The New Zealand government released a discussion document on September 6 2016, proposing reforms to address so-called hybrid mismatch arrangements.
The discussion document outlined New Zealand’s proposed response to the recommendations contained in the OECD BEPS report under Action 2, Neutralising the Effects of Hybrid Mismatch Arrangements. The OECD Final Report was released on October 5 2015. New Zealand’s discussion document generally proposes that the country should amend its domestic laws to reflect the OECD BEPS actions, suggesting a comprehensive approach to implementing the OECD’s recommendations.
The discussion document considers, but rejects, an alternative approach of introducing more targeted rules addressing particular arrangements of concern to New Zealand.
While acknowledging the desirability of simplicity, the document states that “in most cases, the impact of hybrid mismatch rules will be to encourage businesses to use simpler structures which do not require the rules to be applied”. Despite this statement, the document rejects the need for exceptions for arrangements in which hybrid arrangements are driven by commercial or regulatory rather than tax considerations.
In particular, and in contrast to the position taken by the UK, no exception for bank regulatory capital is proposed.
Also in contrast to the UK's rules, no exception is proposed for hybrid transfers to which a financial trader is party, meaning that New Zealand's tax rules will continue to inhibit securities lending transactions.
The discussion document proposes that New Zealand introduce an “imported mismatch” rule (i.e. to deal with a situation where there is no hybrid mismatch involving New Zealand, but a New Zealand transaction is part of a wider arrangement that involves a mismatch in other jurisdictions). This rule would not apply to a payment to a person in a country that has itself implemented hybrid mismatch rules. The discussion document indicates that an imported mismatch rule that is introduced in New Zealand should, so far as possible, be consistent with the rules adopted by the UK and Australia.
The discussion document proposes that there be no transitional relief (i.e. grandparenting) in respect of transactions entered into on the basis of existing law. The discussion document proposes that the hybrid mismatch rules (if enacted) would apply to payments made after a taxpayer's first tax balance date following enactment.
The discussion document does not indicate when the proposed rules are intended to be enacted, but enactment sometime in 2017 seems likely. So if, for example, the hybrid rules were enacted in September 2017 and a taxpayer had a March 31 balance date, the hybrid mismatch rules would apply to payments made on or after April 1 2018.
The government has sought submissions on the proposals by October 17. It is expected that the proposals will then be included in draft legislation to be introduced to parliament in early 2017.
This article was first published in the International Tax Review.
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