BUDGET 2017: Govt targets $100M a year from closing offshore tax loopholes; moves on ‘black hole’ spending

Thursday 25th May 2017

The government expects to raise at least $250 million over the next three years from closing foreign tax loopholes exploited by both multi-national corporations and New Zealand companies with offshore activities.

The gains are expected from three initiatives put out for discussion in the last nine months covering transfer pricing and permanent establishment avoidance, interesting limitation relating mainly to related party debt, and hybrid financial instrument mismatches.

The latter allow companies to pack their New Zealand entities with tax-deductible debt arrangements and reduce tax here and have been subject to a string of successful challenges in the courts by the Inland Revenue Department in recent years.

The forecasts, said to be conservative, assume $50 million of additional tax paid in the next financial year, rising to $100 million a year in the following two years.

Meanwhile, the Budget does away with the contentious treatment of so-called ‘black hole’ expenditure, relating to expenses borne by a company exploring a commercial initiative that is later abandoned.

The issue was the subject of unsuccessful appeals all the way to the Supreme Court by electricity generator Trustpower, which sought relief for expenses related to a wind-farm development that did not go ahead.

“Tax consequences should not be an obstacle to businesses innovating and pursuing opportunities for growth,” said Revenue Minister Judith Collins. “Where no asset is created on the balance sheet, feasibility expenditure would be immediately deductible for income tax purposes.

“Where an asset is created, we are proposing that the feasibility expenditure would be capital expenditure for tax purposes.”

An exposure draft on the initiative is available from today and will be open for discussion from July 6.

While tax forecasts include a contingency for possible lost revenue from the initiative, the sum is not disclosed in the Budget documents.

(BusinessDesk)

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