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Concern at anti-avoidance rule impact on treaties

03 May 2017

A proposed package of amendments and new anti-avoidance rules for transfer pricing is of concern to the New Zealand Law Society for its proposed approach to amending the effect of New Zealand's existing international tax treaties.

In a submission to the Inland Revenue Department on the Government discussion document BEPS - Transfer Pricing and Permanent Establishment Avoidance, the Law Society says there is limited scope for New Zealand to enact changes in the name of "avoidance rules" which have the effect of overruling the clear wording in international treaties.

It acknowledges that other countries, such as the United Kingdom and Australia, have enacted similar rules to those proposed.

"Under our treaties, foreign companies resident in countries with tax treaties that do not carry on business from a permanent establishment are afforded protection against New Zealand tax on their income from New Zealand. In return, that foreign country affords New Zealand companies the same protection," the submission says.

"It is generally accepted that the protections provided in the treaty must be subject to general rules that prevent their abuse. However, there is a line between such general rules and more specific provisions that are intended to simply undo the negotiated position reflected in the treaty. Legislation enacting this latter category is not appropriate."

Under the proposals, foreign companies will be exposed to tax when, on the plain wording of the treaty this should not be the case. It is also proposed that they will be subject to a different regime for the investigation and challenge of their taxes.

The Law Society says this is not in accordance with the spirit of New Zealand's treaty network. It says it is also arguably not in accordance with the legal effect of New Zealand's existing treaty network.

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Last updated on the 3rd May 2017