International tax and 39% trust tax rate Bill and Tax Principles Reporting Bill introduced

New Zealand’s implementation of the OECD’s Base Erosion and Profit Shifting (“BEPS”) global minimum tax rate proposal (more colloquially knows as “Pillar 2”).

The key features of the Pillar 2 proposal are:

•       New Global Anti-Base Erosion (“GloBE”) rules which will apply to New Zealand and foreign multinationals with annual global revenues of at least €750 million to ensure they pay a minimum 15% effective tax rate in the different jurisdictions they operate in.

•       This will be through a series of inter-connected taxing provisions, including an “Income Inclusion Rule” and “Undertaxed Profits Rule”, which levy top-up taxes if the effective tax rate is less than 15%.  

•       The GloBE rules will only come into force in New Zealand at a date set by future Government Regulation, when the Government determines that a critical mass of countries has adopted the GloBE rules. The application date will not be earlier than 1 January 2024 for the Income Inclusion Rule and 1 January 2025 for the Undertaxed Profits Rule.

Quick observation

The inclusion of the GloBE rules in the May 2023 Tax Bill affirms New Zealand’s commitment to the OECD’s Pillar 2 proposal, which is aimed at limiting the “race to the bottom” on global company tax. This is not surprising, given New Zealand’s longstanding and ongoing participation in the OECD BEPS programme of work.

The GloBE rules are highly complex. The Bill commentary on them runs to 50 pages. Some high-level observations:

• A separate administrative regime is being proposed for these new rules which will impose new compliance and reporting requirements on in-scope multinationals (including new notification and disclosure requirements, informational returns, tax returns, payment obligations and penalties).  Those potentially impacted by these rules will need to start navigating these new administrative requirements in New Zealand and in other countries that they operate.
• The GloBE will override New Zealand’s existing tax treaties (Double Tax Agreements) and will be incorporated into New Zealand tax law by reference to the OECD’s Model GloBE rules (and accompanying commentary and administrative guidelines). This means that the individual rules will not be ‘hard-wired’ into the Income Tax Act and those affected will need to keep on top of OECD and global developments, in case they change the rules.  
  
• Depending on the specific GloBE taxing provision, top up taxes paid in New Zealand (or offshore) may not be creditable or give rise to NZ imputation credits. Therefore, there is potential for double taxation.  
  
• The various exemptions and de minimis exclusions will need to be considered to determine the scope for application of the GloBE rules.
  
• It is not clear what will constitute a “critical mass” for the NZ GloBE rules to go live. And whether Australia’s commitment to implement Pillar 2 rules in its Budget last week will be a significant event in that regard.
  
• The Government appears to have ruled out a Digital Services Tax as an additional BEPS response. 
  

The Budget 2023 increase in the trustee tax rate from 33% to 39%, from 1 April 2024 and accompanying amendments.

The consequential amendments include:

• Treating beneficiary income received by certain “close companies” (i.e. companies with 5 or fewer natural person or trustee shareholders holding more than 50% of the shares, which are not Māori Authorities or charities, and where a settlor of the trust has “natural love and affection” for a shareholder of the company) as trustee income.
• Allowing trustees of a deceased estate to pay tax on trustee income at the deceased person’s marginal tax rate if the income is derived within 12 months of the person’s death, to avoid over-taxation. Trustee income derived more than 12 months after death will be subject to tax at 39%.
  
• Allowing trustees of a “disabled beneficiary trust” (a trust whose sole beneficiary must be the disabled person) to be taxed at the disabled beneficiary’s marginal tax rate.
  

Quick observation

Pre-Budget, the Government was keen to hose down expectations around major tax changes. Whether the trust tax rate increase is a “major tax change” will no doubt be debated. It potentially has quite broad impact, given the widespread use of trusts in New Zealand and for a variety of different uses.

The rate change is framed as improving fairness and increasing tax system integrity. Inland Revenue has previously raised concerns around misalignment of personal and entity tax rates, with a particular focus on trusts. The results of its recent High Wealth Individuals research is likely to have added to the pressure. The trust rate announcement closes one of these “gaps”. Interestingly, the Regulatory Impact Analysis accompanying the May 2023 Tax Bill suggests that misalignment with the company and top PIE rate will be the subject of future consideration.

There is acknowledgement that increasing the trustee tax rate could result in over-taxation for some. The Bill Commentary (and Inland Revenue fact sheet) discuss mitigation options. The suggestion is that income can always be allocated to the beneficiary (including credited to their current account or the amount “paid” but then resettled on the trust, if there is no cash to distribute) to access the lower rates. However, this will not necessarily be straightforward, particularly once the trust law overlay (including trustees’ fiduciary obligations) is applied. At a minimum, there is the potential for additional compliance costs and unintended consequences.   

The additional integrity measures, such as taxing trust distributions to certain close company beneficiaries at the trust rate, will also need careful monitoring. The changes are also not intended to adversely impact on trust structures used in commercial transactions – for example, trusts used as securitisation vehicles. However, the way these exclusions are given effect may create other tax issues (such as additional withholding tax obligations or the inability to access amounts until liquidation).

The future status of detailed trust disclosures is also unclear. New trust disclosure requirements were introduced with effect from the 2022 tax return (the last of these returns were due by 31 March this year). The rationale for the disclosure was to provide additional information to Inland Revenue and Government on the use of trusts, including to determine whether they are being used to shelter income. Arguably, that purpose has largely now been fulfilled. Given the compliance costs involved with completing the disclosures, we believe this requirement should be revisited.

These include:

• Tax rollover relief for depreciable assets and revenue account assets that have been destroyed or are uneconomic to repair. The rollover relief will apply until the earlier of the income year the relevant assets have been replaced or the end of the 2027-28 income year.
• Clarification that deprecation and on-going expenses and losses can continue to be claimed where there are ongoing business disruptions (including loss of access to depreciable property, such as buildings).
  
• Optional matching rules for timing of income and deductions (for disposal losses) when insurance proceeds have been received for flood affected assets.
  

Quick observation

The changes are welcome. They are modelled on the Canterbury and Kaikoura earthquake responses, although the scope is slightly wider – for example, replacement assets to access rollover relief will not need to be in the same region, due to issues such as managed retreat. 

These include:

• Changes to the DTA source rule to exclude technical services fees and certain payments connected to a taxable presence in a third country.
• Clarifying that the automatic RWT exemption applies to all charities registered under the Charities Act 2005, not just charitable trusts.
  
• A number of changes that will impact individuals, including:
  
•  From 1 July 2024, the Government will pay the three percent employer contribution to KiwiSaver on Paid Parental Leave payments if the recipient also makes a matching contribution. (This was a Budget 2023 announcement).
  
• Allowing backdated lump sum compensation and reimbursement payments received from ACC and the Ministry of Social Development to be taxed based on the recipient’s average tax rate for the previous 4 years (or in the case of tax withheld payments, for that withholding to be a final liability). This change will apply to payments received on or after 1 April 2024. (As a quick observation, while welcome, we believe the change should apply to payments not yet returned. Also, similar over-taxation can arise in other contexts, such as where holiday pay entitlements have been miscalculated and a lump sum compensation payment is received. We believe these situations should also be addressed.)
  
•  The tax rate applicable to extra pays (e.g. holiday pay) on termination of employment will be based on annualisation of the preceding two pay periods (rather than four weeks).
  
•  Individuals who acquired New Zealand financial arrangements while non-resident will only be taxed under the base price adjustment rules on any gains (or losses) made after becoming a transitional resident. (That is any accrued gains made on these investments while they were non-resident will be excluded).