LegalResearchFoundation

Whilst  the  free  movement  of  goods,  capital  and  labour  across  borders,  and  the  freedom to establish  a  business  abroad,  are  the  neoliberal  cornerstones  of  global  economics,  it  is the nation  state that continues  to dominate global politics. One result of this disconnect between international  trade  and  national  power  is  the  ability  of  persons  to  benefit  from  location-specific  advantages  while  paying  little  or  no  tax  in the  host jurisdiction.  Although there  is  a strong  argument  that  states  are  under  an  obligation  to  protect  their  citizens  from  these  tax-avoiding  free-riders,  the  available  solutions  are  seemingly  sub-optimal.  Unilateral solutions run the risk of causing double taxation, investor uncertainty and other obstacles to free trade, thus  putting  foreign  investment  and  economic  growth  at  risk.  Multilateral  solutions  require inroads into state sovereignty,  which not only has  government revenue  implications  but also means state power being ceded to a global regime that lacks the bite of hard law. Thus, states find  themselves  in  a  quandary.  Should  they  trade  autonomy  and  legislative  freedom  for  the promise of a global public good that ultimately lacks certainty with regards enforcement? Or should they risk their economy and use their power to compel global actors to pay a fair share of  tax?  This  article  argues  that  if  liberty,  guaranteed  by  certainty  of  legal  outcome,  is  the moral justification of law, any erosion of sovereignty, temporary or otherwise, in favour of aglobal soft-law regime must guarantee sufficient certainty for taxpayers; and, if benefit theory is  an  acceptable  moral  justification  for taxation, a  global  tax  system  that respects  locational benefits  would  provide  a  fair  share  of  tax  revenues  for  states.  Accordingly,  there  is  a  good argument that global formulary apportionment (for producers) and a destination-basis goods and   services   tax   (for   consumers)   are  the   right   direction   of  travel   when   it   comes to international tax cooperation.

The  New  Zealand  government  had  been  facing  increasing  criticism  for  its  failure  to address the imbalance in the housing market. In particular the government was criticised for  the consequent inability to provide New Zealanders  affordable housing, especially in Auckland. The media had often pointed the finger at the increasing number of residential properties  being  sold to non-residents.  Equally, there has  been considerable speculating in  land  and  this  has  been  seen  as  a  further  cause  of  the  economic  distortion  in  the residential property market. The  National  Party,  and  in  particular  then  Prime  Minister  John  Key,  had  continually denied  there  was  any  problem  with  the  New  Zealand  housing  market.  Then  in  the  2015 there was a massive policy reversal with one of the stated purposes being to ensure  non-residents  are  paying  their “fair  share”  of  tax.  On  17  May  2015,  the  Government delivered  a  significant  taxation  reform  package  as  part  of  Budget  2015,  containing 4 interrelated  measures.  While  the  new  measures  affect  all  vendors  and  purchasers,  they are particularly aimed at “offshore persons”. It  is  the  taxation  of  off-shore  persons  that  is  the  core  of  this  article.   Specifically,  the article considers the international tax implications  of the new “bright  line”  measures  in this regard. This includes a discussion of the sharing of information with other countries non-residents purchasing residential property in New Zealand pursuant to New Zealand’s network  of  Double  Tax  Agreements  (DTA)  and  Tax  Information  Exchange  Agreements. Importantly, it considers New Zealand’s  taxing  rights in relation to the capital proceeds from  the  sale  of  residential  land  under  the  relevant  distributive  articles  in  its  DTAs. Finally,  it  suggests  that  the  focus  of  the  new  measures  on  offshore  persons  may  breach non-discrimination articles in some of New Zealand’s DTAs.

The attitude of the Australian government to the OECD’s BEPS project is a curious blend of vociferous  enthusiasm  and  quiet  dissonance.  While  some  elements  of  the  BEPS  Action  Plan have  been  welcomed  and  already  acted  upon,  the  Australian  Government  has  displayed  a degree  of  intransigence  on  other  issues  and  a  willingness  to ‘go-it-alone’,  even  though unilateral actions have the potential to endanger the fragile BEPS consensus and the spirit of international co-ordination upon  which the success of the BEPS project ultimately depends. This article outlines and analyses the inconsistent and equivocal approaches of the Australian government to the BEPS project to date.

Thin  capitalisation  regimes  are  designed  to  reduce  profit  shifting  from  one  jurisdiction  (the jurisdiction  of the  borrower  where an  interest expense is  claimed) to another  (the jurisdiction of the lender  where  the  income  is  shifted  to).  Most  developed  countries  have  such  regimes to  counter  this fundamental  tax  planning  technique.  In  2015  the  Organisation  for  Economic Co-operation  and Development  (OECD)  released  the  Final  Report  on  Limiting  Base  Erosion  Involving  Interest Deductions and other Financial Payments (better known as Action 4, it was subsequently updated in late 2016). This report recommended that countries adopt thin capitalisation regimes to allow interest expense on debt funding based on a proportion (fixed ratio) of earnings. For example, the rule would only permit an entity to deduct net interest expense up to a benchmark of net interest as a proportion of  earnings  before  interest,  taxes,  depreciation  and  amortisation  (EBITDA).  The  benchmark  ratio suggested  only permits interest deductions of an amount of 10 to 30 per cent of EBITDA. Should New Zealand  adopt  the  OECD’s  suggestion?  This  paper  evaluates  the  OECD’s  proposal  against  the existing New Zealand thin capitalisation regime which  currently operates on the basis of the entity’s balance sheet. This assets-based regime looks at the level of debt and compare this to total assets. In assessing  the  respective  merits  of  the  proposal  against  the  existing  regime  the  paper  uses key principles set out by the Tax Working Group when it carefully examined the New Zealand tax system in 2010.The conclusion reached is that, contrary to the strong recommendation in the OECD’s report, there is no compelling case for change to an earnings-based EBITDA method. The paper goes on to suggest a mechanism to deal with particular problems identified with“high-priced debt” suggesting an interest rate cap as an alternative.

This article seeks to offer perspective from the United States on the basic research question contemplated by  this  conference,  which  relates  to  the  taxation  of  non-residents  in  New  Zealand in  the  wake  of  the OECD’s issuance of final reports on its base erosion and profits shifting (BEPS) project. What can New Zealand learn from the experience of the United States in reacting to the various underlying pressures on international tax policy that have led to the OECD BEPS project in the first instance? Secondly, what can any country hope to learn from the United States reaction?

New Zealand’s foreign trust regime (FTR) has courted much controversy over the years. This article  considers  the  extent  to  which  the  FTR  can  be  considered  neighbourly  in  a global context.  Such  an  investigation  provides  an  opportunity  to  consider  not  only  how  the  FTR operates, but also the criticisms to which it has been subjected. More generally, the principle of neighbourliness is considered as a norm for guiding nation states in the design and reform of those domestic tax rules  that have an  international dimension. Thus, this  article  considers the place of domestic tax systems  in a rapidly evolving international tax environment. Given the particular focus on the FTR, what emerges is the realisation that, in its current form, the FTR is inconsistent with the principle of neighbourliness.

While  New  Zealand’s  legislators  strive  towards  the  wholesale  implementation  of  the OECD’s  proposals to  neutralise  hybrid  mismatch  arrangements,  we  pause  to  consider whether  adopting  such  recommendations  are  necessary  for  New  Zealand  and  what  the unintended consequences of implementing them may be. After analysing the actual scale of hybrid mismatch problems in New Zealand, the complexities of OECD’s proposals, and the extent  to  which  they  are  being  adopted  elsewhere,  our  recommendation  is  that  New Zealand  does  not  attempt  wholesale  implementation.  Instead,  we  urge  policy  makers  to consider the impact that OECD’s recommendations will have on foreign direct investment into New Zealand and advocate that New Zealand takes a tailored approach in this area. Rather than swiftly adopting all of OECD’s proposals, a tailored approach would involve implementing only carefully designed rules that specifically target actual hybrid mismatch problems in New Zealand and work within our existing legal framework.