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May 25, 2023

New Zealand to adopt the OECD GloBE (Pillar Two) rules

  • Pillar Two of the OECD's Global Anti-Base Erosion rules will apply in New Zealand. The application date is to be agreed by Parliament with reference to the take up of these rules in other territories.
  • An Income Inclusion Rule and Under Taxed Profits Rule will be introduced, together with a Domestic Income Inclusion Rule. The Income Inclusion Rule will apply on or after 1 January 2024, with the introduction of the Under Taxed Profits Rule not occurring before 1 January 2025.
  • An EUR750m threshold will apply.
  • Any top-up tax collected under the Income Inclusion Rule or Under Taxed Profits Rule will not give rise to imputation credits. Top-up tax collected under the Domestic Income Inclusion Rule will give rise to imputation credits.
  • Top-up tax paid under either the Income Inclusion Rule or Under Taxed Profits Rule overseas would not give rise to foreign tax credits in New Zealand.
  • The new rules will override existing double-tax treaties with New Zealand (unless there is a specific reference in the double-tax treaty to the Global Anti-Base Erosion rules).

Executive summary

The New Zealand Government has announced that it will adopt legislation to implement the OECD'si Global Anti-Base ErosionPillar Two Rules in New Zealand (the overall New Zealand package is referred to as the "Applied GloBE Rules").

The adoption of these rules is not unexpected, as the Government flagged this originally as part of a public consultation process in May 2022.

Even by tax standards, these are highly complex and very nuanced rules. They seek to ensure that income earned by large corporate groups is at least taxed to agreed minimum levels. They allow countries to examine the income and taxes reported in offshore entities and "top up" that tax if it is below agreed measurement norms. The desire to have one set of rules, together with the resultant need to navigate different industries, business structures, ownership chains and financial reporting standards drives the significant level of detail and complexity.

From a New Zealand fiscal perspective, it seems unlikely that there will be a material amount of tax collected under the new rules. However, Government is seeking to ensure New Zealand's rules are aligned with other OECD members and therefore has introduced the necessary legislative framework. These rules are deliberately inactive at present and will be "switched on" in the future.

The Applied GloBE Rules will incorporate a multinational Income Inclusion Rule, an Under Taxed Profits Rule, and a Domestic Income Inclusion Rule for New Zealand-headquartered multinational entities. The Government will set the application date for all rules once it determines that a "critical mass" of countries has adopted these rules. However, for the Income Inclusion Rule and Domestic Income Inclusion Rule this will not be before 1 January 2024, while for the Under Taxed Profits Rule this will not be before 1 January 2025.

In one departure from OECD norms, the Domestic Income Inclusion Rule is limited in scope to New Zealand-headquartered groups. Its limited scope distinguishes the Domestic Income Inclusion Rule from a domestic Qualified Minimum Top-Up Tax, as defined by the OECD and being adopted by many other OECD countries.

As New Zealand will largely adopt the Applied GloBE Rules into domestic tax legislation by direct reference and as a package, our rules will for the most part reflect the OECD Model Rules, Commentary, and recent Administrative Guidance. Putting aside the Domestic Income Inclusion Rule, much of the remaining bespoke legislation is included to ensure the OECD package can be accommodated into New Zealand's tax code in a workable manner.

Nonetheless, further work will be required to assess whether the interaction of these new measures with the existing New Zealand tax rules will produce any unexpected outcomes.

Detailed discussion

The measures apply to all multinational groups (MNE Groups) with consolidated accounting revenue of EUR750 million (approximately NZD1.3 billion) or more. Specifically:

  • The New Zealand Applied GloBE Rules will apply if the turnover exceeds the threshold in at least two of the preceding four years.
  • Although not explicitly mentioned, we expect (pursuant to the OECD Model Rules) that the threshold will be determined for any year based on the average exchange rate in December of the immediate preceding year.

The Income Inclusion Rule (IIR) and Under Taxed Profits Rule (UTPR) will apply equally to both New Zealand-parented MNE Groups and to foreign-parented MNE Groups. Conversely, the Domestic Income Inclusion Rule (DIIR) will apply only to New Zealand-headquartered MNEs.

Consistent with the OECD Model Rules, only limited exemptions to the rules will apply (e.g., for investment funds, pension funds, government entities, international organizations, not-for-profit organizations and income associated with international shipping).

The rules associated with calculating the top-up taxes required under the IIR, UTPR and DIIR are complex and have been the subject of extensive consultation at both the OECD level and within New Zealand. This Tax Alert is not intended to reproduce or examine these rules in detail, but rather to focus on some of the practical implications that the introduction of these new measures could have for MNE Groups with a presence in New Zealand.

Importantly, these rules are centered on, and triggered by, a threshold measure — the jurisdictional Effective Tax Rate (ETR) for each country in which the MNE Group operates.

Broadly, the ETR for all entities of an MNE Group must be determined on a jurisdictional basis by dividing the Adjusted Covered Taxes of the entities in the respective jurisdiction by their Global Anti-Base Erosion (GloBE) Income. The starting point for this calculation is the Consolidated Financial Statements prepared under the financial accounting standard adopted by the parent (e.g., International Financial Reporting Standards (IFRS), US Generally Accepted Accounting Principles (US GAAP)).

The GloBE ETR calculation is therefore conceptually similar to a "typical" ETR calculation, being a calculation of tax expense as a proportion of accounting income. However, given the rules need to ensure a consistent calculation methodology across all countries that adopt them, detailed computation provisions contain a series of complicated and nuanced adjustments. These must be applied in determining both the Adjusted Covered Taxes and GloBE Income amounts.

If the resultant ETR is below the 15% global minimum tax rate in a jurisdiction, the MNE Group is subject to top-up tax and this tax could be collected under the DIIR, IIR or UTPR.

Where the top-up tax is collected under the IIR (in relation to any New Zealand-parented low-taxed constituent entity (LTCE) or DIIR (for domestic New Zealand operations)), the UTPR rule should not apply. The UTPR represents a back-stop rule if neither IIR nor DIIR applies.

Foreign income of New Zealand-parented MNE Groups — the IIR

The application of the IIR adopts the OECD Model Rules and applies where a New Zealand entity that is the Ultimate Parent Entity (UPE) of an MNE Group holds (directly or indirectly) an ownership interest in an LTCE in a jurisdiction that does not meet the 15% ETR.

In these circumstances, the New Zealand parent must pay its proportionate share of the resultant top-up tax to the New Zealand Revenue Authority (Inland Revenue). In this respect, the IIR operates similarly to New Zealand's existing controlled foreign company (CFC) rules.

Any top-up tax paid to Inland Revenue under the IIR will not give rise to an imputation credit.

Application to foreign-parented MNE Groups — the UTPR

For New Zealand entities that are not the UPE of an MNE Group, the IIR may still apply in limited circumstances to require top-up tax to be paid to Inland Revenue, such as where the UPE is resident in a jurisdiction that has not implemented the IIR and there is a New Zealand Intermediate Parent Entity (IPE) that owns (directly or indirectly) an ownership interest in an LTCE.

The UTPR could also operate in limited circumstances and result in additional tax being paid to Inland Revenue with respect to LTCEs of the MNE Group that are resident in foreign jurisdictions and not otherwise subject to a IIR or Qualified Domestic Minimum Top-Up Tax (QDMTT). On the other hand, where a New Zealand entity owns that LTCE, the UTPR would not typically apply and the IIR would take precedence.

Any top-up tax paid to Inland Revenue under the UTPR will not give rise to an imputation credit.


The DIIR is distinct from a QDMTT due to its more limited scope. However, it is conceptually similar in terms of what it intends to achieve. The DIIR will use the same tax base as the GloBE Pillar Two Rules for calculation purposes. However, unlike a QDMTT, it applies only to the profits of domestic LTCEs that are members of an MNE headquartered in New Zealand. While there is no explicit definition of "headquarters" within New Zealand domestic legislation, the Applied GloBE Rules provide that it will have a meaning consistent with the GloBE Pillar Two Rules and related OECD Commentary.

If the ETR as calculated under the DIIR is less than 15%, a top-up tax will be payable to the Inland Revenue to effectively adjust the New Zealand jurisdictional ETR to a 15% minimum rate. The DIIR, where applicable, therefore preserves New Zealand's taxing rights with respect to undertaxed New Zealand income.

The DIIR also contains an initial-phase relief mechanism. This means that, for New Zealand-headquartered MNEs, the rule will not apply during the initial phase (given any undertaxed New Zealand income would not be taxed by another country's UTPR during this period).

Another key difference between the DIIR and a QDMTT arises where a foreign entity has a minority interest in a New Zealand-headquartered MNE. In such a situation, the DIIR will only apply to the proportion of the low-taxed profits attributable to the New Zealand MNE's ownership, whereas under a QDMTT, the top-up tax would need to be paid on the basis of an attributed 100% ownership (irrespective of the actual ownership percentage).

New Zealand's approach in introducing a DIIR as opposed to a more broadly encompassing QDMTT is interesting. This appears to be a policy choice to restrict application of the domestic minimum tax mechanism to groups that are ultimately New-Zealand parented. This differs from the approach taken in many countries, including New Zealand's close trading partners the United Kingdom and Australia, where a more typical QDMTT has been or is expected to be introduced.

One point of interest will be whether the departure from OECD norms drives additional New Zealand compliance costs, as MNEs will likely want to implement a consistent global process. By adopting a different rule, New Zealand creates a small wrinkle in that approach for affected New Zealand-headquartered MNEs.

Any top-up tax paid under the DIIR will give rise to an imputation credit.

Safe harbor rules

New Zealand will adopt the three tests under a transitional safe harbor regime consistent with those agreed to in the OECD Inclusive Framework in February 2023, namely the De Minimis Test, Simplified ETR Test and Routine Profits Test. The transitional safe harbor regime is expected to apply for the first three fiscal years beginning on or after 1 January 2024.

It is important to note that the transitional safe harbor regime contains a "once out, always out" rule. That is, once the transitional safe harbor is not applied for one fiscal year for a jurisdiction, the transitional safe harbor cannot be applied for subsequent years.


Amendments have also been made to New Zealand's tax administration regime to absorb the Applied GloBE Rules (and the associated top-up taxes) within New Zealand's existing compliance and administrative framework. Specifically:

  • All in-scope MNEs must register with Inland Revenue within six months of the end of the first income year they are in-scope of the Applied GloBE rules. If they cease to be in-scope of the rules, they must notify Inland Revenue within six months of the end of the income year that the rules do not apply.
  • New Zealand-parented MNEs must submit a GloBE Information Return (GIR) to Inland Revenue electronically in the prescribed standard OECD template within 18 months of the end of the income year (15 months for subsequent years). Foreign-headquartered in-scope MNEs may also need to submit GIRs, depending on whether GIRs have been filed in the UPE country.
  • All in-scope MNEs must file an annual top-up tax return (which is separate to the annual income tax return) that will state the amount of top-up tax payable. The first top-up tax return would be due to Inland Revenue two months after the GIR is due (one month in subsequent years). Top-up tax is also due on the same date as the annual top-up tax return.
  • The country-by-country reports are filed electronically in the XMLii format.

New penalties for late registration and incomplete / late filing of the GIR and CbC reporting (CbCR) have also been introduced. Penalties for incomplete/late payment of the top-up tax will adopt the current penalties under the income tax regime (i.e., late payment penalties, shortfall penalties, and use of money interest).

Considerations for affected taxpayers

Impact assessment

Many MNE Groups have already conducted preliminary assessments of the likely impact of these measures, based on the OECD Model Rules. Given the likely commencement date of 1 January 2024, further work should be undertaken to update the assessment and more definitively evaluate the likely impact of these rules from a compliance, ETR and cash tax perspective.

For MNE Groups that have held off undertaking an assessment, it will be important to commence this now in line with best practice to consider both the technical impact of the rules as well as the organization's data and systems readiness to comply with and report on the rules.

Our expectation is that many in-scope MNEs parented in New Zealand are likely to be in a position to avail themselves of at least the temporary safe harbor concession. Where this does apply, it should materially reduce the compliance burden placed upon these taxpayers.

It will be critical for taxpayers to identify whether these safe harbors apply and whether the requisite data to support qualification is available and accurate. In addition, taxpayers will need to ensure that CbCR is prepared using Qualified Financial Statements (broadly, the accounts used to prepare the UPE's Consolidated Financial Accounts, with some exceptions).

Financial accounting disclosures

Consideration will need to be given to new accounting public disclosure rules governing the disclosure of Pillar Two information in financial accounts. The International Accounting Standards Board (IASB) has issued amendments to IAS 12, Income Taxes, with respect to Pillar Two that includes:

  • A temporary exception — to the accounting for deferred taxes arising from jurisdictions implementing the global tax rules in their domestic legislation
  • Targeted disclosure requirements — to help investors better understand a company's exposure to income taxes arising from the reform, particularly before legislation implementing the rules is in effect

Companies can benefit from the temporary exception immediately but must provide the disclosures to investors for annual reporting periods beginning on or after 1 January 2023. In other words, although financial reporting will not recognize Pillar Two-related tax balances, financial reporting teams need to address the potential impact of the new rules and consider the need for any necessary disclosures.

The IASB will continue to monitor developments related to implementation of the Pillar Two Model Rules. Public statements indicate the IASB plans to undertake further work to determine whether to remove the temporary exception or to make it permanent — after there is sufficient clarity about how jurisdictions implemented the rules and the related effects on entities.

Significant compliance effort

Affected taxpayers will need to seriously consider the significant compliance effort needed to comply with the new rules. This is critical in a New Zealand context, where we expect much of the material impact on New Zealand-parented MNEs to be compliance-related, as opposed to a cash tax cost. The readiness exercise requires understanding and identifying the many tax, financial and other data requirements for the calculations, as these go beyond what is needed for traditional tax compliance and reporting.

MNE Groups need to develop a plan for timely access to necessary information to enable budgeting, forecasting, interim and annual tax accounting, tax compliance and tax controversy.

MNE Groups should assess whether existing systems can manage the Pillar Two calculations and compliance obligations, or whether a redesign of tax processes and systems will be required to support compliance.

MNE Groups should also address their resource needs to manage the calculations and compliance obligations. We anticipate that Inland Revenue will likely examine tax corporate governance issues around compliance with the new measures to ensure that corporate taxpayers have adequate processes in place.

It is important to note that qualifying for the transitional safe harbors (and assuming said qualification can be adequately supported) should result in a material reduction in the compliance burden.

Interaction with other New Zealand tax rules

Several amendments to New Zealand domestic tax legislation have also been made to accommodate the imposition of the Applied GloBE Rules. Notably, the rules will override the terms of any existing double-tax treaty, unless the terms of the treaty expressly refer to the GloBE rules. Furthermore, any top-up tax paid overseas under either the IIR or UTPR would not give rise to foreign tax credits in New Zealand (although tax paid pursuant to a foreign country's QDMTT or similar tax should give rise to foreign tax credits for New Zealand purposes).

Finally, and as noted above, the domestic imputation credit regime has been amended, such that any payments of top-up tax under the DIIR only will give rise to New Zealand imputation credits in the hands of the entity paying the DIIR tax.

The interaction of the Applied GloBE Rules with domestic tax legislation also gives rise to various considerations, including:

  • This interaction could have an impact on imputation credit accounts and associated planning, in particular the divergent imputation credit account treatment of top-up tax collected under the DIIR versus the IIR and UTPR, discussed above.
  • Normal penalty and anti-avoidance provisions under existing tax laws will apply to the Applied GloBE Rules; as a result, related penalties will likely be applied to compliance failures and careful attention will be required in structuring or restructuring MNE Groups to ensure any anti-avoidance rules are considered.
  • Care is required to provide consistency between the top-up tax accounting and payment disclosures under the new rules and the existing CbCR reporting requirements.

Many New Zealand taxpayers manage their ongoing tax obligations by utilizing tax pooling. Tax pooling is fairly unique to New Zealand but widely used and allows taxpayers to use a collective "tax pool" to manage overpayments or underpayments of tax throughout an income year and mitigate the penalty and interest impact should these arise. Although the draft rules and commentary are silent on this subject, we do not anticipate that taxpayers would be able to use tax pooling in respect of obligations under the Applied GloBE Rules, which represent an ancillary tax, whereas tax pooling is limited to income taxes.

Communication with management/boards

Tax teams should now brief management, and in some cases the board, on the likely impact of these measures, including (i) any potential top-up taxes that may be payable, (ii) the financial accounting disclosure requirements, and (iii) the extensive compliance effort that will be required to meet the administrative and filing requirements.

Engagement with statutory auditors

It is likely that statutory auditors will want to understand the potential application of these new measures and may request both qualitative and quantitative information regarding the likely impact on MNE Groups. Accordingly, early engagement with auditors to understand their expectations with respect to both the disclosure requirements and, as appropriate, governance processes in place to meet the potentially onerous compliance obligations, is recommended.

Engagement with Inland Revenue

Inland Revenue has indicated that it is prepared to meet with interested companies to discuss the likely compliance impact of the Applied GloBE Rules, and to gather any insights on how to simplify compliance for taxpayers. New Zealand is expected to have a relatively limited number of domestically headquartered taxpayers with annual revenue sufficient to fall within the ambit of the rules. EY has previously consulted with Inland Revenue in relation to the introduction of these rules and will continue to do so.

We encourage engagement with Inland Revenue, but note it is likely that Inland Revenue may be somewhat limited in its ability to simplify Pillar Two compliance for taxpayers, given that the detailed data disclosure requirements of the annual filings are required under the OECD Model Rules.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Limited (New Zealand), Tax Policy, Auckland

Ernst & Young Limited (New Zealand), Auckland

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor



i Organisation for Economic Co-operation and Development

ii Extensible Markup Language