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An anti-avoidance rule has been introduced for large multinationals (that is, over EUR 750 million of consolidated global turnover per annum) with a structure intended to avoid having a permanent establishment (PE) in New Zealand.

The rule deems a non-resident to have a PE in New Zealand if a related entity carries out sales-related activities for it here under an arrangement with a more than merely incidental purpose of tax avoidance (and the other requirements of the rule are met).

The rule applies for income years starting on or after 1 July 2018.

Detailed guidance on the rule is provided in Tax Information Bulletin Vol 31 No 3 April 2019.

Tax Information Bulletin - Vol 31 No 3 - April 2019

The following guidance outlines the risk indicators that Inland Revenue will use in deciding whether to investigate the possible application of section GB 54 of the Income Tax Act 2007 to an arrangement. It also explains how Inland Revenue will determine the profit attributable to a PE deemed to exist under section GB 54.

Key features

The new PE anti-avoidance rule is contained in section GB 54. A PE is deemed to exist in New Zealand for a non-resident if all the following criteria are met.

Question Criteria


The non-resident is part of a large multinational group (that is, over EUR 750 million of consolidated global turnover per annum).


The non-resident makes a supply of goods or services to a person in New Zealand.


A person (the 'facilitator') carries out an activity in New Zealand for the purpose of bringing about that particular supply.


The facilitator is associated with the non-resident, is an employee of the non-resident, or is commercially dependent on the non-resident.


The facilitator's activities are more than preparatory or auxiliary to the non-resident's supply.


The non-resident's income from the supply is subject to a double tax agreement (DTA) that does not include the OECD's latest PE article.


A more than merely incidental purpose or effect of the arrangement is to avoid New Zealand tax, or a combination of New Zealand tax and foreign tax.

Where a supply is subject to the rule, the non-resident is deemed to make that supply through the deemed PE. The activities of the facilitator in relation to the supply are also attributed to the PE.

The application of the rule is illustrated in the flowchart on page 24 of Tax Information Bulletin Vol 31 No 3 April 2019.

Tax Information Bulletin - Vol 31 No 3 - April 2019

Risk indicators

The PE anti-avoidance rule is based on what actually occurs in New Zealand, as opposed to the terms of the contract. The following factors may be practical indicators of risk.

  • Significant functions are in practice carried out in New Zealand in relation to the sale, including those activities designed to convince a particular customer to acquire supplies from the non-resident.
  • The non-resident has little or no contact with the New Zealand customer (other than executing the sales contract).
  • The more complicated the supply, the more likely significant functions will be carried out in New Zealand to achieve sales.
  • The employees of the New Zealand facilitator are highly remunerated, possibly indicating the provision of high value activities for non-residents.
  • No or low foreign tax ultimately being payable on the income from New Zealand. However, the payment of tax on the income in another jurisdiction is not sufficient to circumvent the application of the rule.

These factors will be used by Inland Revenue to determine whether it needs to investigate an arrangement further in relation to section GB 54. The presence of one or more of these factors does not necessarily mean that section GB 54 will apply to an arrangement.

The actual application of section GB 54 will depend on whether the legislative requirements of the section are met, and in particular whether the arrangement has a more than merely incidental purpose or effect of tax avoidance.

New Zealand profit attribution rules

The normal profit attribution rules apply to determine the amount of profit attributable to the deemed PE under section GB 54. In this regard, New Zealand follows an earlier version of the OECD's latest PE profit attribution rules (and not the latest version, which is known as the 'authorised OECD approach', or AOA). This is for the following two reasons.

  1. The AOA only applies to DTAs which incorporate the latest version of Article 7 (business profits) of the OECD Model Tax Convention (MTC). None of New Zealand's DTAs incorporate this version of Article 7, so the AOA is not relevant to New Zealand's DTAs.
  2. New Zealand does not agree with some aspects of the AOA and has made an explicit reservation against it.

Further guidance on profit attribution is contained in the Commentary to Article 7 of the MTC. Given New Zealand's specific reservation against Part 1 of the AOA, the relevant commentary in interpreting New Zealand's DTAs is the commentary as it read immediately before 22 July 2010, taking into account our reservations and observations. This version is found in the annex to the MTC Commentary on Article 7.

A New Zealand observation made in this version of the commentary notes that New Zealand does not agree with the approach reflected in Part I of the 2008 Report Attribution of Profits to Permanent Establishments, an earlier version of the AOA. New Zealand does not agree with the amendments made to the commentary that adopt the conclusions of that report such as, for example, the concept of allocating free capital.

Also see our general information on branches 'General principles of attribution' section.


Profit available for attribution

Where a PE is deemed under the rules, profit is attributable to it in accordance with normal profit attribution rules. Depending on the facts and circumstances, profit could be positive, nil or negative.

It is not correct to state that no additional profit arises in the PE merely because the facilitator has returned an arm’s length profit. This is due to a range of factors, including the following.

  • The activity taxed in the PE is different to the activity of the facilitator.
  • An arm’s length transfer pricing outcome for the facilitator, in accordance with Article 9 of the MTC, will not always result in New Zealand based activities being fully taxed in New Zealand.
  • Mechanical differences exist in the application of transfer pricing rules and the application of profit allocation rules.

New Zealand sourced income is taxed either in the hands of the non-resident or the facilitator, the same income is not taxed twice.

The factors above are explored further in the following examples.

A facilitator performs customer credit risk assessment functions on behalf of a non-resident. The facilitator does not undertake sales so it is never exposed to the customer credit risk for which it is responsible for assessing. The non-resident however undertakes the sale and is exposed to this risk. The business activities of the facilitator and non-resident are different.

In accordance with the transfer pricing rules, the facilitator would be entitled to an arm’s length return for the activities it performs and the non-resident would be entitled to the profit arising from its exposure to the credit risk. Where the non-resident is deemed to have a PE, its profit arising from this risk exposure would be available for attribution to the PE.

Where a non-resident contractually assumes risk and the non-resident and a related party New Zealand facilitator both control the risk and have the financial capacity to bear the risk, within the meaning of the transfer pricing rules, the non-resident would be entitled to the income arising from the assumption of the risk in accordance with the transfer pricing rules.

The transfer pricing rules would require the New Zealand facilitator to be remunerated for its control functions. However, if this remuneration did not reflect a full sharing of the upside or downside risk exposure, where the non-resident is deemed to have a PE, the difference between this amount and the amount actually remunerated would be available for attribution to the PE.

In accordance with the transfer pricing rules, where it is determined that a non-resident has the requisite control over a decision to invest in an asset acquired by a related party New Zealand facilitator, the facilitator would be required to compensate the non-resident for the funding provided. Where the non-resident is deemed to have a PE, that compensation would be available for attribution to the PE.

The specific rules governing transfer pricing and permanent establishment profit attribution differ and can therefore result in different outcomes.

For example, our profit attribution rules do not allow for notional royalty charges. Where a PE utilises intangible property income and expenses related to that property are attributed to the PE, as opposed to a notional royalty charge. This amount may differ from an arm's length amount charged to a related party New Zealand facilitator for its use of the intangible property, or it may involve intangible property exploited by the non-resident which has not been exploited by the New Zealand facilitator.

This same principle applies in respect of notional financing charges and notional mark-ups on administration costs.

Other differences can also arise simply due to mechanical differences in attributing income and expenditure in accordance with profit attribution rules as opposed to the application of specific methods for transfer pricing purposes. In practice, differences also arise due to the inexact nature of transfer pricing and available comparable data.

Returning income

Where a supply is subject to the PE anti-avoidance rule, the non-resident is deemed to make that supply through a deemed PE. The activities of the facilitator in relation to the supply are also attributed to the PE. A separate income tax return must be filed for the PE.

We understand that some multinationals want to comply with section GB 54, but do not want to restructure their New Zealand operations to a distributor model (for example, because it would be inconsistent with their regional strategy) or file a separate PE return. We have been asked whether we would accept the facilitator returning additional income under the transfer pricing rules equal to the amount payable under a distributor model, but without requiring them to actually restructure their legal arrangements or file separate PE returns.

Inland Revenue does not accept this approach. If section GB 54 applies, then we expect taxpayers to either return the corresponding income by filing a PE return, or to legally restructure their arrangements (for example, to a distributor model).

This approach is taken with regard to the following considerations.

  • We see the introduction of section GB 54 as a significant change to our international tax settings.
  • Compliance savings from single filing would be minimal because the relevant PE profit attribution calculation would still be required.
  • The presence of a PE can have other tax consequences, for example, it can make royalties and interest payable by the non-resident subject to NRWT to the extent they are attributable to the PE.
  • Returning income in the wrong taxpayer could result in adverse consequences in the event of a dispute with a tax treaty partner. For example, if we accepted a return to the facilitator that was above the arm's length amount for the actual legal arrangements, then the other country could challenge this return under their own transfer pricing rules. This would require us to refund the additional tax paid in New Zealand on the above arm's-length return.
Last updated: 28 Apr 2021
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