Document 2 Policy and Strategy Te Wāhanga o te Rautaki me te Kaupapa 55 Featherston Street PO Box 2198 Wellington 6140 New Zealand Briefing note Reference: BN2015/537 Date: 1 October 2015 To: Paul Kilford and Maraina Hak cc: T. 04-890 1500 F. 04-903 2413 Naomi Ferguson, David Carrigan, Matt Benge, Emma Grigg, 9(2)(a) Government & Executive Services, Policy records management 9(2)(a) From: 9(2)(a) Subject: The release of the OECD BEPS package The OECD will publicly release the OECD Base Erosion and Profit Shifting (BEPS) package on 5 October. This note sets out what will be released and provides some brief comments. We will separately provide a draft media statement on the package’s release and backpocket Q&As. At the end of this briefing note we include a brief update on the OECD/G20 Automatic Exchange of Information (AEOI) initiative. While only loosely related to BEPS, the AEOI update is provided in case the Minister of Finance faces questions about New Zealand’s AEOI implementation in the margins of his planned travel to Lima, Peru. Background: the BEPS project The OECD/G20 project to address BEPS was launched in 2013 following the growing perception that governments are losing substantial corporate tax revenue due to international tax planning. The consequences of the base erosion and profit shifting currently achieved by some multinationals range from unintended competitive advantages for multinational enterprises (MNEs) over smaller or domestic companies, to distortion of investment decisions, to loss of substantial corporate tax revenue for governments. More fundamentally, the perceived unfairness resulting from BEPS jeopardises citizens’ trust in the integrity of the tax system as a whole, thereby undermining voluntary tax compliance. The OECD/G20 created an Action Plan comprising 15 actions intended to modernise international tax frameworks and help prevent BEPS. Reports on these actions, as well as an Explanatory Statement summarising the project and outlining the post-BEPS environment, will all be released on 5 October. An OECD Council Paper, which summarises the BEPS project in more detail and includes the BEPS Explanatory Statement, is attached to this note. www.ird.govt.nz 2 NZ’s position on BEPS and further work New Zealand has been a strong supporter of the OECD’s BEPS work. We have been actively involved in the development of the package, particularly in areas where the OECD’s recommendations could impact us (for example, under the actions relating to tax treaty abuse, transfer pricing, and anti-hybrid rules). While New Zealand’s international tax policy settings are generally robust, in response to the package’s release we will be considering reforms to our domestic rules in response to the OECD recommendations on: - Neutralising the effects of hybrid mismatch arrangements (BEPS Action 2); and Limiting base erosion via interest deductions (BEPS Action 4). We plan to release issues papers on these matters in early 2016. As is clear from the BEPS Explanatory Statement, there is an expectation that as countries reform their international tax rules, they will use the OECD recommendations as a template. This is something we are cognisant of, and we will take into account as we develop proposals for the issues papers. Of course, this expectation will need to be balanced against the need to create proposals that make sense within the context of our other rules and frameworks. Automatic Exchange of Information (AEOI) The AEOI initiative is aimed at assisting tax administrations in the detection and prevention of ‘offshore’ tax evasion. Broadly, AEOI requires financial institutions to report information on bank accounts held by non-residents to their local tax administration, which in turn will exchange that information with tax treaty partners. The exchanged information will be used to verify that residents are correctly reporting offshore income and financial assets for tax purposes. AEOI is a global initiative, and is based on the Foreign Account Tax Compliance Act (FATCA) initiative that is specific to the United States. AEOI has very ambitious timelines. OECD and G20 member countries, and all jurisdictions with international finance centres (e.g. tax havens) were required to make commitments to implement AEOI with a view to conducting first exchanges of information either in 2017 (‘early adopters’) or 2018 (‘late adopters’). New Zealand followed Australia in committing to be a late adopter. However a feature of the Australian and New Zealand implementation plans was that compliance by financial institutions would be voluntary for the first year, and then become mandatory in the following year. In common with other countries, New Zealand’s commitment was effectively a best endeavours commitment, subject to the ability to successfully implement within the desired timelines. Subsequent developments put our ability to implement under extreme pressure. (These include systems issues, implications for our business transformation project, and the inclusion of new Government priorities on the tax policy work programme.) Additionally, New Zealand financial institutions are experiencing difficulty in coping with the numerous tax and other regulatory initiatives currently in play, and are themselves facing pressures. Accordingly, in July this year we decided to withdraw the voluntary timeline (which would mean we would begin exchanging information in 2019). Some OECD and G20 countries are likely to be unhappy with this decision. It is possible that Ministers attending meetings may face questions from OECD and G20 member country delegates as to New Zealand’s position. In response, our key message should be that we understand the OECD/G20 concerns, and we remain fully committed to AEOI implementation. However, we want to do it once and do it right. Classified In Confidence Consultation with Treasury Treasury was consulted about this briefing note. Classified In Confidence