The IRD and Government recently released a discussion paper setting out proposed changes to the approved issuer levy (“AIL”) regime. AIL was introduced originally because typically New Zealand corporates who borrowed funds from non-residents were subject to what are called gross up provisions in the lending documents. This meant that if a New Zealand borrower was obliged to deduct non-resident withholding tax from payments to a non-resident lender, the interest rate the non-resident lender wanted was net of and after any New Zealand withholding taxes. This in effect increased the cost of borrowing funds for New Zealand borrowers.
The Government implemented a solution which was approved issuer levy. Instead of being a withholding tax like PAYE which was deducted from the interest paid to the non-resident, it was a stamp duty and it was a charge on top of the interest paid by the borrower. It is 2% of the interest whereas withholding tax rates are typically 10% or 15% of the interest, but supposedly suffered by the lender (unless of course there were gross up provisions in the loan documentation).
The other requirement for approved issuer levy was that the lender and the borrower could not be associated, i.e. it needed to be an arm’s length transaction.
The Government had indicated in 2014 that it was going to review the NRWT and AIL rules and has now released a discussion paper on it. While this is only for consultation at the present time, it is likely that within the next 12 months this will become law in a substantially similar format to what is proposed.
In broad terms, a simplified summary of the proposals is:
- NRWT will need to be used rather than approved issuer levy where there is a back to back arrangement where say an offshore bank is interposed between an offshore associated lender and its New Zealand associated subsidiary or related entity. Often a third party is used on a back to back basis so that approved issuer levy can be used in New Zealand whereas if funds had been advanced by the offshore associate directly to New Zealand, non-resident withholding tax would have been required to be deducted because the lending was then from an associated person.
- Similarly, a further anti-avoidance provision is also proposed where there is an arrangement between a group of persons to try to avoid non-resident withholding tax and ensure eligibility for approved issuer levy. An example of this would be offshore parent 1 lending to the New Zealand subsidiary of unrelated offshore parent 2. At the same time, offshore parent 2 lends to the New Zealand subsidiary of offshore parent 1. It is effectively a criss-cross arrangement where two unrelated overseas parents work together to ensure that the interest they receive is subject to approved issuer levy as opposed to non-resident withholding tax.
- It is also proposed that approved issuer levy could only be used by offshore financial intermediaries or where money is raised from a group of 10 or more non-associated persons. This will catch many current AIL loans and make then ineligible in the future for AIL.
- Finally, there are also some rules around the eligibility for onshore and offshore branches to use approved issuer levies in these circumstances.
It is likely that these proposals will be subject to submission and ultimately included in a tax bill by the end of 2015, with a view to them becoming law in the first half of 2016.
If you are affected by these in any way, please do not hesitate to contact us so we can look at how best to restructure your current position or to determine its status under the proposed changes. Call us today.