The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (IF) has agreed to develop a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. New Zealand is a member of the OECD and IF. Further details on the two-pillar solution can be found on the OECD website.
Amount A of Pillar One
Amount A of Pillar One co-ordinates a reallocation of taxing rights to market jurisdictions with respect to a share of the profits of the largest and most profitable multinational enterprises (MNEs) operating in their markets, regardless of their physical presence.
Amount A has not yet been finalised. Further information is available on the OECD website.
Amount B of Pillar One
Amount B of Pillar One provides an optional simplified and streamlined transfer pricing approach that jurisdictions may opt to apply to in-country baseline marketing and distribution activities for fiscal years commencing on or after 1 January 2025. The OECD/G20 Inclusive Framework on BEPS’s report on Amount B of Pillar One is available on the OECD website.
Report on Amount B of Pillar One
New Zealand has not opted to apply this approach, as such its introduction does not change our current rules or practice. Our existing simplification measure for small foreign-owned wholesale distributors remains available, and existing transfer pricing rules apply in all other cases.
Simplification measures for transfer pricing
Foreign-owned distributors operating in New Zealand
Arm’s length outcomes for foreign-owned distributors operating in New Zealand must continue to be determined in accordance with existing transfer pricing approaches.
Consistent with paragraph 6 of the approach, in New Zealand the approach will not be treated as providing an arm’s length outcome (including for the purposes of Article 9 of the Model Tax Convention and by extension Article 25). Conforming changes to the Model Tax Convention commentary provide tax certainty in this respect. Therefore the application of the approach by foreign-owned distributors operating in New Zealand:
- will not be considered compliant with New Zealand’s domestic transfer pricing rules
- will not discharge the taxpayer’s burden of proof in respect of those rules and
- will expose the taxpayer to shortfall penalties.
To the extent that double taxation arises from a transfer pricing adjustment, relief will not be provided based on the application of the approach consistent with paragraph 77 of the approach and the conforming changes to the Model Tax Convention commentary.
Regard must also be had to paragraph 43 of the approach, which confirms that the approach has no bearing on existing transfer pricing and does not change any existing OECD guidance. The methodology and guidance used in the approach, including all design elements and defined terms, are specific to the approach. No element or term should be construed as implying that it would be acceptable under existing transfer pricing rules. That is, existing transfer pricing rules must be applied without any reference to the approach.
New Zealand-owned distributors operating offshore
A foreign jurisdiction may opt to apply the approach to distributors operating in its jurisdiction. Where a New Zealand-owned distributor operates in a jurisdiction that applies the approach, it must still apply existing transfer pricing approaches to the relevant transaction in respect of its New Zealand obligations. To the extent New Zealand has a treaty with the relevant jurisdiction, and double taxation arises from a transfer pricing adjustment, relief will not be provided based on the application of the approach consistent with paragraph 77 of the approach and the conforming changes to the Model Tax Convention commentary.
We note that the OECD is continuing work on the development of a political commitment to respect the application of the approach when it is applied by low-capacity jurisdictions. This will include the development of a list of low-capacity jurisdictions. Further information will be provided once the OECD/G20 Inclusive Framework’s work is completed.
Pillar Two
The Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act (the Amendment Act) gives legislative effect in New Zealand to Pillar Two (the GloBE rules) through amendments to the Income Tax Act 2007 (the ITA) and Tax Administration Act 1994 (TAA). The term used in the ITA to describe New Zealand’s GloBE rules is the ‘applied global anti-base erosion rules’ (applied GloBE rules), and the term used for tax imposed under the applied GloBE rules is ‘multinational top-up tax’.
The applied GloBE rules consist of an Income Inclusion Rule (IIR) – including a domestic IIR (DIIR) – and an Undertaxed Profits Rule (UTPR).
The IIR and UTPR components of the applied GloBE rules apply for fiscal years beginning on or after 1 January 2025. The DIIR component of the rules applies for fiscal years beginning on or after 1 January 2026.
For more information on the applied GloBE rules, please refer to the Tax Information Bulletin
Tax Technical: TIB Vol 25 No 4, May 4 2024
Further information on Pillar Two is available on the OECD website.