Changes to Thin Capitalisation Calculations
The Taxation (Neutralising Base Erosion and Profit Shifting) Bill contains a number of amendments to New Zealand’s tax laws designed to prevent multi-nationals lowering their exposure to New Zealand income tax. Among those changes are changes to the thin capitalisation rules.
One proposed change is for “Total Assets” to be calculated net of “Non-Debt Liabilities”. An entity’s “non-debt liabilities” is an entity’s liabilities other than its interest-bearing debt. Some examples of non-debt liabilities are accounts payable, reserves and provisions, and deferred tax liabilities. Some deferred tax liabilities are excluded from the proposed “non-debt liability” adjustment. These are deferred tax liabilities that are technical accounting entries, which do not reflect tax on current accounting profits that will be payable in the future. An example, is the deferred tax liability calculated on a building (depreciated for accounting purposes and not for tax purposes, but creating a deferred tax liability in the financial statements).
A further change to the thin capitalisation rules will apply for infrastructure project finance. This proposal will allow full interest on third-party debt to be deductible, even if the debt levels exceed the thin capitalisation limit if the debt is non-recourse with interest funded solely from project income. This will allow a wider group of investors to participate in public-private partnerships without interest expense denial that has been possible previously.
Further minor changes are:
The de minimis threshold that applies in the outbound thin capitalisation rules (e.g. where a New Zealand resident has a controlled foreign company or foreign investment fund interest), which provides an exemption from the thin capitalisation rules for groups with interest deductions of $1 million or less. This will also apply to inbound thin capitalisation (e.g. foreign controlled taxpayers) provided there is no owner-linked debt.
When an entity is controlled by a group of non-residents acting together, interest deductions on any related-party debt will be denied to the extent the entity’s debt level exceeds 60 per cent.
Clarifying that when a company can use a value for an asset for thin capitalisation purposes, this is different from what it uses for financial reporting purposes.
Introducing an anti-avoidance rule that applies when a taxpayer substantially repays a loan just before the end of an income year to circumvent the measurement date rules.
Clarifying how the owner-linked debt rules apply when the borrower is a trust.
If you think you may be impacted by the new rules, please contact your Findex adviser.