New tax disclosures under revised overseas investment regime
Overseas investors that want to acquire significant New Zealand business assets or sensitive land may be required to make specific upfront tax disclosures to New Zealand’s Overseas Investment Office (OIO) and New Zealand’s Inland Revenue Department (IRD) under upcoming changes to New Zealand’s overseas investment regime.
Tax and the OIO Consenting Process
Overseas investors that want to acquire significant New Zealand business assets or sensitive land are required to obtain consent from New Zealand’s OIO. The OIO currently undertakes a general “good character” assessment as part of the consenting process. While an overseas investor’s tax affairs are arguably a relevant consideration in this assessment, tax is not explicitly covered. This is set to change:
- Tax disclosures to the OIO: Under an upcoming amendment to the Overseas Investment Act 2005, investors will be required to make certain tax disclosures to the OIO as part of the OIO consenting process.
- Tax disclosures to the IRD: There is a Bill before Parliament that, if enacted in its current form, will permit the Governor General to make regulations requiring an overseas investor to make certain additional tax disclosures considered necessary for the administration or enforcement of New Zealand tax law.
We explain these changes below.
Tax Disclosures to the OIO
Overseas investors will be required to disclose the following information to the OIO:
- Whether they have been liable to penalties in respect of an “abusive tax position” or “evasion” under the Tax Administration Act 1994, or under an equivalent enactment in any other jurisdiction within the last 10 years.
- Whether, at the time that the application for the OIO consent is made, the overseas investor has any outstanding unpaid tax (including interest and penalties) of NZ$5 million ($3.2 million) or more due and payable in New Zealand, or an equivalent amount due and payable in any other jurisdiction.
If an overseas investor has been liable for such penalties, and/or is liable for such tax, they will be deemed to be unsuitable to own or control any sensitive New Zealand assets, unless they can prove that these liabilities do not make them an unsuitable candidate. This new OIO tax disclosure requirement will come into force on:
- the date appointed by the Governor General by Order in Council; or
- 2 June 2021, if not brought into force earlier.
Tax Disclosures to the IRD
In addition to the upcoming change above, there are further proposed amendments to the OIO regime that would empower the Governor General to make regulations requiring an overseas investor to provide information that the Commissioner of Inland Revenue considers necessary or relevant for any purpose relating to the administration or enforcement of the Income Tax Act 2007.
The following table has been released by the NZ Treasury, setting out the type of tax information that may be required under such regulations:
|Description of activities|
|1.||A short description of the investor’s plan for the asset over the next 3 years (i.e. maintain status quo, expand or pivot), including any details of significant capital expenditure over that period.|
|2.||Tax residence of the investor entity, its holding company and ultimate holding company.|
|Capital structure for the investment|
|3.||Equity funding for the investment.|
|4.||Debt funding for the investment.|
|5.||Use of a hybrid instrument or hybrid entity to fund the investment.|
|Cross border related party transactions|
|6.||The nature and likely extent of any cross border related party transactions.|
|7.||Expected sales from New Zealand to non-New Zealand related parties.|
|8.||Expected breakdown as to the purchases of goods, services, royalties, interest/guarantee fees or any other charges to non-New Zealand related parties.|
|9.||Any relevant double taxation agreements.|
|10.||Whether an application to Inland Revenue will be made for a ruling or advance pricing agreement in respect of any aspect of the investment.|
This information may not be considered by the OIO when deciding whether a consent is granted, but would be used by the IRD to monitor the overseas investor’s compliance with New Zealand’s tax laws.
We note that the Bill that includes these changes is still going through the normal legislative process. We expect that it will be enacted by mid-2021. Given this timing, we do not expect the IRD tax disclosure regime to come into effect until the second half of 2021, at the earliest, and of course the substance of the regime may still change.
Implications for Overseas Investors
The New Zealand government is increasingly focused on the tax affairs of overseas investors. In recent years a range of base erosion and profit shifting (BEPS) tax measures have been enacted that target overseas investors. The new tax disclosures required under the revised overseas investment regime are a logical next step in this area.
Many overseas investors may not be significantly impacted by these disclosures:
- The penalty and unpaid tax disclosures will only be relevant for those that have been subject to significant tax penalties, and/or have significant amounts of unpaid tax. In theory, these issues may already be taken into consideration under the existing “good character” test, which requires the OIO to consider breaches of law.
- Given the current focus on overseas investors and recent BEPS legislation, fewer overseas investors are likely to adopt aggressive New Zealand investment structures, and so the potential IRD tax disclosures may not be problematic for many investors.
However, we expect the new tax disclosures will have some impact:
- From a practical perspective, tax will become an upfront consideration that cannot be overlooked. Early engagement with New Zealand tax lawyers will be important to determine whether tax could become an issue in the OIO process.
- Overseas investors who have been subject to significant tax penalties, and/or are liable for significant amounts of tax, will need to consider how to address these issues to minimize any adverse impacts on their investment applications. It may be beneficial to front-foot these issues with the OIO, and prepare a detailed explanation of how these issues arose, and why they will not arise in New Zealand.
- The potential IRD tax disclosure requirements are likely to incentivise more conservative tax planning, given the prospect of immediate IRD attention, and potential information sharing with foreign tax authorities.
Prudent overseas investors should carefully consider these increased tax disclosures, and the potential impact on their future New Zealand investments.
This article first appeared in Bloomberg Tax.