Profit shifting tax bill “goes too far

28 Feb 2018

Profit shifting tax bill “goes too far”

Legislation aimed at halting profit shifting by international corporations “starts out very sensibly, but then goes too far,” says John Cuthbertson, New Zealand Tax Leader for Chartered Accountants Australia and New Zealand.

“Government overreach is a theme across a number of areas of the Taxation (Neutralising Base Erosion and Profit Shifting) Bill.

“The drafters of the Bill should have taken a deep breath before including sections which are an overreaction to the problem and potentially damaging to the New Zealand economy,” Cuthbertson said.

Chartered Accountants Australia and New Zealand (CA ANZ) today [28 Feb] made an oral submission on the Bill to the Finance and Expenditure Select Committee.

Cuthbertson said CA ANZ understood the Government’s concerns about base erosion and profit shifting (BEPS) because these activities damaged the integrity of the tax system.

“However, we have significant concerns on two fronts regarding the Bill as it is currently framed – firstly, limiting interest deductions in New Zealand based on the credit rating of the parent company or highest rated member of the group.

“We support limitations, but the rules, as currently written, are at odds with the arms-length principle, are at odds with approaches in other countries and will cause double taxation.

“Secondly, we are very worried by the complexity of rules governing hybrid mismatches – the cross-border arrangements that take advantage of differences in the tax treatment of hybrid entities and instruments.”

He said “Not only are these rules complex, the legislation has been developed in relative haste so inevitably there will be errors and unintended consequences”.

In its written submission, CA ANZ says the Bill:

• Runs the risk of New Zealand being too far ahead of the OECD pack on base erosion and profit shifting (BEPS) and other countries may not follow. “Other countries have not adopted the measures in full because they have determined that it is not in their national interest to do so.”

• Doesn’t fully consider its wider impact on the New Zealand economy. “…there is limited analysis in the current package on the implications for the costof capital for New Zealand businesses and, more importantly, on any overall effect on the New Zealand economy as a whole.”

• Has been developed in isolation rather than as part of an overall package. “As a result of the truncated timeframe, the reforms lack coherence.”

• Is out of proportion relative to the size of the problem.

• Includes many examples of overreach.

An example of the latter, the CA ANZ submission says, is the breadth of rules governing hybrid mismatches.

The proposed rules, it says, will result in a large number of taxpayers being affected. “There is a high risk of overreach in the SME sector, particularly in respect of branch transactions.

“If the legislation were to be enacted in its current form, it would result in increased complexity, uncertainty and cost of capital.”

Implementation should be phased or delayed in line with that of our major trading partners.

Interest limitation proposals

Cuthbertson said the Bill’s interest limitation proposals to prevent related parties using excessive interest rates – “high-priced debt” – to shift profits out of New Zealand were “particularly concerning.

“The proposed restricted transfer pricing rule, by limiting interest deductions in New Zealand by reference to the credit rating of the parent company or highest rated member of the group, does not take into account significant differences among businesses in a group, including their size, the industry they operate in and the relative importance of the New Zealand business in the world-wide group.

“Also from a practical and commercial perspective, it will be difficult to apply.

“Most New Zealand tax managers will not know the credit ratings of all businesses in the wider group.”

The CA ANZ written submission proposes a new approach to interest limitation to ensure everyone plays the game properly.

This includes allowing the Commissioner of Inland Revenue to recognise otherwise disregarded terms and conditions of loans where recognition would be consistent with the overall purpose of the rules.

Also to allow interest deductions on loans which retain materially equivalent terms and conditions to existing significant third-party debt.

A copy of the CA ANZ written submission is available on the New Zealand Parliament website here

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