A Week in Review

Richard AshbyPartner, Gilligan Sheppard

PE Additional Guidance Doc released…

The OECD has just released a report entitled “Additional Guidance on the Attribution of Profits to Permanent Establishments (“PE”)”, which is a follow-on to the 2015 final BEPS package report on “Preventing the Artificial Avoidance of Permanent Establishment Status”.

The guidance document sets out high-level general principles, which countries agree are relevant and applicable in attributing profits to PEs in accordance with applicable treaty provisions. It also provides examples on the attribution of profits to certain types of PEs arising from the changes to the PE definition under BEPS Action 7.

One area that will require a rethink by advisors when considering a client’s cross-border trading activities and whether they may have triggered a PE in another State (with a consequent tax filing obligation), is the present list of items deemed not to establish a PE, such as a storage warehouse or those activities which historically have been considered of a “preparatory or auxiliary character”.

The guidance document provides the example of a storage warehouse for a MNE selling its goods on-line. Most of you would probably agree, that provided the MNE simply stores its goods at the warehouse, for the purpose of subsequent delivery to customers, with no activities of a sales nature being undertaken from the warehouse, the MNE would satisfy the PE exclusion. However the guidance document suggests, that since the warehouse would be considered an important asset of the MNE, and where it required a number of employees of the MNE to operate, the PE exclusion would no longer apply because the warehouse would constitute an essential part of the MNE’s sale/distribution business and its storage and delivery activities would no longer be considered to have a preparatory or auxiliary character.

Once a PE has been established under this scenario, the guidance document then discusses how the warehouse should now be treated as if it were a separate and independent enterprise performing the same storage and delivery activities, and profit attribution methodologies in this regard.

You can find the document here http://www.oecd.org/tax/transfer-pricing/additional-guidance-attribution-of-profits-to-permanent-establishments-BEPS-action-7.pdf.

Tax Debt Relief Options…

IR has released a draft standard practice statement (“SPS”) ED0200, which sets out the Commissioner’s practice when considering the options to remove or defer the taxpayers obligations under the Tax Administration Act 1994 (“TAA”) to pay tax, interest and/or penalties. The SPS suggests the options available are debt remission, write-off, entering into instalment arrangements or a combination.

The document contains detailed discussion on the issues of:

  • Financial relief via entering into instalment arrangements or serious hardship write-offs;
  • Unrecoverable amounts including voluntary administration and the no asset procedure (one-off process providing fresh start to natural persons as alternative to bankruptcy – debts from $1,000 – $47,000); and,
  • Remission – common grounds for granting relief such as events beyond control and declared emergency events.

It should be noted that draft SPS ED0200 does not apply to either child support or student loans.

The deadline for comment is 18th May 2018.

Tax Bill Enacted…

The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill (249-3) (“the Bill”) passed its third and final reading, and then received Royal Assent and was enacted on 29th March 2018.

A recent addition to the Bill was the increase of the bright-line period for residential land disposals, from 2 years to 5 years, the increased period applying where the purchaser obtained their first interest in the land post the date of enactment (the signing of a binding purchase agreement for most). We now have confirmation that the relevant date is 29th March 2018.

I have included detail on the Bill in previous editions of AWIR, but as a reminder, the main proposals contained in the Bill were:

  • setting the annual rates of income tax for the 2017–18 tax year (at the same rates as for 2016–17);
  • introducing measures to improve administration of the pay-as-you-earn (PAYE) rules, in particular through the provision of employment information to Inland Revenue (one example being a requirement for employers to report PAYE information on a payday basis, mandatory from 1st April 2019, although PAYE payment obligations remain unchanged);
  • introducing changes to improve the collection of information about investment income; and,
  • introducing changes to the taxation of employee share schemes.

The text of the Bill as enacted can be found here – http://www.legislation.govt.nz/act/public/2018/0005/latest/DLM7175206.html

Rent Loss Ring-fencing…

Well it is fast becoming a reality, as the intention of the new Government to curb enthusiasm away from residential property investment, firstly via greater taxation of historically what may have been true capital gains (the extended bright-line test period now enacted), and secondly, restricting the off-setting of rental losses against the investors other income sources, is further progressed by the release of the officials issues paper on ring-fencing of rental losses.

Under the proposals, commencing from the start of the 2019-20 income year (although there may be a phased introduction), losses from residential rental properties will no longer be permitted to be off-set against a taxpayers other income sources, and will instead need to be carried forward to the next income year, only available for offset against rental income derived in that income year or against taxable income arising on the disposal of any residential land.

The ring-fencing would be portfolio based, in other words losses could be offset against the rental or disposal income of any residential property in the taxpayer’s portfolio, but ring-fencing would not apply to either mixed-use assets or land that is held on revenue account for whatever reason.

The new rules would apply to any ownership entity (so LTC’s, trusts, limited partnerships), and there would be special rules to capture attempts to restructure borrowings using interposed entities, where the funds are used to acquire shares in the interposed entity which owns residential investment properties (so arguably the interest deduction is not ring-fenced) as opposed to funding a residential investment property acquisition directly (interest deduction ring-fenced).

The definition of residential land would be the same as that used presently for the purpose of the bright-line rules.

The closing date for submissions is 11th May.

Richard Ashby BBus, CA, CPA PARTNER
Em: [email protected]

Ph: +64 9 365 5532

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