NEW ZEALAND Law and Practice Contributed by: Fiona Ashby, Luke Bowers, Daniel Erickson, Jessica Phillips, Natalie Foster, Shelley Slade-Gully, Tina Liu and Theresa Le Bas, Tompkins Wake
between profitable and loss-making group members, reducing the overall tax burden of the corporate group. Foreign Tax Credits Resident companies deriving foreign-sourced income may claim a credit for foreign income tax paid, pre - venting double taxation and supporting international operations. 5.4 Tax Consolidation Tax Consolidation New Zealand does not operate a full tax consolida - tion regime in the same way as Australia or the United States. However, eligible wholly-owned groups of New Zealand-resident companies may form a consolidated group under the Income Tax Act 2007, under which income, losses and tax credits are determined on a single-assessment basis and one nominated com - pany files a group return. Loss Grouping Where full consolidation is not available or chosen, the loss grouping rules permit the transfer of losses between profitable and loss-making group members. Businesses structuring their New Zealand operations across multiple entities should obtain specialist tax advice to determine which approach best suits their circumstances. 5.5 Thin Capitalisation Rules and Other Limitations Thin Capitalisation Rules New Zealand applies thin capitalisation rules under subpart FE of the Income Tax Act 2007, to limit the deductibility of interest expenses where a New Zea - land entity is excessively debt-funded relative to its worldwide group. The rules are designed to prevent multinational groups from artificially reducing their New Zealand taxable income by loading dispropor - tionate levels of debt into their New Zealand opera - tions and claiming large interest deductions. Scope The thin capitalisation rules apply to New Zealand entities that are controlled by a non-resident, are members of a wholly-owned group that includes a non-resident, or are New Zealand branches of non- resident companies. A de minimis exemption applies
where the entity’s net interest deductions do not exceed NZD250,000. How the Rules Work Where the rules apply, interest deductions may be lim - ited if the entity’s New Zealand debt exceeds permit - ted safe harbour thresholds calculated by reference to the entity’s worldwide group debt ratio. Excess interest is effectively treated as income, denying the deduction. Businesses with significant related-party debt should carefully consider these rules when struc - turing their New Zealand operations, and should seek specialist tax advice. Restricted Transfer Pricing Rules These rules apply where inbound related-party bor - rowings reach NZD10 million or more during the year. In addition to standard transfer pricing, interest deductions may be limited based on borrower credit ratings or denied for features such as subordination New Zealand’s transfer pricing rules require cross- border transactions between associated persons to be conducted on an arm’s length basis, and are gener - ally applied consistently with the OECD transfer pric - ing guidelines. Under certain circumstances, Inland Revenue has the ability to recharacterise or disregard a transaction where the OECD guidelines regarding non-recognition are met. Under local legislation, the onus of proof in connection with transfer pricing mat - ters remains with taxpayers; therefore, businesses engaged in cross-border intra-group transactions should maintain contemporaneous documentation commensurate with the materiality and complexity of the covered arrangements, addressing the reasona - bleness of the arrangements under consideration from a local perspective to support their transfer pricing positions, as shortfall penalties may be imposed where adequate documentation has not been kept. 5.7 Anti-Evasion Rules General Anti-Avoidance Rule New Zealand has a broad general anti-avoidance rule that applies to any arrangement entered into for the purpose or effect of avoiding tax, regardless of its legal form. Where the rule applies, Inland Revenue has or contingent interest. 5.6 Transfer Pricing
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