March 2011

OVERSEAS INVESTMENT ACT – GUIDELINES FOR FOREIGN INVESTMENT IN SENSITIVE ASSETS

Since 13 January of this year a Ministerial directive letter and regulations have come into effect.  They have the effect of providing two extra factors to be applied when Overseas Investment Office conducts the benefit test on applications for the purchase of farmland and/or vertically integrated primary production companies (where the purchaser buys land and builds processing facilities and/or takes responsibility for the whole supply chain).

The two new factors are:

  • Economic interests - which require consideration of whether New Zealand’s economic interests are adequately safeguarded and promoted by the investment
  • Mitigating factors – which require an examination of whether the investment will provide opportunities for New Zealand oversight or involvement

These factors apply only to large areas of farmland, which have been defined as being ten (10) times the average size of any type of farm. The table below indicates when the directive and regulations will apply.

Type of Farm

Average Size based on Statistics NZ data

Farms 10 x average size to which OIO applies the two new additional factors:

Dairy Farms

172 hectares

1,720 hectares

Sheep Farms

443 hectares

4,430 hectares

 

The Government is of the view that the new changes will strike a balance between encouraging beneficial foreign investments in New Zealand while balancing public concerns over foreign investment in productive land in New Zealand.  These changes are meant to create extra clarity and certainty for potential overseas investors.

What does this mean in practical terms for overseas investors looking to invest in large New Zealand farms and vertically integrated primary production companies?

The Government has said these two new factors must be given high relative importance in addition to the other nineteen current factors specified in the Overseas Investment Act 2005 and the Overseas Investment Regulations 2005.  Therefore, if the application does not meet the two new factors, it will more than likely result in the application being declined.

 

INVESTMENT AGREEMENT – CLOSER ECONOMIC RELATIONS BETWEEN AUSTRALIA AND NEW ZEALAND

In February of this year New Zealand and Australian Governments signed an Investment Protocol.  It is expected to come into force in the second half of 2011. 

The impetus for these changes is based on the Australia and New Zealand Closer Economic Relations Trade Agreement, which is viewed as one of the highest quality free trade agreement that either country has with any other trading partner and is widely recognised as the most comprehensive bilateral free trade agreement in the world.

The protocol increases the screening threshold above which foreign investments require regulatory approval in each country, as detailed below:

  • In Australia, an increased threshold provides that only New Zealand investments in Australia over AUD $1.005 billion will require approval from the Australian Foreign Investment Review Board. The previous limit was AUD $231 million
  • In New Zealand, the approval threshold for Australians investing in New Zealand business assets is to be increased from NZ $100 million to NZ $477 million
  • The increased screening thresholds apply only to investments in significant business assets and Australian investors will continue to be subject to the same rules under New Zealand’s overseas investment regime with the screening thresholds for investments in sensitive land and fishing quota remaining unchanged

The object of this investment protocol, as expressed by both Governments, is that it will deliver substantial benefits to investors in both countries by reducing compliance costs, red tape, and improving legal certainty.   This is important for both countries, as Australia is the largest source of foreign investment in New Zealand, while New Zealand is the sixth largest source of foreign investment in Australia.  Current accumulated investment between the two countries is more than AU$110 billion.

 

EMPLOYMENT ISSUES -2011

Recent changes in employment legislation and heralded international legislative alignment with Australia may be setting a new scene for labour relations in New Zealand.

On 1 April 2011 a raft of new changes are set to come into force.  If you conduct business in New Zealand and are an employer the following new changes make for more flexible labour workforce:

  • Trial Periods – trial periods of up to ninety days will be available to all employers, allowing a trial of employees before employing them.  This provision must be in the written employment agreement
  • Cashing Up Annual Holidays – employees may now request their employers to pay out in cash, up to one week of their minimum entitlement to annual holidays per year. As part of good practice, employers can revise their workplace policies so it deals with whether or not they will consider such requests and, if so, put a process in place for initiating the requests.  The right to make such requests resides solely with the employee and an employer cannot pressure an employee into cashing up holidays
  • Transferring Public Holidays - employees and employers will be able to agree to transfer the observance of public holidays to another working day in order to meet the needs of the business or the individual needs of the employee.  Good faith obligations need to be met when discussing such requests if the workplace policy has not been revised to incorporate these changes.

 

TRANSFER PRICING FOCUS – 2011

As many will be aware, the OECD released its transfer pricing guidelines in July 2010 for multinational enterprises (MNE’s) and tax administrations to provide guidance on the application of the “arm’s-length principle” which is used in the assessment for tax purposes of cross-border transactions between associated parties.

Consistent application of this principle helps to ensure that taxable profits reported by MNE’s reflect the actual economic activity undertaken.  Furthermore, double taxation can be avoided which may result from a dispute between two countries about the outcome of the arm’s-length fee for their cross-border transactions.

The revision contains detailed guidance on:

  • How to perform comparability analyses in practice to compare the conditions of transactions between associated enterprises and independent enterprises
  • Selecting the most appropriate transfer pricing method to the circumstances of the case, including all transfer pricing methods now being on equal footing
  • Apply in practice two of the OECD-approved transfer pricing methods; referred to as “transactional profit methods”, namely the transactional net margin method and the transactional profit split method
  • Transfer pricing aspects as they relate to business restructurings.  This is the first time guidance has been provided and has been perceived as an area that has required clarification due to the issues surrounding risk transfers, the compensation for the restructuring itself, compensation post restructuring transactions and the recognition of the transactions undertaken

As a result, the Inland Revenue Department (IRD) recently released its quarterly Large Enterprises Update which contained some changes to its practices on transfer pricing.  In summary, it has endorsed the OECD guidelines and increased the de minimis values for the administrative practices regarding service fees and loans. 

The threshold for de minimis administrative practices in relation to cross-border associated party service allows entities to apply a mark-up of 7.5% as an arm’s length rate for services provided between cross-border associated parties, as long as the total direct and indirect costs of supply of services is less than the specified threshold, which has been increased from NZD $100,000 to NZD$600,000.  The increase puts New Zealand in alignment with Australia.

The threshold for small value loans has been raised from NZD $1million to NZD $2 million and a 300 basis points (3.0%) over the relevant base indicator has been put in place as being broadly indicative of an arm’s length rate for small-value loans.  The base indicator is the bank bill rate for variable rate loans or the swap rate for fixed rate loans.

On the transactional side, the IRD will not be updating its own Transfer Pricing Guidelines to reflect the latest OECD Guidelines even though it will be applying them, so any New Zealand based transfer-pricing documentation will now need to be updated to comply with the OECD Guidelines.

The anticipated effect of the IRD's adoption of the OECD guidelines means a reduction of compliance costs for a number of taxpayers and certainty for large MNE’s when carrying out business in New Zealand.

SMALL BITES – OCR- CHINA FREE TRADE AGREEMENT- RETAIL DEPOSIT GUARANTEE SCHEME

  • The Reserve Bank of New Zealand announced on 10 March 2011 the Official Cash Rate is reduced by 50 basis points to 2.5%.  Part of the reason for reducing the rate was to overcome any negative impact perceived from the Christchurch earthquake and to hold business and consumer confidence deteriorating
  • The NZ - China Free Trade Agreement continues to deliver economic benefits two years on for both countries.  Total trade between New Zealand and China increased by more than a third, from $8.5 billion to $11.1 billion.  Exports to China have now more than doubled.
  • Update on Retail Deposit Guarantee Scheme – this scheme was referred to in the April 09 NZ Law Update and is to be discontinued on 31 December of this year.  The Government is looking at ways to maintain confidence in the financial system by considering a number of permanent options to manage any future financial market difficulties. The Reserve Bank of New Zealand has released details of an option called the “Open Bank Resolution” process which provides for continuity of core banking services to be kept open to retail customers and businesses upon a bank failure, while placing the cost of a bank failure primarily on the bank's shareholders and creditors rather than the taxpayer.  The aim is to minimise the stress on the overall banking and payments system.  Consultation is currently in progress with banks to consider what systems requirements are needed to ensure the concept can be put into operation.  Consultations close on 30 June 2011.

 

DISCLAIMER

This publication is necessarily brief and general in nature. You should seek further information before taking any action in relation to the matters dealt with in this publication. If you have any questions on the matters discussed in this update please contact the New Zealand Mackrell partner, Brian Joyce at Clendons North Shore by email to brian.joyce@clendons-ns.co.nz or phone 64 9 377 8419