June 7, 2022
New Zealand Inland Revenue Officials consult on domestic adoption of OECD Pillar Two
New Zealand Inland Revenue Officials have released an Officials' issues paper discussing New Zealand's potential adoption of the Organisation for Economic Co-operation and Development (OECD) Pillar Two GLOBE rules. The paper outlines the New Zealand Inland Revenue Officials' (Officials) views as to whether New Zealand should adopt the GLOBE rules, and if so, how and when the rules should apply.
It is important to note that the document represents the views of the Officials only. The New Zealand Government is yet to make a final decision on New Zealand's adoption of the OECD Pillar Two proposals.
Adoption of Pillar Two
The Officials' overall preference is for New Zealand to adopt the GLOBE rules, and to do so while conforming closely to the OECD Model Rules. The two primary reasons for this position are:
The Officials consider that bespoke settings that are inconsistent with the GLOBE rules create double taxation risks, and New Zealand as a small capital-importing economy is particularly sensitive to any foreign investment implications.
Timing of potential adoption
The Officials' view is that New Zealand should wait to ensure that a "critical mass" of other jurisdictions adopt the GLOBE rules before progressing further. As well as looking to the European Union, the United Kingdom and the United States (US), New Zealand will in particular, look to follow Australia's lead given the close economic relationship between the two states. If a decision is made to adopt the rules, Inland Revenue has indicated that it is likely that domestic legislation adopting the GLOBE rules would be enacted in 2023, with the rules coming into effect in 2024.
Adoption of the rules as a package
For reasons of efficiency and compatibility, the Officials have indicated a clear preference for the New Zealand GLOBE rules to be implemented as closely aligned to the OECD Model Rules as possible. Therefore, the scope, mechanism, and implementation of the rules are not the subject of consultation in this paper. Significantly, this means that key operating provisions of the GLOBE rules would apply in New Zealand (as set by the OECD's Inclusive Framework). This includes: the determination of in-scope constituent entities, calculation of GLOBE income, covered taxes, effective tax rate, and top-up tax, and the imposition of the IIR and UTPR.
New Zealand-specific design considerations
Specifically, the Officials consider that the New Zealand settings should:
It is clear that the GLOBE rules will require bespoke and unique GLOBE calculations on a country-by-country level for the determination of scope (and tax impact). The difficulty will be in gathering the necessary information to perform these checks and calculations. The information required will often have multiple sources and will likely require reference to accounting, tax, and in some cases company secretarial (or other) data. This is a complex exercise that will test the capability of existing reporting systems and risk placing renewed pressure on business' finance function.
While direct adoption of the OECD's proposed rules may seem a simpler approach, it may not eliminate or reduce complexity. In many cases, the rules will require an effective resetting of tax attributes (such as deferred tax balances at a 15% rate, aligning with the GLOBE minimum rate). As currently formulated, this can lead to unexpected outcomes, particularly where entities have large permanent differences (which materially reduce effective tax rates) or derive losses in certain territories. Much of the impact of the proposals will not be understood until the rules are applied in practice.
While the paper consults on a number of issues, it is notable that the Officials do not consider it appropriate that IIR tax paid by a New Zealand entity should generate any imputation credits. Significantly, the Officials have set out thinking that, in their view, distinguishes tax pursuant to IIR from tax imposed under New Zealand's Controlled Foreign Company rules. If implemented as proposed, the impact is that IIR tax will create economic double taxation as between New Zealand corporates and their shareholders. We note Australian Officials have yet to formally comment on the corresponding (franking credits) issue.
Ultimately, while there is clearly substantial momentum around the process at both a local and global level, significant practical hurdles remain. Critically, many eyes remain on the US and its agreement around process and scope. Unsurprisingly, US agreement is key to obtaining the requisite degree of consensus for the rules to have global credibility; it is still uncertain as to whether the US will adopt an OECD-mandated approach or take a different view.
Public submissions on the discussion document are open until 1 July 2022. Following final Government decisions, legislation is expected to be introduced to Parliament later this year with enactment expected in 2023.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Limited (New Zealand)