• Artificially high interest rates on loans from related parties to shift profits out of New Zealand (interest limitation rules)
• Hybrid mismatch arrangements that exploit differences between countries' tax rules to achieve an advantageous tax position
• Artificial arrangements to avoid having a taxable presence (a permanent establishment) in New Zealand, and
• Related-party transactions (transfer pricing) to shift profits into offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore.
Consultation to date
The Government, IRD and Treasury have listened to submissions - to an extent. Within the timeframes allotted, the consultation process has been fair.
Without going into tax detail, I can see elements where the proposals have been improved by specialist input. Special rules for infrastructure project finance, and grandparenting for regulatory capital hybrids and existing Advance Pricing Agreements are examples of this.
Picking up where National left off
From a first inspection, the measures are largely consistent with those announced by the previous government in August 2017. Nash can be applauded for policy continuity and it seems likely the Bill will attract cross-party support.
Can Parliament deliver?
Whether these measures are all needed is debatable but that's not the subject of my comments today.
Where Nash (and new Chair of Parliament's Finance and Expenditure Committee [FEC] Michael Wood) will face challenges is around managing the process from here. Can Parliament deliver legislation that "works" on a purely mechanical level: that does what its designers intend?
Recently I had the privilege of listening to Nash speak to a room full of tax professionals.
Nash is an old hand on FEC from his days in Opposition. He repeatedly stressed his concerns:
Too often, there were times when the IRD was saying one thing while tax professionals were saying another.
None of us on the select committee were tax professionals, yet we were expected to rule on complex tax law. This point was personally very challenging.
Those comments carry weight. As a tax professional, I find aspects of this new tax bill – notably those addressing hybrid mismatch arrangements and dealing with deferred tax – "personally very challenging" myself.
Submissions from EY and others, and the resulting discussion at FEC, can only be about complex tax law. And, without having worked through the detail yet, past experience tells me:
1. There will be aspects on which we disagree with IRD about how a particular clause works
2. We won't always agree on the type of transactions likely to be caught (the taxation of overseas branches of New Zealand companies will be an area of focus)
3. We're not all-seeing. The implications of some of the new measures won't become apparent for years to come.
Tight timeframes
The measures are intended to apply (in most cases) for income years beginning on or after 1 July 2018. Assuming there is no intent to make them retrospective, that means the Bill needs to become law by June 2018.
So the time for FEC to consider 70 pages of complex tax law will be short and, as Nash states, few MPs are tax professionals.
In his speech, Nash emphasised to us:
…there will always be areas where full agreement cannot be reached, but it shouldn't be a fundamental disagreement on crucial tax legislation.
If this Bill passes into law without disagreement in some form, it will be a major achievement.
Watch this space.
