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April 29, 2021
2021-5504

OECD releases New Zealand Stage 2 peer review report on implementation of Action 14 minimum standard

Executive summary

On 15 April 2021, the Organisation for Economic Co-operation and Development (OECD) released the Stage 2 peer review report of New Zealand relating to the outcome of the peer monitoring of the implementation of the Base Erosion and Profit Shifting (BEPS) minimum standard under Action 14 on improving tax dispute resolution mechanisms.1 Stage 2 focuses on monitoring the follow-up of any recommendations resulting from New Zealand’s Stage 1 peer review report.New Zealand requested that the OECD also provide feedback concerning their adoption of the Action 14 best practices, and therefore, in addition to the peer review report, the OECD has released an accompanying document addressing the implementation of best practices.3

Overall, the Stage 1 peer report concluded that New Zealand met most of the elements of the Action 14 minimum standard. The Stage 2 report concludes that New Zealand addressed almost all of the shortcomings identified in its Stage 1 report. The remaining shortcomings mainly relate to the wording of tax treaties regarding:

  • Various restrictions on taxpayers’ ability to submit a request for Mutual Agreement Procedure (MAP)
  • Restrictions on the time limits for submission for MAP
  • Restrictions imposed on implementation of agreement reached in MAP discussions by domestic law amendment periods
  • An inability for competent authorities to consult together for the elimination of double taxation in cases not provided for by the relevant treaties

New Zealand signed and ratified the Multilateral Instrument (MLI) and opted for part IV of the MLI concerning the introduction of a mandatory and binding arbitration provision in its tax treaties. In most instances, the remaining shortcomings have been or will be resolved by way of the MLI. Where this is not the case, New Zealand has stated that it intends to update its treaties to meet the Action 14 minimum standard through bilateral negotiations.

Detailed discussion

Background

In October 2016, the OECD released the peer review documents (i.e., the Terms of Reference and Assessment Methodology) on Action 14 which form the basis of the MAP peer review and monitoring process under BEPS Action 14.4

The Terms of Reference translate the minimum standard approved into a basis for peer review, consisting of 21 elements complemented by 12 best practices. The Terms of Reference assess a Member’s legal and administrative framework, including the practical implementation of this framework to determine how its MAP regime performs relative to the 21 elements in four key areas: (i) preventing disputes; (ii) availability and access to MAP; (iii) resolution of MAP cases; and (iv) implementation of MAP agreements.

The Assessment Methodology establishes detailed procedures and guidelines for a two-stage approach to the peer review and monitoring process. Stage 1 involves the review of a Member’s implementation of the minimum standard based on its legal framework for MAP and the application of this framework in practice. Stage 2 involves the review of the measures taken by the Member to address any shortcomings identified in its Stage 1 peer review. In light of the above, the OECD has also released a schedule for Stage 1 of the peer review and a questionnaire for taxpayers. The schedule catalogues the assessed jurisdictions into 10 batches for review.

Both of these stages are desk-based and are coordinated by the Secretariat of the Forum on Tax Administration’s (FTA) MAP Forum.In summary, Stage 1 consist of three steps or phases:

  1. Obtaining inputs for the Stage 1 peer review
  2. Drafting and approval of a Stage 1 peer review report
  3. Publication of Stage 1 peer review reports

Input is provided through questionnaires completed by the assessed jurisdiction, peers (i.e., other members of the FTA MAP Forum) and taxpayers. Once the input has been gathered, the Secretariat prepares a draft Stage 1 peer review report of the assessed jurisdiction and sends it to the assessed jurisdiction for its written comments on the draft report. When a peer review report is finalized, it is sent for approval of the FTA MAP Forum and later to the OECD Committee on Fiscal Affairs (CFA) to adopt the report for publication.

For Stage 2, there are two steps or phases: (i) approval of Stage 2 peer monitoring report of an assessed jurisdiction and (ii) publication of Stage 2 peer review reports. More specifically, an assessed jurisdiction should within one year of the adoption of its Stage 1 peer review report by the CFA submit a detailed written report (Update Report) to the FTA MAP Forum. The Update Report should contain: (i) the steps that the assessed jurisdiction has taken or is taking to address any shortcomings identified in its peer review report; and (ii) any plans or changes to its legislative or procedural framework relating to the implementation of the minimum standard. Members of the FTA MAP Forum should also provide their comments on the Update Report provided by the assessed jurisdiction. Based on the Update Report submitted by the assessed jurisdiction and the input from the peers, the Secretariat will revise the Stage 1 peer review report of the assessed jurisdiction with a view to incorporate these updates in the Stage 2 peer monitoring report of the assessed jurisdiction. After adoption from the CFA, the Stage 2 peer monitoring report will be published.

Minimum standard peer review reports

The report is divided into four parts, namely:

  1. Preventing disputes
  2. Availability and access to MAP
  3. Resolution of MAP cases
  4. Implementation of MAP agreements

Each part addresses a different component of the minimum standard.

Overall, New Zealand addressed almost all the shortcomings identified in its Stage 1 peer review report.

Preventing disputes

All of New Zealand’s 47 tax treaties include a provision relating to MAP, which mostly follow paragraphs 1 to 3 of Article 25 of the OECD Model Tax Convention. Its treaty network is mostly consistent with the requirements of Action 14 minimum standard.

Of New Zealand’s 47 existing treaties, 9 do not contain language equivalent to the first sentence of Article 25(3) of the OECD Model Tax Convention, which requires competent authorities to endeavor to resolve by mutual agreement any doubts or difficulties arising as to the interpretation or application of the treaty.

New Zealand has signed the MLI, under which three of these nine treaties are covered tax agreements. Therefore, two have been modified and one is expected to be modified by the MLI once ratified. New Zealand has put a plan in place to bring the remaining six treaties in line with the requirements under this standard via bilateral negotiations. According to this plan, negotiations are being initiated for four treaty partners, while for the remaining two treaty partners such negotiations are envisaged once the initiated negotiations have been completed.

New Zealand has a bilateral Advance Pricing Agreement (APA) program in place, which enables taxpayers to request rollbacks of bilateral APAs and such rollbacks are granted in practice.

Availability and access to MAP

Currently, nearly all of New Zealand’s treaties are considered not to contain a provision fully equivalent to the first sentence of Article 25(1), which allows a taxpayer to make a MAP submission to the competent authority of either Contracting State, because the majority of New Zealand’s treaties are restricted to taxpayers only being able to submit a request for MAP to the New Zealand competent authority, and a further subset of treaties only allowing MAP for transfer pricing cases. However, all but three contain a provision that is equivalent to Article 25(1), first sentence, of the OECD Model Tax Convention (OECD, 2015a), either as it read prior to the adoption of the Action 14 final report or as amended by that report (OECD, 2015b).

Of the 47 treaties, 2 treaties do not contain a provision equivalent to the second sentence of Article 25(1) of the OECD Model Tax Convention allowing taxpayers three years from an action giving rise to taxation not in accordance with the convention to file a MAP request. An additional six treaties meet neither of the above requirements.

Of these, the majority have been or are expected to be modified by the MLI to meet the minimum requirements. Others are to be amended through bilateral negotiations that are scheduled or pending. For the remaining thee treaties, no actions have been taken but are included in the plan for renegotiations. New Zealand reported it will seek to include Article 25(1) of the OECD Model Tax Convention (OECD, 2017) in all of its future tax treaties.

Currently, 22 of New Zealand’s 47 treaties do not contain the second sentence of Article 25(3) of the OECD Model Tax Convention (OECD, 2017), enabling them to consult together for the elimination of double taxation in cases not provided for by these treaties. New Zealand is consulting with 15 of these treaty partners to include the required provision either by the MLI or otherwise via bilateral negotiations. The remaining seven are limited scope treaties that only apply to a certain category of income or a certain category of taxpayer. New Zealand has reported it considers it inappropriate to give the competent authorities the possibility to consult in cases that have intentionally been excluded from the scope of the treaty.

New Zealand reported that it provides access to MAP in all eligible cases although since 1 January 2015 it hasn’t received any MAP requests concerning cases where anti-abuse provisions are applied or cases where there has been an audit settlement.

New Zealand has in place a documented bilateral consultation or notification process for those situations in which its competent authority considers the objection raised by taxpayers in a MAP request as unjustified, although no such cases have arisen since 1 January 2015. New Zealand also has clear and comprehensive guidance on the availability of MAP and how it applies this procedure in practice under its treaties.

Resolution of MAP cases

Of New Zealand’s 47 tax treaties, 38 contain a provision equivalent to Article 25(2), first sentence, of the OECD Model Tax Convention (OECD, 2017) requiring its competent authority to endeavor – when the objection raised is considered justified and no unilateral solution is possible – to resolve by mutual agreement with the competent authority of the other treaty partner the MAP case with a view to the avoidance of taxation which is not in accordance with the tax treaty.

Three of the remaining nine treaties have been or are expected to be modified by the MLI to include the required provision. Negotiations are envisaged, scheduled or pending for a further four. No actions have been taken for the remaining two, however they are included in the plan for renegotiations.

New Zealand easily met the minimum standard of resolution of MAP cases within an average time frame of 24 months. Its average time needed to close MAP cases in the years 2016 to 2018 was 10.27 months. In 2016 to 2018, New Zealand closed 68% of MAP cases started in those years. Its MAP inventory on 31 December 2018 increased by 63% as compared to 1 January 2016 (from 8 to 13 cases), however old cases were resolved, and New Zealand has since managed to further reduce its MAP inventory.

In total, 13 attribution/allocation cases (transfer pricing) were closed during 2016 to 2018. Of these, 62% were resolved by an agreement fully eliminating double taxation or fully resolving double taxation not in accordance with a tax treaty and the remaining 31% by way of unilateral relief granted.

A further 22 other cases were closed during the same period. Of these, 82% were resolved by an agreement fully eliminating double taxation or fully resolving taxation not in accordance with a tax treaty; 11% were resolved by domestic remedy or unilateral relief granted and 5% were withdrawn by the taxpayer.

New Zealand meets all other requirements of the Action 14 minimum standard in relation to the resolution of MAP cases. New Zealand’s competent authority operates fully independently from Inland Revenue’s audit function and was described as adopting a cooperative approach to resolve MAP cases in an effective and efficient manner. Its organization was considered adequate and its performance indicators appropriate to perform the MAP function.

Implementation of MAP agreements

Action 14 recommends that all MAP agreements reached should be implemented and that this should occur on a timely basis. Further, jurisdictions should either: (i) provide in their tax treaties that any mutual agreement reached through MAP shall be implemented notwithstanding any time limits in their domestic law; or (ii) be willing to accept alternative treaty provisions that limit the time for adjustments.

While New Zealand largely meets the Action 14 minimum standard regarding implementation of MAP agreements, it does have a domestic statute of limitations and none of New Zealand’s tax treaties contain the equivalent of Article 25(2), second sentence, of the OECD Model Tax Convention (OECD, 2017). For treaties without this provision, there is a risk that not all MAP agreements will be implemented in cases where the agreement requires a downward adjustment, as this is subject to the discretion of the Commissioner of the Inland Revenue.

New Zealand has put a plan in place to bring those treaties that do not meet one or more of the elements of the Action 14 minimum standard in line with the requirements of this standard via bilateral negotiations. This concerns the seven tax treaties that do not contain the equivalent of Article 25(2), second sentence, of the OECD Model Tax Convention (OECD, 2017) and which will not be modified by the MLI to include such equivalent. According to this plan, negotiations are being initiated for four treaty partners, while for the remaining three treaty partners, such negotiations are envisaged once the initiated negotiations have been completed.

Best practice peer review reports

New Zealand reports that it has met many of the best practices related to the Action 14 Minimum Standard. In particular:

  • New Zealand has a well-established unilateral, bilateral and multinational APA program. Its approach to each APA is bespoke to facts and circumstances rather than a standardized formal process. There are no specific timelines for the filing of an APA request in New Zealand.
  • New Zealand reported it provides access to MAP in cases of bona fide taxpayer-initiated foreign adjustments. New Zealand further reported that it will notify the other competent authority of a downward adjustment made in such situation so as to prevent an outcome that leads to (partial) non-taxation of a primary adjustment made.
  • New Zealand reported that it is amenable to consider multilateral MAPs on a case-by-case basis and that it has one such case in its MAP inventory.
  • New Zealand reported that while officially suspension of tax collection is not available for pending MAP cases, in practice, collection procedures are suspended during the period a valid MAP case is in progress.
  • New Zealand reported that it is in favor of including Article 9(2) of the OECD Model Tax Convention (OECD, 2017) in its tax treaties where possible and that it will seek to include this provision in all of its future tax treaties.

Implications

In a post-BEPS world, where multinational enterprises (MNEs) face tremendous pressures and scrutiny from tax authorities, the release of New Zealand’s Stage 2 peer review report represents the continued recognition and importance of the need to achieve tax certainty for cross-border transactions for MNEs. While increased scrutiny is expected to significantly increase the risk of double taxation, the fact that tax authorities may be subject to review by their peers should be seen by MNEs as a positive step to best ensure access to an effective and timely mutual agreement process.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Limited, International Tax and Transaction Services, Auckland

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Endnotes

  1. https://doi.org/10.1787/794c808c-en.
  2. https://www.oecd.org/tax/beps/making-dispute-resolution-more-effective-map-peer-review-report-new-zealand-stage-1-9789264304369-en.htm.
  3. http://www.oecd.org/tax/beps/beps-action-14-peer-review-best-practices-new-zealand-2021.pdf.
  4. See EY Global Tax Alert, OECD releases BEPS Action 14 on More Effective Dispute Resolution Mechanisms, Peer Review, dated 31 October 2016.
  5. http://www.oecd.org/tax/forum-on-tax-administration/about/.
 
 

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