Pillar 2 Dashboard: New Zealand

The Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Act, 2024 has been enacted, receiving Royal assent, March 28, 2024.

On May 18, 2023, New Zealand published a draft law (the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill) to implement the Pillar Two Global Minimum Tax.

On March 11, 2024, the Finance and Expenditure Committee of the New Zealand Parliament made a number of amendments to the draft law.

OVERVIEW

Section 123(5) of the Law provides that the GloBE rules generally apply in New Zealand for fiscal years starting on or after January 1, 2025.

New Zealand is taking a similar approach to Switzerland and Liechtenstein and is directly transposing the OECD Model Rules (and Commentary and other Agreed Guidance) into domestic law in order to reduce the risk of interpretive errors and mismatches between the GloBE rules as adopted in other countries and as adopted in New Zealand.

The transposition into domestic law is via a ‘dynamic’ reference to the OECD Model Rules, Commentary and Agreed Administrative Guidance.  As such any changes to the application of the rules by changes to the OECD Commentary or Administrative Guidance will be automatically applied in New Zealand (unless they make a regulation not to apply any such change).

The use of the OECD Model Rules themselves are also dynamic with any subsequent changes to these having effect in New Zealand unless they relate to the definition of the minimum 15% rate.

GLOBE APPLICATION

General

Tax Treaty Override

The OECD has stated that the IIR and UTPR are both compatible with OECD model-based tax treaties, such as New Zealand’s. To avoid any uncertainty on this point, a new Section BH 1(4) of the Income Tax Act (ITA) provides that the GloBE rules adopted by New Zealand will apply notwithstanding the terms of a tax treaty, unless those terms expressly refer to the GloBE rules.

IIR/UTPR

The Law includes an Income Inclusion Rule (IIR), and an Under-Taxed Profits Rule (UTPR).

A new Section BF 1(bb) of the ITA provides that the Multinational Top-Up Tax will be an “ancillary tax”, not income tax. As such, the GloBE calculation and any resulting tax liability would be treated as a separate tax liability independent of income tax.

Under the UTPR, the charge is to be capped by reference to taxable deductions and available tax losses for the fiscal year claimed by all New Zealand constituent entities. When the UTPR liability exceeds these amounts, it is to be carried forward to the next fiscal year. This is included in a new schedule 25B inserted into the ITA.

QRTC

New Zealand’s research and development tax credit is designed so that it must be partially refunded within four years. As such the New Zealand Treasury believes that the refundable amount would be a qualifying refundable tax credit under the OECD Model Rules (with it being treated as GloBE income). Any remaining credit would be treated as a non-qualifying refundable tax credit and would be a reduction to covered taxes (even if it gives rise to a tax reduction or other benefit within the four-year period).

Capital Gain Carry Back Election

The Treasury notes that the election to spread back a net realised gain on local tangible assets should be useful in New Zealand, given it does not tax some capital gains. The election will allow untaxed gains to be matched against prior year untaxed losses. It will also allow tax to be imposed at greater than the 15% rate in the spread-back years to reduce or eliminate any GloBE liability that would otherwise arise from the untaxed gain.

Other

The OECD Model Rules refer to an income tax that is charged under a qualifying imputation system as a Qualified Imputation Tax. New Zealand’s corporate income tax meets the definition of a Qualified Imputation Tax and is therefore a covered tax.

Foreign tax credits are available for GloBE top-up tax paid under a QDMTT. The credit is available against a New Zealand CFC tax liability and a head-office tax liability for a New Zealand MNE’s permanent establishments.

Imputation Credits

The Law provides that Multinational Top-Up Tax payable would not give rise to a New Zealand imputation credit unless the top-up tax is paid under the DIIR.

This is because the Model Rules state that if the payment of GloBE top-up tax under a country’s IIR or UTPR gives rise to a benefit, the IIR or UTPR will not be qualifying, and other participating countries will continue to apply top-up tax to the country’s in-scope MNEs under their UTPR.

A payment of tax under a country’s DIIR that gives rise to an imputation credit will not result in a DIIR being non-qualifying.

Administrative Guidance

New Zealand applies a new section HP 3 into the Income Tax Act that requires the Model Rules to be applied consistently with the Commentary and the Agreed Administrative Guidance.

The Law includes a new Section HP 3(4) that specifically provides that if there is a conflict between the OECD model rules and Commentary or Administrative Guidance, the Commentary or Administrative Guidance prevails.

For example, the Model Rules provide that Article 7.4.1 only applies to investment entities. The Commentary provides that Article 7.4.1 applies to investment entities and insurance investment entities which is the correct rule to apply.

Safe Harbour and Penalty Relief Guidance

The Safe Harbour and Penalty Relief Guidance will be treated as additional administrative guidance and as such will apply in New Zealand.

ELECTIONS

Elections in the OECD Model Rules

Given the OECD Model Rules are directly transposed into domestic law, all of the elections in the OECD Model Rules (where relevant) should be applicable.

Elections in the Administrative Guidance

Given the OECD Administrative Guidance specifically applies the OECD Model Rules in accordance with the Agreed Administrative Guidance, relevant elections in the OECD Administrative Guidance would also be transposed into New Zealand’s domestic law.

DEVIATIONS FROM THE OECD MODEL RULES/EU GLOBAL MINIMUM TAX DIRECTIVE

As the Law directly transposes the OECD Model Rules (and Commentary and other Guidance) into domestic law, differences are minor.

A new schedule 25B is inserted into Income Tax Act 2007 which does specifically tailor the application of the Model Rules to New Zealand.

Most of the amendments are minor, with only two amendments of any note:

-Operation of the UTPR (see analysis above)

-Inclusion of the anti-inversion provision

The new Schedule 25B specifically includes Article 9.3.5 of the OECD Model Rules.  This is an optional anti-avoidance rule for corporate inversions that jurisdictions can choose to implement or not. It relates to the transitional rule that excludes MNEs from the under-taxed payments rule for the first five years of operations.

There is the potential for an MNE group to use the UTPR transitional rules to avoid or minimise Pillar Two top-up tax.

This is because if an MNE group had its Ultimate Parent Entity (UPE) in a jurisdiction it would generally be subject to the Income Inclusion Rule (IIR) on low-taxed profits of its foreign constituent entities. However, the UTPR transitional rules treats all jurisdictions as having no UTPR top-up tax liability.

Therefore, a UPE could restructure the group to create a new UPE in a jurisdiction that did not implement an IIR. The UTPR would then not apply to its foreign subsidiaries providing the conditions were met for the UTPR transitional rule.

Therefore, Article 9.3.5 of the OECD Model Rules includes an optional provision that allows a jurisdiction to apply the UTPR to MNE groups that have a foreign UPE but significant operations in that jurisdiction.

DOMESTIC MINIMUM TAX

General

New Zealand does not implement a domestic minimum tax as a QDMTT. The original consultation by New Zealand on Pillar Two was non-committal on the introduction of a qualifying domestic minimum top-up tax.

It noted that given New Zealand’s small Pillar Two population, relatively high tax corporate income tax rate and general lack of tax incentives (other than for capital gains) it may be that there is insufficient benefit from a domestic minimum tax to make it worthwhile implementing. The Law follows this approach and does not implement a domestic minimum tax as a QDMTT.

The Law includes a Domestic Income Inclusion Rule (DIIR) for financial years ending on or after January 1, 2026, by adding new Articles 2.1.7 and 2.1.8 into its transposition of the OECD Model Rules.

The DIIR, uses the same tax base as the GloBE rules but applies to New Zealand-headquartered in-scope MNEs on domestic low-taxed profits.

For these MNEs, top-up tax on undertaxed New Zealand profits would ordinarily be collected under a UTPR (including New Zealand’s).

A DIIR avoids New Zealand-headquartered MNEs having to pay any part of the GloBE top-up tax on undertaxed New Zealand income to other countries under the UTPR.

Note that this is not the same as a QDMTT, as if the low-taxed domestic subsidiary was not wholly owned the DIIR would only apply to the portion of the low-tax profits attributable to the New Zealand MNE’s ownership. Under a QDMTT, the top-up tax would need to be paid on the basis of 100% ownership (as there is no reduction for minority interests under a QDMTT).

Schedule 25(1B) to the ITA provides that the DIIR does not apply to a Parent Entity of an MNE Group that is in the initial phase of its international activity.

QDMTT Design Features

New Zealand does not implement a domestic minimum tax as a QDMTT.

Registration

A new Section 78H in the Tax Administration Act 1994 provides that a constituent entity of an MNE group must apply to the Commissioner for registration of the MNE group within 6 months after the end of any fiscal year ending on or after 1 January 2025 when it is subject to the GloBE rules.

An application for registration of an MNE group must contain:

-the name of the ultimate parent entity of the MNE group;

-the ultimate parent entity’s tax file number, if any;

-any taxpayer identification numbers of the ultimate parent entity; and

-any other information required by the Commissioner.

Filing

GloBE Information Return (GIR)

The relevant aspects of the submission of a GloBE Information Return (GIR) are included in Section 78I of the Tax Administration Act 1994, as provided in OECD Model Rules.

Every Constituent Entity located in New Zealand will have an obligation to file a GIR in New Zealand. However, this obligation can be discharged if the GIR is filed by:

-The Ultimate Parent Entity, or

-The Designated Filing Entity.

Where the GIR is being filed by either the Ultimate Parent Entity or the Designated Filing Entity, the Constituent Entity, must file a notification with the Commissioner.

The notification must contain:

-Details of the entity that is filing the GIR, and

-The jurisdiction in which such an entity is located.

Where the GIR is filed by the Designated Local Entity it needs to outline the Constituent Entities that it is filing on behalf of.

Both the GIR and associated notifications must be filed no later than 15 months after the end of the fiscal year (with an 18-month deadline for the Transition Year).

Annual multinational top-up tax return

Section 78J of the Tax Administration Act 1994 provides that a constituent entity subject to the GloBE rules is required to submit a multinational top-up tax return within 16 months after the end of the fiscal year (20 months in the commencement year).

This will show:

-whether or not the constituent entity has a multinational top-up tax liability for the fiscal year;

-the amount of multinational top-up tax payable by the constituent entity for the fiscal year, if any; and

-any other information required by the Commissioner.

7.3 Payment

A constituent entity is required to pay any multinational top-up tax within 16 months after the end of the fiscal year (20 months in the commencement year).

7.4 Penalties

A new Section 94BCB in the Tax Administration Act provides for a penalty of up to $100,000 for failure to register for GloBE purposes (under Section 139ABB of the Tax Administration Act).

A new Section 139A(3B) in the Tax Administration Act provides that the late filing penalty for a multinational top-up tax return is $500.

Taxpayers filing with an unacceptable tax position are liable to a 20% shortfall penalty. This applies for fiscal years, starting on or after 1 January 2027.

None issued.

No

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