IRD eyes hybrid instruments, related party debt in global tax avoidance clamp-down

Inland Revenue is looking at the tax treatment of hybrid debt and equity instruments and the use of related party loans funding local subsidiaries as part of a global clamp-down on tax avoidance.

Acting deputy commissioner of policy and strategy David Carrigan told Parliament's finance and expenditure select committee that New Zealand's thin capitalisation and transfer pricing rules for foreign companies are "robust" but it is looking into two areas where it can tighten up for potential avoidance. One area is the use of hybrid instruments, where companies juggle debt and equity between jurisdictions to claim deductions in one country while not paying tax in another.

"Those are instruments where the clever tax planners essentially ensure the flow coming out of the country is deductible and when it reaches the other country it's non-assessible," Mr Carrigan said. "They do that through the different rules that different countries have for debt and equity, and we are thinking very seriously about whether we need to change our rules to combat that sort of situation."

The IRD has successfully pursued companies using mandatory and optional convertible notes, which the courts ruled constituted tax avoidance, leading to a string of settlements with the tax department after a test case involving Australian firm, Alesco, settled on the eve of appeal hearings in February.

Mr Carrigan said the other area the IRD is looking at is related party debt, where a foreign company uses debt to capitalise a New Zealand subsidiary, meaning interest deductions paid to the parent are deductible.

"We have thin capitalisation rules that protect us to some extent but the question is: Do we need any more rules to protect against that," he said.

Inland Revenue has officials involved in the Organisation for Economic Cooperation's working group base erosion and profit shifting, which this year put up a number of proposals to Group of 20 finance ministers on how to plug gaps in international tax rules.

Mr Carrigan said information sharing between international tax agencies is another route for action.

Revenue Minister Todd McClay is seeking feedback on how to make it easier for IRD to share information, not just internationally but also between government departments, with plans to loosen the country's tax secrecy provisions, which are broader than most other jurisdictions at a time of heightened expectations about cross-border sharing.

IRD commissioner Naomi Ferguson told the committee the department's business transformation project's forecast cost had been whittled down to less than $1 billion due to the lack of extra work that would be needed to adapt the Fast software to New Zealand's processes, and that the new system would be agile enough to take on new tax types.

(BusinessDesk)