Tax loophole stays open for now

Woodhouse's statement indicated the government was grappling with whether and how to target the policy. Photo / Mark Mitchell

The government has kicked for touch over whether to close a profit-shifting tax loophole, delaying a decision on whether to follow international guidelines and limit how much interest payments can be used to write off taxes.

Revenue Minister Michael Woodhouse said through a spokesperson that long-mulled recommendations from the OECD that member states should cap tax deductions on interest paid to a maximum of 30 per cent of ebitda would not be implemented this year.

"In line with the tax policy process, the Government intends to release a discussion document early next year on proposed changes to our interest limitation rules," Woodhouse said.

The government has long expressed a desire to tackle multinational tax avoidance through multilateral channels instead of going it alone and the OECD recommendation is one of 15 steps on an "action plan" agreed internationally in 2015.

Documents obtained under the Official Information Act suggest the policy - its introduction this year was described in March briefings to the Revenue Minister as a "likely development" - was initially intended to be announced this month.

Timeframes drafted in April ("more detailed dates are not to be made public," an IRD manager said of these timings) had the policy reported to the Minister in July, with public consultation concluded in September, and a final report delivered this month.

Legislative changes, if required, were to have been introduced to Parliament "possibly late 2016/early 2017".

Woodhouse's statement indicated the government was grappling with whether and how to target the policy.

"These proposals will seek to ensure that multinationals cannot take excessive interest deductions in New Zealand, while at the same time limiting the impact on firms with conservative levels of interest expense which do not pose a risk to New Zealand's tax base," he said.

Tax advisers spoken to this week said the main areas of dispute where whether to limit the policy to companies owned by non-residents, and whether to make certain debt-heavy industries exempt.

Analysis by the Weekend Herald suggests a blanket application of the rule would have a relatively modest effect on NZX companies - typically less-leveraged than privately-owned firms - with extra tax liabilities totalling less than $10 million annually.

But private equity-owned firms, particularly infrastructure companies, typically using capital structures heavily-laden with loans, potentially face new tax bills totalling tens of millions of dollars.

As an example, of New Zealand's five largest power lines companies, the majority are over the interest deductions cap of 30 per cent with one - Wellington Electricity Distribution Network (WEDN) - at 65.3 per cent.

WEDN's financial statements filed with the Companies Office show it paid just $1.4m in tax last year. Were these results and capital structure - including a $234.5m related-party loan - subject to the proposed cap on deductions that tax bill would leap to $9m.

Massey University senior lecturer in taxation Deborah Russell said the potential effect on Wellington power consumers - who may end up being charged more to cover the new tax bills - showed the arcane world of tax planning had real-world effects.

"What this does show is all these really complicated wiring diagrams of tax structures can end up having an effect on ordinary consumers," she said.

John Payne, chair of the Corporate Taxpayer's Group (CTG) that represents large companies, said New Zealand's large taxpayers pulled their weight.

"New Zealand's corporate tax take as a percentage of GDP is one of the highest in the OECD," Payne said.

Payne, speaking on what he described as a "broad consensus" of CTG members, described a strict interest deduction limit as "such a blunt instrument - one size doesn't fit all".

He questioned whether change was necessary as New Zealand already had what he described as "robust" transfer pricing and thin capitalisation rules.

"The industry view is the current regime is fit for purpose and we didn't see a burning platform for change."

Payne said changing rules would lead to some turbulence, particularly if exemptions weren't made for debt-heavy industries, and may influence foreign direct investment decisions.

"It's always an issue when you change the settings: Do you grandfather existing loans, for example; Or does the government just say 'Well, the rules have changed, that's our prerogative'. There are winners and losers doing that latter - in this case mostly losers," he said.