October 2, 2018 OECD releases New Zealand peer review report on implementation of Action 14 minimum standard Executive summary On 30 August 2018, the Organisation for Economic Co-operation and Development (OECD) released the fourth batch of peer review reports relating to the implementation of the Base Erosion and Profit Shifting (BEPS) minimum standard under Action 14 on improving tax dispute resolution mechanisms.1 New Zealand was among the assessed jurisdictions in the fourth batch.2 New Zealand requested that the OECD also provide feedback concerning their adoption of the Action 14 best practices, and therefore, in addition to the peer review report, the OECD has released an accompanying best practices report.3 Overall the report concludes that New Zealand meets almost all of the elements of the Action 14 minimum standard. In the next stage of the peer review process, New Zealand's efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Detailed discussion Background In October 2016, the OECD released the peer review documents (i.e., the Terms of Reference and Assessment Methodology) on Action 14 on Making Dispute Resolution Mechanisms More Effective.4 The Terms of Reference translated the Action 14 minimum standard into 21 elements and the best practices into 12 items. The Assessment Methodology provided procedures for undertaking a peer review and monitoring in two stages. In Stage 1, a review is conducted of how a member of the Inclusive Framework (IF) on BEPS implements the minimum standard based on its legal framework for Mutual Agreement Procedure (MAP) and how it applies the framework in practice. In Stage 2, a review is conducted of the measures the member of the IF on BEPS takes to address any shortcomings identified in Stage 1 of the peer review. Both of these stages are desk-based and are coordinated by the Secretariat of the Forum on Tax Administration's (FTA) MAP Forum.5 In summary, Stage 1 consist of three steps or phases: (i) Obtaining inputs for the Stage 1 peer review (ii) Drafting and approval of a Stage 1 peer review report (iii) Publication of Stage 1 peer review reports Input is provided through questionnaires completed by the assessed jurisdiction, peers (i.e., other members of the FTA MAP Forum) and taxpayers. Once the input has been gathered, the Secretariat prepares a draft Stage 1 peer review report of the assessed jurisdiction and sends it to the assessed jurisdiction for its written comments on the draft report. When a peer review report is finalized, it is sent for approval of the FTA MAP Forum and later to the OECD Committee on Fiscal Affairs' to adopt the report for publication. Minimum standard peer review reports The report is divided into four parts, namely: (i) Preventing disputes (ii) Availability and access to MAP (iii) Resolution of MAP cases (iv) Implementation of MAP agreements Each part addresses a different component of the minimum standard. The report includes nine recommendations relating to the minimum standard. In general, the performance of New Zealand with regard to MAP has proven to be satisfactory in their respective reports. Overall, New Zealand meets almost all of the elements of the Action 14 minimum standard. Preventing disputes The Report notes that 11 out of 48 of New Zealand's treaties do not contain a provision that is equivalent to Article 25(3) of the OECD Model Tax Convention, although two of those will be appropriately amended by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). As a result, it recommends New Zealand attempt to include such a provision in its bilateral treaties by negotiation with the counterparty. Availability and access to MAP The Report recommends New Zealand ensures that time limits imposed under its domestic disputes procedure do not limit or restrict taxpayer rights to access MAP within a period of three years from first notice of the proposed double taxation, as provided under the OECD Model Tax Convention. The report also recommended New Zealand maintain and publish records of instances when the competent authority declines to commence a MAP on the grounds either it is not justified or the relevant treaty does not include the necessary MAP article. The Report also recommended New Zealand permit a MAP even when the proposed double taxation arises from the application of the New Zealand domestic anti-avoidance rule in a way that might conflict with the relevant treaty. Finally, the Report recommends New Zealand confirm that MAP is available for all instances of multilateral dispute (and not merely bilateral disputes under a particular treaty), and that collection of any disputed tax owing in New Zealand is suspended during the MAP. Resolution of MAP cases The Report recommended New Zealand ensure suitable resources are applied to MAP to ensure the timely resolution of all disputes. Implementation of MAP agreements The Report recommends New Zealand ensure that time limits imposed under its domestic disputes procedure do not limit or restrict taxpayer rights to access MAP within a period of three years from first notice of the proposed double taxation, as provided under the OECD Model Tax Convention. Best practice peer review reports The Best Practice Peer Review concluded that New Zealand is conforming to best practices in almost all areas. Despite the small number of MAPs with which the New Zealand revenue authority has been involved [it was noted that New Zealand has only participated in a single multilateral MAP], the Review generally commended its approach and procedures. The sole substantive concern related to the lack of adequate procedure when the adjustment potentially giving rise to double taxation was proposed by an overseas revenue authority. Almost half of New Zealand's treaty network (19 out of 48) do not contain the equivalent of Article 9(2) which allows competent authorities to make a corresponding adjustment to unilaterally eliminate double taxation arising from primary adjustments. Including this provision in tax treaties provides taxpayers the possibility to obtain the elimination of such double taxation via a unilateral corresponding adjustment. Accordingly, New Zealand was advised to seek to include that article into its bilateral treaty negotiations. A procedural concern related to the requirement under New Zealand law for the payment of all outstanding tax (including interest and penalties) while the MAP remains (which is contrary to the domestic disputes procedure that generally suspends the obligation to pay the tax until the dispute is resolved). New Zealand Inland Revenue advised that it is considering extending the domestic rules to also apply to cases under the MAP. Next steps New Zealand is already working to address deficiencies identified in its peer review and will now move on to Stage 2 of the process, where New Zealand's efforts to address any shortcomings identified in its Stage 1 peer review report will be monitored. Under the peer review program methodology, New Zealand shall submit an update report to the Forum on Tax Administration's MAP Forum within one year of the OECD Committee on Fiscal Affairs' adoption of the Stage 1 peer review report. Implications In a post-BEPS world, where multinational enterprises (MNEs) face tremendous pressures and scrutiny from tax authorities, the release of New Zealand peer review report represents the continued recognition and importance of the need to achieve tax certainty for cross-border transactions for MNEs. While increased scrutiny is expected to significantly increase the risk of double taxation, the fact that tax authorities may be subject to review by their peers should be seen by MNEs as a positive step to best ensure access to an effective and timely mutual agreement process. Furthermore, the peer review for New Zealand provides insights to taxpayers on the availability and efficacy of MAP. With additional countries continuing to be reviewed, the OECD has made it known that taxpayer input continues to be welcomed on an ongoing basis. With stakeholder feedback in mind, businesses are encouraged to share their views with the OECD on the peer review for New Zealand and any other jurisdictions, and to perhaps comment on whether the next iteration of the OECD's assessment of tax administration's MAP performance warrants greater feedback from taxpayers as the primary source. Feedback from the international tax community is the logical next step after peer review, which may help to further validate the current favorable result. ——————————————— 1 See EY Global Tax Alert, OECD releases fourth batch of peer review reports on Action 14, dated 4 September 2018. 3 See https://search.oecd.org/tax/beps/beps-action-14-peer-review-best-practices-new-zealand.pdf. 4 See EY Global Tax Alert, OECD releases BEPS Action 14 on More Effective Dispute Resolution Mechanisms, Peer Review, dated 31 October 2016. 5 http://www.oecd.org/tax/forum-on-tax-administration/about/. ——————————————— For additional information with respect to this Alert, please contact the following: EY Law Limited, New Zealand Tax Controversy Leader, Auckland
Ernst & Young Limited, International Tax Services, Auckland
——————————————— PDF version of Tax Alert 2018-1936
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