Tuesday, 18 October 2016

New Zealand: Discussion document released on hybrid mismatch arrangements

On 6 September 2016, the New Zealand government announced the release of a discussion document (Paper) that contains proposals for addressing hybrid mismatch arrangements.

The Paper proposes that New Zealand should adopt the OECD recommendations on hybrid mismatch arrangements, as proposed under action 2 of the BEPS action plan, and seeks input on how the OECD recommendations could be implemented in the country. Recommendations seek to prevent the misalignment of domestic rules resulting in unintended tax advantages, which would be primarily achieved through the use of “linking rules” that change the usual tax treatment of cross-border transactions to ensure that there is no hybrid mismatch in such cases.

The Paper is divided into two parts. Part I describes the problem of hybrid mismatch arrangements, the case for responding to the problem and a summary of the OECD recommendations. Part II explains the OECD recommendations in greater detail and discusses how they could be incorporated into New Zealand tax law.

The Paper considers 12 specific OECD recommendations on BEPS action 2, and proposes a number of changes to New Zealand’s tax law to implement them.

There are a significant number of proposals included in the Paper, many of which are complex. Proposals appear ominous, as page 1 states: “It is expected that most hybrid arrangements would be replaced by more straightforward (non-BEPS) cross-border financing instruments and arrangements following the implementation of the OECD recommendations in New Zealand.”

There is recognition that the rules (in particular, recommendation 6: deductible hybrid payments rule) will result in complexity for foreign branches of New Zealand companies, so submissions are requested on whether there should be an active branch income exemption. There also is a proposal to treat companies that are resident in another country under a tax treaty as nonresident for New Zealand tax purposes. Proposals are expected to apply to payments made after a taxpayer’s first tax balance date following enactment.

The Paper makes it clear that the final decision in relation to the proposed implementation of the OECD recommendations in New Zealand will be made after the consultation phase; comments on the Paper must be submitted by 17 October 2016.

Source: Deloitte