Inland Revenue’s RSP Post Integrity Reviews

In late December 2021, Inland Revenue announced that from the last week of January 2022 they will begin undertaking Post-Payment Verifications (PPVs) on taxpayers who received a Resurgence Support Payment (RSP) from August 2021. PPV’s will be issued progressively from late January to the end of March 2022, the work is anticipated to be completed by the end of April 2022. Taxpayers will be required to supply the supporting information (such as bank statements) used to support their revenue drop calculation when making the RSP claim and/or the application of the RSP to business expenses. Where a tax agent submitted the RSP on their clients’ behalf the PPV letter will be directed to the tax agent. Where the taxpayer applied directly the PPV letter will be sent directly to the taxpayer. The timeframe to respond to a PPV is five working days. If the review determines eligibility criteria or payment conditions have not been met, a repayment may be sought. Deloitte understands that PPV’s will only be conducted on a selection of taxpayers.

Issues paper on the forestry aggregation tax issue

On 1 December 2021, the Government released an issues paper Forestry aggregation tax issue with submissions having closed on 31 January 2022. Currently, small and medium sized forest owners benefit from aggregating forests and achieve significant economies of scale when doing so. Formal aggregation involves the sale of individual forest blocks to a new entity (an aggregation entity). However, this formal aggregation triggers the disposal for tax purposes, for example, the disposal of a forest into a new entity would be a taxable event. The tax issue is that the aggregation would bring forward much of the tax liability that would normally arise later, usually at the time of harvest or upon any subsequent sale to a third party.

The proposal is for the tax system to ignore, for tax purposes, the disposal on aggregation where the foresters are simply exchanging ownership of their individual forest interests for an equivalent economic interest in a look through entity. This way, the foresters who received the deduction for planting and growing the forest, continue to be liable for taxation on the harvest or sale proceeds. Feedback was sought on whether the tax impediment to aggregation has been correctly identified and views on other potential options to address it.

EV road user charges exemption extended

Te Manatū Waka Ministry of Transport has completed amending the legislation needed to extend the light electric vehicle (EV) exemption from road user charges (RUC) until 31 March 2024. The previous deadline was 31 December 2021. The RUC exemption will save EV owners around $800 a year and has been extended as part of a package of measures to encourage the uptake of electric vehicles to reduce emissions.

ACC levy changes to ensure financial sustainability

On 10 December 2021, the Government announced changes to the Accident Compensation Corporation (ACC) levy to ensure financial sustainability of the no fault insurance scheme. The levies are currently set $1.39 billion below the projected cost of new injuries each year, which require the small change in levies now to avoid larger levies in the future. Key aspects of the ACC levies for 2022/23, 2023/24 and 2024/25 include:

• Average Work levies paid by employers and self-employed people will decrease from 67 cents to 63 cents per $100 of liable earnings in April and remain at this rate until 2025.
• Average Motor Vehicle levies, which include the annual license levy and petrol levy, will remain at $113.94. Electric vehicles will continue to receive a subsidised levy.
• Earners’ levies paid through PAYE (or invoiced directly through ACC for self-employed people) will increase from $1.21 per $100 to $1.27 next April, $1.33 in 2023 and $1.39 in 2024, excluding GST. The annual prescribed maximum liable earnings increased from $130,911 to $136,544 next April, $139,384 in 2023 and $142,283 in 2024.

Inland Revenue statements and guidance

Controlled foreign company determinations issued – Tower Insurance LimitedOn 2 December 2021, Inland Revenue published five controlled foreign company (CFC) determinations. These determinations apply to Tower Insurance Limited. They grant non-attributing active CFC status to the specified insurance CFC residents in the Cook Islands (CFC 2021/01), Papua New Guinea (CFC 2021/02), Fiji (CFC 2021/03), Tonga (CFC 2021/04) and Vanuatu (CFC 2021/05).

Tax on fees paid to a member of a board, committee, panel, review group or task force

On 7 December 2021, Inland Revenue published a general article GA 21/01 - Tax on fees paid to a member of a board, committee, panel, review group or task force under the Cabinet Fees Framework published by the Cabinet Office. The document outlines that taxation applies to any fees paid to members depending on the personal circumstances of the individual member and the terms of their contract/appointment. Whether there is a withholding tax obligation will depend on who is treated as receiving that income for tax purposes. If a fee is classified as a schedular payment, the payer has an obligation to deduct withholding tax from the payments before they are made and pay that tax to Inland Revenue. The withholding tax rate on the payment of a fee to member is 33 cents in the dollar unless Inland Revenue has issued an exemption certificate or a special tax rate certificate to the recipient, or the recipient has chosen their own. A payment of fees to a member, in respect of their capacity as a board member, is not subject to GST. However, if a person is carrying on a taxable activity and accepts the appointment to the board as part of that taxable activity, then any service supplied by that person (as a member) is deemed to be supplied in the course or furtherance of their taxable activity. Accordingly, in that circumstance the member can charge GST on the services provided to the board, committee, panel, review group or task force.

Consultation on Available Subscribed Capital record keeping

On 9 December 2021, Inland Revenue released a draft Operational Statement ED0239 - Available Subscribed Capital record keeping requirements, with submissions closing on 11 February 2022. Key points discussed include what a dividend is and the purpose of available subscribed capital (ASC). The purpose of calculating ASC is to determine the amount of capital that shareholders have paid into the company when subscribing for shares. The amount is usually returned to the shareholder tax free when there is a repurchase of shares or the company is liquidated. However, there are concerns over the calculation of ASC, particularly in the case of ASC uplift. Often taxpayers been unable to provide sufficient information when requested, as they have not retained sufficient records to substantiate their tax positions taken at the time that distribution was made, especially if the time period between the ASC uplift and distribution exceeds seven years.

The Commissioner’s view is that the onus of proof is on the taxpayer to show the basis for their self-assessment is correct (i.e., their tax position that the distribution is excluded from being a dividend because it is sheltered by ASC under s CD 22 or CD 26 of the Income Tax Act 2007). The formula for calculating ASC includes the 1 July 1994 balance date and consideration the company received for the issue of shares after 30 June 1994. Given this requirement, the calculation of ASC can require consideration of circumstances that happened more than seven years ago. A taxpayer taking a tax position based on the company’s level of ASC would need to be able to substantiate that ASC calculation, irrespective if the events feeding into the calculation happened more than seven years ago.

New COVID-19 Variation in relation to the definition of “finance lease”

On 14 December 2021, Inland Revenue issued a new COVID-19 Variation COV 21/06 - Variation in relation to the definition of “finance lease” in s YA 1 of the Income Tax Act 2007. This variation applies to the time period of “more than 75% of the asset’s estimated useful life” referred to in paragraph (b) of the definition of “finance lease” in s YA 1 of the Income Tax Act 2007 is extended to “more than 75% of the asset’s estimated useful life plus an additional 18 months” where the term of the lease is extended between 17 August 2021 and 31 March 2022.

This variation is subject to the following conditions:

• The lease was entered into before 14 February 2020.
• The lease term was not more than 75% of the estimated useful life when the lease was entered into.
• The lease term is not extended more than 18 months beyond the end of its term as at 14 February 2020.
• The lease was extended because, in the period between 17 August 2021 and 31 March 2022, the lessee’s business has experienced a significant decline in actual or predicted revenue due to COVID-19, and the lessee has been able to extend the lease term in return for reduced or deferred lease payments.

This variation applies from 14 December 2021 to 31 March 2022.

Elections not to depreciate commercial buildings

On 16 December 2021, Inland Revenue published QB 21/11 – Elections not to depreciate commercial buildings. Prior to 2021, the depreciation rate for commercial buildings was 0%. However, as part of the COVID-19 response, commercial building owners were able to claim a depreciation loss at either 2% diminishing value or 1.5% straight-line. This statement outlines that where a taxpayer has made an election to treat their commercial building as not being depreciable property, that election is irrevocable, and the taxpayer is bound by that election until the building is disposed of. For this election to be effective, it must be made in writing.

If the taxpayer does not make an election and claims a depreciation loss for their commercial building, then they must continue to depreciate that building at the rate the Commissioner has set. A taxpayer who does not make a written election and has never claimed a deduction for a depreciation loss on their commercial building may make a retrospective election not to depreciate that building. This election will apply from the date the taxpayer acquired the building.

Calculating a foreign tax credit

On 22 December 2021, Inland Revenue published an interpretation statement IS 21/09 - Income tax - foreign tax credits - how to calculate a foreign tax credit under subpart LJ of the Income Tax Act 2007. A New Zealand resident who derives assessable income from a foreign source may be entitled to a foreign tax credit for foreign income tax paid on that income. To calculate the foreign tax credit, the foreign-sourced income is divided into segments. The foreign-sourced income must first be divided by country and then further divided by source or by nature. After the foreign-sourced income has been segmented, the person’s notional New Zealand income tax liability must be calculated. A formula is then applied to find the amount of New Zealand tax payable on each segment of foreign-sourced income. Any expenditure incurred must be attributed to each segment, and some adjustments may be required. The person is then entitled to a foreign tax credit for the foreign tax paid on the segment, up to a maximum of the amount of New Zealand tax payable on that segment.

Foreign investment fund

On 5 January 2022, Inland Revenue published a determination FDR 2021/04 – A type of interest in a foreign investment fund for which a person may not use the fair dividend rate method (Dimensional Trusts – Global Bond Sustainability Trust NZD Class). Any investment by a New Zealand resident investor in the NZD class of units of the Dimensional Trusts Global Bond Sustainability Trust, to which none of the exemptions in ss EX 29 to EX 43 of the Income Tax Act 2007 apply, is a type of attributing interest for which the investor may not use the fair dividend rate method to calculate foreign investment fund income for the interest. This determination applies for the 2022 income year and subsequent income years.

Research and Development Tax Incentive: Guidance

Inland Revenue has updated the Research and Development Tax Incentive (RDTI) guidance. Changes made in this latest version include:

• Refreshed material in response to questions received from stakeholders on topics including eligible R&D activity.
• Updated information on claiming the tax credit, to reflect further progress on operational design.

Inland Revenue has also clarified that core activities begin once taxpayers have identified their scientific or technological uncertainty and decided to take a planned approach to resolving that problem. This means the core activity may start when taxpayers are designing the approach they will take to test possible solutions to the scientific / technological uncertainty.

Inland Revenue Annual Report

Inland Revenue has released its annual report for the year ended 30 June 2021. The following points may be of interest:

• Inland Revenue is always monitoring taxpayer behaviour to identify and address issues early before they become too onerous for taxpayers to deal with and before patterns of behaviour become too established. Inland Revenue adjusts and issues warnings to taxpayers attempting to adjust or repeatedly alter information in their myIR accounts to reduce their tax. This year Inland Revenue prevented over $5 million in incorrect claims for expenses related to residential rental returns and ring-fencing of losses.
• This year $16.4 million in use of money interest has been written off for 94,000 taxpayers; reintroduction of depreciation on commercial buildings from 2020-21 is forecast to provide businesses with $2 billion in 2023-24; 5,000 taxpayers have applied for a loss carry back in the 2019 or 2020 tax year with the monetary benefit of loss carry back being $158.4 million; an increase in the threshold for low value write-offs until March 2021 is forecast to provide businesses with $596 million over 2023-24.
• Inland Revenue has improved the stress of an audit by reducing the time taken to complete a pre-audit review and an audit by an average of 14 days. Inland Revenue has continued to review taxpayers with complex structures or tax interpretation issues. These reviews resulted in tax position differences of $377 million. Inland Revenue closed approximately 16,140 audit cases, compared to 16,669 in 2019-20 and 12,294 in 2018-19. Across investigations Inland Revenue identified tax position differences of $854 million.
• Inland Revenue can confidently assure a large portion of New Zealand’s corporate tax base without needing to default to audits, which are expensive for IR and taxpayers. For instance, only 10% of the Multinational Enterprises contacted this year needed a more in-depth follow-up review.

Global Anti-Base Erosion Model Rules (Pillar Two) Proposals

On 20 December 2021, the G20/OECD Inclusive Framework on BEPS published Tax Challenges Arising from the Digitalisation of the Economy Global Anti-Base Erosion Model Rules (Pillar Two). A summary of the model rules (known as GloBE) prepared by Deloitte UK and US International Tax experts can be viewed here. The rules aim to ensure that large multinational groups pay corporate income taxes at a minimum of 15% in every country in which they operate. These rules are intended to apply to multinational groups with an annual consolidated revenue of at least EUR750 million in at least two of the four immediately preceding income years.

The Income Inclusion Rule (main rule) applies on a top-down basis so tax due is calculated and paid by the ultimate parent company to the tax authority in its country. The tax due is the “top up” amount required to bring the overall tax on the profits in each country where the group operates up to the minimum effective tax rate of 15%. The Undertaxed Payments Rule applies as a secondary rule in cases where the effective tax rate in a country is below the minimum rate of 15%, but the Income Inclusion Rule has not been fully applied. The top up tax is allocated to countries which have adopted the undertaxed payments rules based on a formula. The annual effective tax rate calculation required for each country considers the total covered taxes, profits, and losses attributable to all the group companies in that country, as calculated under specific Pillar Two rules.

Transfer pricing guidelines for Multinational Enterprises and Tax Administrations

On 20 January 2022, the OECD released the January 2022 edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. These guidelines provide guidance on the application of the “arm’s length principle” which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises. This January 2022 edition includes the revised guidance on the application of the transactional profit method and the guidance for tax administrations on the application of the approach to hard-to-value intangibles agreed in 2018, as well as the new transfer pricing guidance on financial transactions approved in 2020.

New transfer pricing profiles for 21 countries

The OECD has released the second batch of updated transfer pricing country profiles for Austria, Belgium, Bulgaria, France, Georgia, Germany, Indonesia, Ireland, Italy, Latvia, Malaysia, Mexico, Peru, Poland, Seychelles, Singapore, South Africa and Sweden. The transfer pricing country profiles contains information on key aspects of transfer pricing legislation and practice. The information on the country profiles reflects the current state of legislation and practice in each country regarding key transfer pricing aspects, including the arm's length principle, methods, comparability analysis, intangible property, intra-group services, financial transactions, and documentation. The New Zealand transfer pricing country profile was published previously and is available here.

Measuring effective Taxation of housing

On 12 January 2022, the OECD released a working paper on Measuring effective taxation of housing – Building the foundations for policy reform. This paper measured the effective taxation of housing investments in 40 OECD member and partner countries. The paper finds that the level and components of housing taxation depend greatly on the investment scenario. Effective tax rates vary substantially depending on the holding period, rate of return, tenure (owner-occupied or rented), financing scenario and the inflation rate. The effective tax rates do not vary much with the taxpayer’s income and wealth or with the rate of return.

An Australian perspective on the Multilateral Instrument

Deloitte Australia has published a very good summary of the Australian perspective on the Multilateral Instrument (MLI). The MLI is an outcome of the BEPS Action 15 and is designed to swiftly implement the tax treaty-related measures arising from the G20/OECD BEPS project, without the need to renegotiate each double tax treaty. The MLI is expected (over time) to modify more than 1,600 double tax treaties.

The way the MLI impacts a particular double tax treaty will depend upon the respective MLI positions of the two countries – so the impact will differ between treaty to treaty. Generally, it is only where both countries have adopted a MLI position that the MLI will relevantly modify the particular tax treaty. As such, where Australia has opted out of a MLI provision, that provision will generally not impact the relevant treaty, irrespective of the position of the treaty partner.

Note: The items covered here include only those items not covered in other articles in this issue of Tax Alert.