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New Zealand’s Inland Revenue has released proposals for reform of the thin capitalization rules, which aim at bolstering the taxation of highly leveraged investments made by non-residents.

According to Revenue Minister Peter Dunne, while the existing thin capitalization rules are intended to prevent non-residents from using excessive interest costs to reduce their tax liabilities, they have not been effective in all cases. Two major proposals, made by the Revenue and contained in an issues paper, are therefore designed to “beef up the rules,” Dunne explained.

Under the first proposal, the thin capitalization rules would be extended to non-residents who act together to operate businesses in New Zealand. At present, the rules apply only if a single non-resident controls the business.

The second major reform would see some shareholder debt disregarded when calculating the global indebtedness of a non-resident investor. This debt can currently be included and used to justify a high level of indebtedness in New Zealand, which can then be used to offset tax liability.

Dunne said that issues paper “shifts the focus to investment in New Zealand by non-residents, and proposes changes to limit excessive tax deductions for interest costs.” This “would be a fairer outcome,” he added, stressing that while the government wants to ensure that a fair amount of tax is paid, it does not want to discourage investment.

The paper is open for submissions until February 15.

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