New Zealand Rectifies Error In Restricted Transfer Pricing Rule

; posted on
February 20th, 2018

The Inland Revenue in New Zealand issued a note on revising the drafting error in the Taxation (Neutralizing Base Erosion and Profit Shifting) Bill, which is currently considered by the Finance and Expenditure Committee. Wording in the Bill means that the interest deduction limitation rule applying to cross-border related party loans is not applied as widely as it should.

Ownership Threshold in the Bill

The Bill drafted that the restricted transfer pricing rule applies where a person or group holds 50% or more of the voting interests in a New Zealand company. Voting interests are the average percentage one person out of four shareholders holds decision-making rights in a company. From a policy perspective, the restricted transfer pricing rule is closely related to the thin capitalisation rule. Both rules deal with the very significant BEPS issue of interest deductions on cross border related party debt. In an EBITDA rule, as recommended by the OECD in BEPS Action 4, thin capitalisation and transfer pricing are effectively combined, and thus necessarily subject to the same ownership threshold. In this case, the Officials recommend to the Finance and Expenditure Committee that the ownership threshold is changed to align with that in the thin capitalisation rules, which also deals with the issue of interest deductibility. This means where a foreign shareholder has varying decision making rights on their shares in a New Zealand company, it will be the highest of the four rights that determines whether that person or group has a 50% or greater interest in the New Zealand borrower, rather than the average.

Submission Due Day

This change will have no impact in the usual case where shareholders do not have varying rights. The Finance and Expenditure Committee expects to hear from submitters on the Bill by February 28, and written submissions are supposed to be provided by March 2.

Source: IRD

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