Strategizing International Tax Best Practices – by Keith Brockman

http://www.ird.govt.nz/resources/1/0/10876180402363a989fbef5d802abedf/is1301.pdf

The New Zealand Inland Revenue has issued an interpretation statement about a “tax avoidance arrangement.”  It sets out the approach the Commissioner will take to ss BG 1 and GA 1 of the Income Tax Act 2007. Section BG 1 is the general anti-avoidance provision in the Act. Section GA 1 enables the Commissioner to make an adjustment as a result of the application of s BG 1.

Section BG 1 voids a tax avoidance arrangement. An “arrangement” is defined widely and includes formal, legally enforceable contracts through to informal, unenforceable understandings.

The Commissioner’s approach to analyzing and applying s BG 1 is set out in a flow chart that outlines the sequence of analysis undertaken to establish whether an arrangement is a tax avoidance arrangement.  There are also examples illustrating how the approach is worked.

The Commissioner has a broad discretion as to the adjustments that can be made to counteract the tax advantage. There is no duty to describe precisely the actual basis for an adjustment. Further, the Commissioner may adjust the taxable income of any person affected by the arrangement.  A person can be affected by an arrangement whether they are a party to the arrangement and whether they are aware that they benefited from a tax avoidance arrangement.

However, s BG 1 may apply even if there is a specific anti-avoidance provision that accompanies the provisions used or circumvented.

This “interpretation” is very subjective, outlining the manner in which a taxpayer may envision Parliament’s intentions.  The examples  and flowchart may be helpful, and the interpretation is a “must read” for documentation of significant planning transactions in New Zealand.

Best Practices for GAAR developments are included in prior posts including: GAAR; Poland’s reintroduction (8 August), EY 2013 survey; GAAR history/trends & Tax Treaty vs. domestic law application (7 August), and UK Finance Act 2013; GAAR has arrived (21 July).

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