm’s length/market price that unrelated parties would agree to.

The Bill proposes amendments to strengthen the transfer pricing rules so they align with the OECD’s transfer pricing guidelines and Australia’s transfer pricing rules. This involves amending New Zealand’s transfer pricing rules so that:

  • they refer to using the 2017 OECD transfer pricing guidelines as guidance for how the rules are applied;

  • the economic substance and actual conduct of the parties have priority over the terms of the legal contract. This is achieved by requiring the transfer pricing transaction to be “accurately delineated” consistent with section D.1 of chapter I of the new OECD guidelines;

  • transfer pricing arrangements which are not commercially rational because they include unrealistic terms that third parties would not be willing to agree to can be disregarded or replaced. This is consistent with the chapter I, section D.2 of the new OECD guidelines;

  • the legislation specifically refers to arm’s length conditions (as per Australia’s legislation) to clarify that the transfer pricing rules can be used to adjust conditions other than the price;

  • the onus of proof for demonstrating that a taxpayer’s transfer pricing position aligns with arm’s length conditions is shifted from Inland Revenue to the taxpayer (consistent with the onus of proof being on the taxpayer for other tax matters);

  • the time bar that limits Inland Revenue’s ability to adjust a taxpayer’s transfer pricing position is increased from 4 to 7 years (in line with Australia);

  • in addition to applying to transactions between related parties, the transfer pricing rules will also apply when non-resident investors “act in concert” to effectively control a New Zealand entity, such as through a private equity manager;

  • the new legislation codifies the requirement for large multinationals to provide Inland Revenue with the information required to comply with the OECD’s Country-by-Country reporting initiative.

Administrative measures for investigating large multinational groups

It can be difficult and resource intensive for Inland Revenue to assess and engage in disputes with multinationals in practice. This is partly due to the difficulties Inland Revenue faces in obtaining the relevant information.

To address these issues, the Bill proposes strengthening Inland Revenue’s powers to investigate large multinationals (with at least EUR €750m of global revenues) that do not cooperate with a tax investigation. This involves amending the Tax Administration Act 1994 to allow Inland Revenue to:

  • collect any tax owed by a member of a large multinational group from any wholly-owned group member, provided the non-resident fails to pay the tax itself;

  • use section 17 of the Tax Administration Act 1994 to request information that is held offshore by another group member of the large multinational group;

  • more readily assess a large multinational group’s tax position based on the information available to Inland Revenue in cases where the group has failed to adequately respond to an information request. A failure to provide the requested information to Inland Revenue can also prevent the information from being subsequently admitted as evidence in court proceedings. These proposals are based on an existing provision in section 21 of the Tax Administration Act 1994 which currently applies to deductible payments; and

  • impose a new civil penalty of up to $100,000 for large multinational groups which fail to provide requested information (which replaces the current $12,000 maximum criminal penalty).

Hybrid and branch mismatches

Hybrid and branch mismatches are cross-border arrangements that exploit differences in the tax treatment of an entity, branch, or instrument under the laws of 2 or more countries to create a tax advantage.

There are a number of ways this can be achieved, including:

  • through a payment being deductible for a payer in 1 country but not included as taxable income for the payee in the other country;

  • a single payment being able to be deducted against different income streams in 2 countries;

  • other arrangements that result in double non-taxation outcomes through the use of hybrid instruments, entities, or branches.

The OECD has made a number of recommendations as to how countries can improve their domestic rules to prevent mismatches arising and neutralise their effect when they do arise. These recommendations relate to Action 2 of the OECD/G20 BEPS Action Plan: Neutralising the Effects of Hybrid Mismatch Arrangements.

To address hybrid mismatch BEPS strategies the Bill proposes law changes that represent a comprehensive adoption of the OECD recommendations on hybrid and branch mismatch arrangements with suitable modifications for the New Zealand context. Some examples of these modifications are to ensure that New Zealand companies with simple foreign branch structures are not caught by the rules, or that the rules do not apply to purely domestic firms, and not introducing rules when an adequate New Zealand provision already exists.

The OECD recommends 2 kinds of rules. The first are rules specifically designed to reduce the likelihood of hybrid mismatches arising. The second are “linking rules”, which apply to payments that give rise to a deduction in more than 1 country, or which give rise to a deduction in 1 country but are not taxed as income in another country due to a hybrid or branch mismatch. These generally only apply to:

  • arrangements between related parties (25% or more commonly owned) or control groups (50% or more commonly owned); or

  • structured arrangements—generally, arrangements between non-associated parties which intentionally exploit such mismatches.

The linking rules operate on the basis of “primary” and “secondary” taxing rights to reflect their cross-border nature. This means that 1 country is allocated the primary right to counter the tax benefits of the arrangement. If the country with this primary right does not have hybrid and branch mismatch rules, then the other country involved has a secondary right to counter the tax benefits. As a result, the relevant rules contained in this Bill have separate provisions to cover situations when New Zealand has the primary right and when it has the secondary right. This is necessary to ensure that all hybrids with a New Zealand resident party are within the scope of the rules.

A further issue concerns cross-border hybrid financial instruments that are treated as debt in New Zealand but equity in an overseas jurisdiction. To address this, the Bill proposes a new hybrid mismatch rule which allows New Zealand to charge non-resident withholding tax on payments under such instruments if New Zealand allows an interest deduction for the payment. This rule would override our double tax agreements and would apply retrospectively, but contains a “savings” provision for taxpayers that have adopted a contrary position prior to the introduction of the Bill.

Departmental disclosure statement

The Inland Revenue Department is required to prepare a disclosure statement to assist with the scrutiny of this Bill. The disclosure statement provides access to information about the policy development of the Bill and identifies any significant or unusual legislative features of the Bill.

Regulatory impact statement

The Inland Revenue Department produced 4 regulatory impact statements to help inform the main policy decisions taken by the Government relating to the contents of this Bill.

Clause by clause analysis

Clause 1 gives the title.

Clause 2 gives the dates on which the clauses come into force. Under subclause (1), most come into force on 1 July 2018. Under subclause (2), a pair of provisions come into force retrospectively on 1 April 2008. Under subclause (3), another pair of provisions come into force retrospectively on 1 January 2016. Under subclause (4), several provisions come into force on the day on which the Act receives the Royal assent.

Part 1Amendments to Income Tax Act 2007

Clause 3 provides that Part 1 amends the Income Tax Act 2007

Clause 4 amends section BH 1, which relates to double tax agreements, by amending subsection (4) to exclude new sections GB 54 and RF 11C from the effect of a double tax agreement. The exclusion of section RF 11C is made retrospectively.

Clause 5 inserts new section CH 10B, recognising income arising under section FE 7B when a participant in a public project is required to apportion interest expenditure arising from public project debt.

Clause 6 inserts a new heading and section CH 12, recognising income arising under new subpart FH, which matches deductions and income from multi-jurisdictional arrangements.

Clause 7 inserts a new heading and section CX 64, recognising excluded income arising under new subpart FH, which matches deductions and income from multi-jurisdictional arrangements.

Clause 8 inserts a new heading and section DB 57B, recognising deductions arising, and the denial of deductions for amounts, under new subpart FH, which matches deductions and income from multi-jurisdictional arrangements.

Clause 9 amends section DR 3 to deny a deduction for a life reinsurance premium paid to a non-resident life reinsurer if the premium is not taxed as income of the life reinsurer.

Clause 10 amends section EX 20D, to insert references to non-debt liabilities in calculations, reflecting the amendments to section FE 12.

Clause 11 amends section EX 20E, to insert references to non-debt liabilities in calculations, reflecting the amendments to section FE 12.

Clause 12 amends section EX 44 to include a reference to new section EX 47B, which limits the calculation methods for calculating FIF income or loss from a returning share transfer under a structured arrangement.

Clause 13 amends section EX 46 to limit the options available for calculating FIF income or loss from a returning share transfer under a structured arrangement.

Clause 14 inserts new section EX 47B, which requires the use of a particular calculation method for calculating FIF income or loss from a returning share transfer under a structured arrangement in some circumstances.

Clause 15 amends section EX 52 by inserting new subsection (14C), which introduces an exception to a calculation method for calculating FIF income or loss from a returning share transfer if it is part of a structured arrangement.

Clause 16 amends section EX 53 by inserting new subsection (16C), which introduces an exception to a calculation method for calculating FIF income or loss from a returning share transfer if it is part of a structured arrangement.

Clause 17 inserts new section FE 4B, defining public project asset, public project debt, and public project participant debt, which are defined terms used in new section FE 7B.

Clause 18 amends section FE 5, which sets, for excess debt entities, the thresholds used by the thin capitalisation rules in the apportionment of interest. Subclauses (1) and (2) amend subsection (1), and subclause (6) inserts new subsection (6), to provide for new rules applying to an excess debt entity controlled by a group of non-residents or a group of non-residents acting in concert. Subclauses (3) to (5) make amendments consequential on the amendments to section FE 12, changing the way in which debt percentages are calculated to include non-debt liabilities.

Clause 19 amends section FE 6, which provides for the apportionment required by section FE 5 for interest expenditure of excess debt entities. Subclause (1) amends the formula in subsection (2) by inserting a new item providing for the denial of interest amounts under subpart FH. Subclause (2) amends section FE 6(3)(a) to exclude from that item in the formula the effect of subpart FH. Subclause (3) inserts new section FE 6(3)(aba), which defines the item inserted by subclause (1). Subclause (4) amends section FE 6(3)(ac), as it relates to a concession increasing the amount of deductions available after apportionment of interest. Subclauses (5) and (6) amend section FE 6(3)(e) by providing for the apportionment of interest expenditure by an excess debt entity owned by a non-resident owning body or a group of non-residents acting in concert. Subclause (7) provides for the period of application of the amendments in subclauses (1) to (4). Subclause (8) provides for the period of application of subclauses (5) and (6) and refers to section FZ 8, which provides for a transition period before some excess debt entities are fully affected by the amendments.

Clause 20 inserts new section FE 7B, which applies the thin capitalisation rules separately to the debt and assets that are associated with a public project for a participant in the public project. The public project is treated as if it were the sole business of the participant and the public project debt and public project assets were the participant’s sole debt and assets. The treatment of the interest expenditure on public project debt depends on whether the public project debt is provided by other participants in the public project and whether the public project debt is secured solely against public project assets.

Clause 21 amends section FE 8 to insert references to non-debt liabilities, consequential on the amendments to section FE 12.

Clause 22 amends section FE 10 to insert references to non-debt liabilities, consequential on the amendments to section FE 12.

Clause 23 replaces section FE 11 to provide for the effect of new section GB 51B by excluding from calculations under the interest apportionment rules the fluctuations to which that section applies.

Clause 24 amends the formula in section FE 12 for calculating the debt percentage of a group. Under the amended formula, the value of the group’s non-debt liabilities is subtracted from the group’s assets.

Clause 25 amends section FE 14 to insert references to non-debt liabilities, consequential on the amendments to section FE 12.

Clause 26 amends section FE 15 to exclude, from the definition of total group debt, financial arrangements for which deductions are denied under new section FH 3, FH 7, or FH 11.

Clause 27 amends section FE 16 to provide for the valuation of assets for the purposes of the interest apportionment rules.

Clause 28 inserts new section FE 16B, which defines total group non-debt liabilities for the purpose of the amendments to section FE 12.

Clause 29 amends section FE 18, which provides for the measurement of the debts and assets of a worldwide group. Subclauses (1) and (2) insert references to non-debt liabilities, consequential on the amendments to section FE 12. Subclause (3) extends the description of debts that are not included in the total group debts to include debt from an owner who has made significant settlements on a trustee that is a member of the group.

Clause 30 inserts new subpart FH, which provides for the matching of deductions and income arising from arrangements between parties in more than 1 jurisdiction having different taxation law. The subpart contains new sections FH 1 to FH 15. A brief description of the background and general scheme and effect of the sections is given by section FH 1.

Clause 31 inserts new heading and section FZ 8, which gives the rules relating to a transition period for excess debt entities owned by a non-resident owning body, or a group of non-residents acting in concert, and affected by some of the amendments to sections FE 5 and FE 6.

Clause 32 amends section GB 2 by amending a heading in a cross-reference.

Clause 33 inserts new section GB 51B, which provides for calculations under the interest apportionment rules to ignore fluctuations in value caused by an action or omission or arrangement with a purpose or effect of defeating the intent and application of the rules.

Clause 34 inserts new heading and section GB 54, which treats a non-resident that is a large multinational group or is a member of a large multinational group, under the new definition, as having a permanent establishment in New Zealand if the non-resident makes a supply of goods and services in New Zealand with the help of a facilitator in New Zealand.

Clause 35 amends section GC 6, which provides for the purpose and effect of the transfer pricing rules. Subclauses (2) and (5) insert in subsections (1) and (2) references to control group, rather than association, as the test for the application of the transfer pricing rules to the parties to an arrangement. Subclause (3) inserts new subsection (1B), which provides that the transfer pricing rules apply consistently with the OECD transfer pricing guidelines. Subclause (4) inserts new subsection (1C), which provides for the effect of new sections GC 15 to GC 18 to be taken into account in the application of the transfer pricing rules in sections GC 7 to GC 14.

Clause 36 amends section GC 13, which provides for the calculation of arm’s length amounts for a transfer pricing arrangement. Subclause (1) replaces subsection (1), which specifies the approach to calculating an arm’s length amount. Subclause (2) updates the list of methods that may be used for the calculation. Subclause (3) replaces subsections (4) and (5), which specify how arm’s-length conditions for a transfer pricing arrangement are determined as part of determining an arm’s length amount. Subclause (4) inserts new subsection (6) which provides that the time limit for a reassessment under the transfer pricing rules is 7 tax years after the tax year in which a return of income is made for the assessed income year.

Clause 37 inserts new heading and sections GC 15 to GC 18, which relate to the treatment of loans under the transfer pricing rules. The new sections provide for adjustments to the credit rating of the borrower and the disregarding of features of the loan that would increase the interest rate paid by a borrower under an equivalent loan from an independent lender. Section GC 15 provides that the adjustments to credit ratings under sections GC 16 and GC 17, and the disregarding of loan features under section GC 18, are to be made before the other transfer pricing rules are applied. The section also gives the meaning of 3 terms used in the sections, which are insuring or lending person, which relates to a person having loans that are affected by regulatory requirements, cross-border related loan, and indirect associated funding arrangement.

Clause 38 inserts new section HD 30, which provides that a member of a wholly-owned large multinational group is an agent of another member of the wholly-owned large multinational group for tax obligations.

Clause 39 amends section IA 2 to provide for the treatment of mismatch amounts that arise under new section FH 8 and are later treated as ordinary losses under new section FH 12(8).

Clause 40 amends section LE 1, to introduce an exception to the availability of a tax credit for an imputation credit from a share affected by a returning share transfer. The exception applies if the parties to the returning share transfer are related or the returning share transfer is a structured arrangement.

Clause 41 amends section RF 2C by introducing an item in the formula in subsection (4) that removes from the calculation amounts that are denied as deductions under new sections FH 3, FH 7, and FH 11.

Clause 42 inserts new section RF 11C, which provides that a payment by a non-resident company to another non-resident company of non-resident passive income that consists of interest is treated by the NRWT rules as consisting of interest, even if a double tax agreement would otherwise require the payment to be treated as a dividend. The amendment resolves an issue regarding the effect of tax treaty provisions on New Zealand’s right to impose withholding tax on such instruments. It comes into force on 1 April 2008. Subclause (2) provides for an exception if a person has taken a tax position, for a payment, that is inconsistent with the amendment.

Clause 43 amends section YA 1, which contains definitions. Subclause (2) inserts a new definition of act together. Subclause (3) amends the definition of arm’s length amount by correcting a heading in a cross-reference. Subclause (4) inserts a new definition of branch mismatch report, by reference to section FH 15. Subclause (5) inserts a new definition of control group, by reference to section FH 15. Subclause (6) inserts a new definition of country-by-country report by reference to section 78G of the Tax Administration Act 1994, which requires a large multinational group to make such a report. Subclause (7) amends the definition of deductible foreign equity distribution to allow for the effect of hybrid mismatch legislation. Subclause (8) inserts a new definition of financial instrument, by reference to section FH 15. Subclause (9) amends the definition of goods by inserting cross-references to sections GB 54 and YD 4B. Subclause (10) inserts a new definition of hybrid mismatch legislation, by reference to section FH 15. Subclause (11) inserts a new definition of hybrid mismatch report, by reference to section FH 15. Subclause (12) inserts a new definition of large multinational group, as a consequence of the obligation to provide information imposed by new section 78G of the Tax Administration Act 1994. Subclause (13) amends the definition of life reinsurer by correcting a cross-reference. Subclause (14) inserts a new definition of mismatch amount, by reference to section FH 15. Subclause (15) inserts a new definition of mismatch situation, by reference to section FH 15. Subclause (16) inserts a new definition of OECD transfer pricing guidelines. Subclause (17) inserts a new definition of permanent establishment by reference to section YD 4B. Subclause (18) inserts new definitions of public project asset, public project debt, and public project participant debt, by reference to section FE 4B. Subclause (19) inserts a new definition of related, by reference to section FH 15. Subclause (20) amends the definition of related-party debt so that the definition applies generally. Subclause (21) amends the definition of returning share transfer to remove a requirement that the share be listed. Subclause (22) amends the definition of services to include new cross-references. Subclause (23) inserts a new definition of structured arrangement, by reference to section FH 15. Subclause (24) inserts a new definition of surplus assessable income, by reference to section FH 15. Subclause (25) inserts a new definition of total group non-debt liabilities by reference to new section FE 16B. Subclause (26) amends the definition of transfer pricing arrangement by correcting a heading in a cross-reference. Subclause (27) inserts a new definition of wholly-owned large multinational group.

Clause 44 amends section YD 4, which gives classes of income having a New Zealand source, by inserting new subsection (17C), which relates to income from a permanent establishment in New Zealand, and new subsection (17D), which relates to income taxable by New Zealand under a double tax agreement.

Clause 45 inserts new section YD 4B, which defines a permanent establishment in New Zealand by reference to the definition of the term in an applicable double tax agreement, or by reference to new schedule 23 if there is no applicable double tax agreement.

Clause 46 inserts new section YD 5(1BA), which excludes from the section business activities carried on through a permanent establishment, as a consequence of the insertion of new section YD 5B.

Clause 47 inserts new section YD 5B, which provides for the apportionment of income from business activities carried on through a permanent establishment in New Zealand.

Clause 48 inserts new schedule 23, containing the definition of a permanent establishment for a resident of a jurisdiction with which New Zealand does not have an applicable double tax agreement.

Part 2Amendments to Tax Administration Act 1994

Clause 49 provides that Part 2 amends the Tax Administration Act 1994

Clause 50 amends section 17 by inserting new subsection (1CB), which provides when information is in the knowledge, possession, or control of a member of a large multinational group for the purposes of sections 139AB, 143, and 143A.

Clause 51 inserts new section 21BA, which limits the availability, as evidence in proceedings, of information that is not provided by a member of a large multinational group when required by the Commissioner. The Commissioner must notify a member of the consequences of not providing the information and that the Commissioner may exercise her powers relying on the information already held by the Commissioner.

Clause 52 inserts new section 78G, which requires a large multinational group with an ultimate parent in New Zealand to provide a country-by-country report to the Commissioner.

Clause 53 inserts new section 139AB, which provides for a civil penalty of an amount determined by the Commissioner if a member of a large multinational group fails to provide information within the knowledge, information, or control of the member under new section 17(1CB).

Clause 54 amends section 143 to provide a member of a large multinational group with a defence against a charge under that section of failing to provide information that is presumed by new section 17(1CB) to be within the knowledge, information, or control of the member.

Clause 55 amends section 143A to provide a member of a large multinational group with a defence against a charge of an offence under that section of failing to provide information that is presumed by new section 17(1CB) to be within the knowledge, information, or control of the member.

The schedule contains new schedule 23, which is inserted by clause 48 and gives the meaning of permanent establishment applicable when no double tax agreement applies.