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.
