Changes impact inbound investments

The Government signalled last year that Officials would be undertaking further work on changes to investment policy.

The concern at the time was whether a further (taxpayer unfavourable) change in the safe harbour ratio was on the cards.

While this has been ruled out, for the time being at least, the proposals will have significant impact for certain investors.

Non-resident investors

The most significant change proposed is the extension of the thin capitalisation rules to multiple non-residents holding or controlling more than 50% of a New Zealand company or group if these parties are “acting together.“

Officials consider that “acting together” should include explicit cooperation (through a written or tacit shareholder agreement) or coordination of decision making by a person or group of persons (e.g. private equity managers).

A majority non-resident owned public entities will be excluded from the proposed extension.

While we recognise the concerns, there is need for care and caution.

Unlike a scenario where there is a single non-resident investor, and control can be easily identified, situations involving multiple non-associated shareholders can be complex (as each investor will have their own investment drivers, which may or may not align, including coincidentally).

Key concern

A key concern is how the “acting together” concept will be reflected in legislation, and practically applied/interpreted by Inland Revenue in a way that does not penalise non-resident investors who are genuinely operating at arm’s length from each other.

The risk is that the default position becomes application of the thin cap rules to all companies in which non-residents hold a combined interest of 50% or more, regardless of whether there is a coordinated approach to decision making.

In the interests of taxpayer certainty, it is concerning that, what is meant by “acting together” will not be exhaustively defined in legislation and left deliberately vague.

We are also concerned about the potential impact on inbound investment, specifically where a consortium of investors, including non-residents, is required due to the scale of the funding necessary.

A common situation is non-resident funding for large-scale projects, such as infrastructure, which will involve a combination of equity and debt.

As a net capital importer, any move to limit interest deductibility could drive up the after-tax cost of debt funding or result in a shortfall of the actual investment required.

Neither outcome is desirable for New Zealand.

Unhelpful proposals

In this regard, it is disappointing that officials appear to view long-term infrastructure investors as being no different to private equity funds.

Should these proposals be accepted by the government, there is a real risk that the much-needed social infrastructure projects that require private capital to proceed will become less affordable and therefore delayed indefinitely or scrapped.

At a time when infrastructure investment is a priority for Christchurch, Auckland and indeed in many other parts of the county, these proposals will be unhelpful.

There is a case for excluding important infrastructure projects from these proposals, or indeed all Public Private Partnerships, if these are considered important policy initiatives for the long-term benefit, as these are always highly leveraged, and need to be so in order to deliver value for money for Government and the taxpayer.

Greg Knowles and Tony Joyce are Partners (Tax) of KPMG based respectively in Auckland and Wellington. The above is an edited version.

KPMG is the sponsor of the Business Excellence in ICT Category of the Indian Newslink Indian Business Awards 2013.