Double Tax Agreements and the Arm's Length Principle: the Safe Harbour Ratio in New Zealand's Thin Capitalisation Rules

Abstract

The opportunities for international tax avoidance through the shifting of profits between jurisdictions is increasing as the world’s economy becomes more integrated. While transfer pricing has been the primary method for multinationals to shift profits, thin capitalisation arrangements have been seen by some multinationals as an alternative as transfer pricing practices have become subject to greater scrutiny by revenue authorities. As a result many OECD members have over the last decade introduced specific rules to deal with thin capitalisation arrangements.

New Zealand introduced thin capitalisation rules (along with revised transfer pricing rules) in 1995. At the time of their introduction there was no consideration of any kind as to the relationship between these new thin capitalisation rules and New Zealand’s existing DTA obligations. This omission is notable given that existing DTA obligations could override the new thin capitalisation rules or instead the new rules could potentially override existing DTA obligations. The objective of this article is to review New Zealand’s thin capitalisation rules enacted in 1995 to determine whether they can be considered consistent with the arm’s length principle found in New Zealand’s DTAs.