Negotiations concluded on New Zealand European Union free trade deal

On 1 July 2022, New Zealand and the European Union (EU) concluded negotiations on a free trade agreement (FTA) on 30 June 2022.

In a press release by the government, the following outcomes relating to tax were noted:

• Duty-free access on 97% of New Zealand’s current exports to the EU, with over 91% being removed the day the FTA comes into force.
• New Zealand exporters set to save approximately $110 million per annum on tariff elimination, with $100 million slashed from day one.
• Immediate tariff elimination for all kiwifruit, wine, onions, applies mānuka honey and manufactured goods, as well as almost all fish and seafood, and other horticulture products.

Signing of the FTA is expected to be in 2023. Once the FTA is signed, both sides will begin their legal processes to bring the FTA into force. This could occur in 2024, subject to domestic processes on both sides.

Parliament written questions and answers - Penalty and Interest Remission Figures

On 6 July 2022, Andrew Bayly asked the Minister of Revenue, Honourable David Parker, “How many sole traders, partnerships, and companies, if any, have requested remission of interest and penalties for late payments, and how much has been waived in total in each month for the last five years since the 2017/2018 financial year?” We thought the answer made interesting reading:

The late payment penalties and interest remitted for individuals (incl. sole traders), companies and partnerships between 2020 and 2022 are summarised below:

Interpretation Statement – Variation to section 68CB(2) of the Tax Administration Act 1994

On 6 June 2022, Inland Revenue published COV 22/19 - Variation to section 68CB(2) of the Tax Administration Act 1994 (“TAA 1994”). This variation applies to a person who is seeking the Commissioner of Inland Revenue’s approval of their research and development activities by filing a general approval application for the 2021–22 income year under section 68CB of the TAA 1994.

The variation recognises that the impact of COVID-19 means the planning or conduct of research and development or the ability to obtain information, seek advice and formulate an application or complete a return, for some taxpayers has been materially delayed.

The variation extends from 7 August 2022 to 30 September 2022 the time by which a person with a 30 June balance date, to be entitled to research and development tax credits under section LY 1 of the Income Tax Act 2007, must apply for a general approval for the 2021–22 income year.

The variation applies from 6 July 2022 to 30 September 2022.

Operational Statement – Authority to Act for Tax Agents and other Intermediaries and Nominated Persons

On 6 June 2022, Inland Revenue published OS 22/03 - Authority to Act for Tax Agents and other Intermediaries and Nominated Persons. This statement prescribes how a tax agent or a representative can obtain the authority to act from their clients. This Statement sets out information about:

• Who may give an authority to act;
• What the authority to act should cover;
• The requirements for obtaining authority to act electronically;
• The requirement to keep a record of the client’s authority and identity verification documents; and
• Inland Revenue’s process for auditing these documents.

The statement includes an example of an authority to act form.
This statement applies from 6 July 2022.

Draft QWBA – Interest deductibility where amount not determined at balance date

On 28 June 2022, Inland Revenue published PUB00415 - Can a close company deduct interest on a shareholder advance where the amount is not known until after balance date? The proposed answer to this QWBA is yes.

This QWBA updates the Public Information Bulletin No. 130 on “Deductibility of interest, the quantum of which has not been determined at balance date” (September 1984:7) to reflect changes in case law on when expenditure is incurred. It also sets out the resident withholding tax consequences of interest payments made to shareholder current accounts.

In this QWBA, it is proposed that a close company can make such deductions if it has a legal obligation to pay the interest on the shareholder advance based on a previously agreed formula or method. The company must have the legal obligation, including a method of calculating the liability, before its balance date, which is usually 31 March. Companies need to keep records of the method they used to determine the amount of interest owing and of the legal obligation to pay the interest.

The deadline for comment is 9 August 2022.

Interpretation Statement – Tax depreciation rate for hydrofraise rigs

On 14 July 2022, Inland Revenue published DEP 108 - Tax depreciation rates for hydrofraise rigs available for use in the ordinary course of business. Hydrofraise rigs are used to build diaphragm (water blocking) type retaining walls. Diaphragm walls are often constructed in wet areas where groundwater will tend to flood an excavated area. The construction of the wall must therefore keep water out, as well as being strong enough to stop surrounding ground from collapsing into the excavation.

The determination applies to the 2021–22 and subsequent income years.

Public Rulings – GST and directors’ fees and board members’ fees

On 14 July 2022, Inland Revenue published 3 draft public rulings on the GST treatment of directors’ and board members’ fees:

• Goods and Services Tax — Directors’ fees
• Goods and Services Tax — Fees of Board Members not appointed by the Governor-General or Governor-General in Council
• Goods and Services Tax — Fees of Board Members appointed by the Governor-General or Governor-General in Council.

In summary:

• If a GST-registered person accepts an office as a director or board member in carrying on their taxable activity, the fees that person receives for providing their services are subject to GST;
• Where the director or board member has been engaged in their capacity as an employee, they may be required to account for their fees to their employer, in which case the employer is treated as making the supply of services, not the director (and so directors’ fees will be subject to GST if the employer is GST registered);
• Where the director or board member has been engaged in their capacity as a partner in a partnership, the partnership is deemed to make the supply of services, rather than the director;
• If a board member is appointed by the Governor-General or the Governor-General in Council, the services that the board member provides will always be excluded from the definition of “taxable activity”.

A flowchart illustrating the GST treatment of these fees from a director’s or board member’s perspective is in Appendix 1. 

PUB000424 will replace Public Ruling BR Pub 15/10: “Goods and services tax – directors’ fees” as the draft ruling includes 2 new rulings addressing the GST treatment of board members’ fees.

The deadline for comment is 17 August 2022.

Inland Revenue – Sharing the secrets of successful business transformation

On 15 July 2022, Inland Revenue announced that they have launched a website making the detail behind its successfully completed $1.5 billion transformation programme available to other agencies and organisations. The Business Transformation Programme (BT) was officially closed off last month and Inland Revenue Deputy Commissioner, Greg James, says they have had many requests to share what has been learned in delivering it. You can access the BT website here.

Interpretation Statement – Claiming depreciation on buildings

On 20 July 2022, Inland Revenue published IS 22/04 - Claiming depreciation on buildings. This interpretation statement provides guidance to building owners on when they can claim depreciation on buildings. It considers the meaning of “building” for depreciation purposes and the distinction between residential and non-residential buildings. This statement is also accompanied by a fact sheet.

Notably, Inland Revenue has incorporated a number of Deloitte recommendations from our submission on the draft statement, please contact your usual Deloitte advisor if you have any queries on building depreciation.

Inland Revenue and the Ministry of Social Development child support information sharing change

From 1 July 2023, child support collected by Inland Revenue will be passed on directly to sole parents on a benefit.

Child support is counted as income when the Ministry of Social Development (MSD) works out a benefit payment. Currently, MSD must give clients 10 working days to respond to them changing a benefit based on the child support received. Those 10 working days mean MSD is not able to change benefit payment based on Inland Revenue collected child support. This could mean taxpayers get underpaid, or overpaid, and end up with a debt.

Inland Revenue and MSD would like to remove the 10 working day response period from the information sharing agreement they have. Consultation on this is open to the public and will close on 17 August 2020.

International Tax Update – Simplification Measures for Transfer Pricing

On 20 July 2022, Inland Revenue has completed its annual review of the small value loans simplification measure and updated the measure. For small value loans (that is, for cross-border associated party loans by groups of companies for up to $10 million principal in total), Inland Revenue currently consider 250 basis points (2.5%) over the relevant base indicator is broadly indicative of an arm's length rate, in the absence of a readily available market rate for a debt instrument with similar terms and risk characteristics. The rate previously, from 1st July 2020 to 30 June 2022 was 375 basis points over the relevant base indicator. Transactions priced in accordance with this simplification measure are likely to present a low transfer pricing risk and as such no further benchmarking is required. You can find more information about this here.

Inland Revenue has also updated the information on their APA inventory published on their website. In the year ended 30 June 2022 a further 19 APAs were completed.

Reissued Draft Interpretation Statement – Loss carry-forward – continuity of business activities

On 21 July 2022, Inland Revenue published PUB00376 - Loss carry-forward – continuity of business activities. This draft interpretation statement has been released for public consultation. The statement provides guidance on how the main aspects of the business continuity test in s IB 3 of the Income Tax Act 2007 apply. The business continuity test may enable a company to carry forward tax losses despite a breach in ownership continuity if certain requirements are satisfied.

The deadline for comment is 1 September 2022.

Interpretation Statement – Cash basis persons under the FA rules

On 27 July 2022, Inland Revenue published IS 22/05 - Cash basis persons under the financial arrangements rules, together with an accompanying fact sheet.

This interpretation statement explains when a person can account for income and expenditure from financial arrangements on a cash basis instead of an accrual basis. It also sets out the adjustment that must usually be made when a person ceases to be a cash basis person (cash basis adjustment) and must account for their financial arrangements using accrual basis. The statement includes worded examples and a fact sheet.

The statement answers a specific question that arose from IS 20/07, Income tax – Application of the financial arrangements rules to foreign currency loans used to finance foreign residential rental property on the cash basis adjustment. The new statement revisits the meaning of cash basis person and details how to perform a cash basis adjustment.

Fact Sheet – Donations – What is required to maintain a public fund?

On 27 July 2022, Inland Revenue published QB 22/02 FS - Income tax - Donations – what is required to establish and maintain a “public fund” under s LD 3(2)(d) of the Income Tax Act 2007? The 6-page fact sheet summarises the conclusions reached in the QWBA that was issued in April 2022: QB 22/02, “Donations – what is required to establish and maintain a “public fund” under s LD 3(2)(d) of the Income Tax Act 2007?"

Corporate Tax Residency – COVID-19 guidance

On 31 July 2022 concessional COVID-19 corporate tax residency rules ceased to apply. This guidance dealt with tax issues which could arise when director control over a company was impacted by the inability of directors to easily travel. Inland Revenue’s guidance now states: “From 31 July 2022 changes to border restrictions mean that generally it is no longer the case that directors are unduly restricted in movement between countries. It remains the case that the occasional exercise of control by the directors from New Zealand, for example through a board meeting, will not make the company tax resident in New Zealand. IS 16/03 contains our interpretation of matters relating to company residence. We will continue to monitor any impacts of the COVID-19 pandemic.”

ATO: Central Management and Control Test (CMAC) of residency changes

On 29 June 2022, the ATO published PCG 2018-9, which updated certain rules on residency. The Guideline contains practical guidance to assist foreign incorporated companies and their advisors to apply the principles set out in Taxation Ruling TR 2018/15 Income tax: central management and control test of residency.

The ATO has extended their transitional compliance approach in relation to the corporate tax residency rules to 31 December 2022. This means that foreign incorporated companies are not expected to apply compliance resources to assess corporate residency until after this date if the foreign incorporated company was not treated as a resident in Australia under the tax ruling TR 2004/15 which applied before the current tax ruling TR 2018/5 and the company changes its governance arrangements so that its CMAC is outside of Australia by the end of the transitional period.

Global Forum members’ Competent Authorities exchange on their practices and experiences

The 9th Competent Authorities meeting was held virtually on 30 June and 1 July 2022. The event brought together 355 participants from 106 jurisdictions.

Discussions covered the implementation of both the exchange of information on request (EOIR) and the automatic exchange of financial account information (AEOI) standards. Competent Authorities exchanged on specific practical matters related to EOIR, such as the translation of the answers provided, the feedback on the usefulness of the answers received and the sending of a status update in the case of a delayed answer, as well as the impact of court cases on the EOI process. The meeting also provided the opportunity to explore more advanced forms of international cooperation, such as simultaneous tax examination.

International tax reform agreement progressing

On 11 July 2022, the OECD issued the OECD Secretary-General Tax Report to the G20 finance ministers and central bank governors stating that the implementation of the international tax reform agreement to ensure multinational enterprises pay a fair share of tax wherever they operate is progressing. The report includes a new Progress Report on Pillar One, presenting a comprehensive draft of the technical model rules to implement a new taxing right that will allow market jurisdictions to tax profits from some of the largest multinational enterprises (Pillar One). This report will now be subject to public consultation through 19 August 2022. The Inclusive Framework will then aim to finalise a new Multilateral Convention by mid-2023 for entry into force in 2024. The revised timeline is designed to allow greater engagement with citizens, business and parliamentary bodies which will ultimately have to ratify the agreement.

Technical work under Pillar Two, which introduces a 15% global minimum corporate tax rate, is largely complete, with an implementation framework to be released later this year to facilitate implementation and coordination between tax administrations and taxpayers. All G7 countries, the European Union, several G20 countries and many other economies have now scheduled plans to introduce the global minimum tax rules.

Efficiency, effectiveness and equity of housing taxation can be improved

Improving the efficiency, effectiveness and equity of housing taxation as part of an overall tax policy mix can help improve the functioning of housing markets, improve fairness and equity and help raise more revenue better, according to a new OECD report. Housing Taxation in OECD Countries provides an assessment of the wide range of taxes governments levy on residential property. The report shows that while housing taxes play an important role in OECD countries, there is substantial room for reforms to enhance their equity, economic efficiency and revenues.

Tax revenues in Asia and the Pacific hit hard by the COVID-19 crisis

On 25 July 2022, OECD released a report showing that tax revenues in Asia and the Pacific fell by 1.2% to 19.1% of GDP on average in 2020 because of the COVID-19 pandemic. Revenue Statistics in Asia and the Pacific 2022 provides harmonised data on tax revenues for 28 economies in the region. The report reveals that the average tax-to-GDP ratio in Asia-Pacific was 19.1% in 2020, lower than the averages for the OECD and Latin America and the Caribbean (LAC). Between 2019 and 2020, tax-to-GDP ratios fell in 19 of the 26 economies for which 2020 data are available.

New results show progress continues in combatting harmful tax practices

As of 27 July 2022, further progress has been made on the implementation of the international standard on harmful tax practices as the OECD/G20 Inclusive Framework on BEPS agrees new conclusions on preferential tax regimes and substance in no or only nominal tax jurisdictions.

At its April 2022 meeting, the Forum on Harmful Tax Practices (FHTP) agreed new conclusions on 12 regimes as part of the implementation of the BEPS Action 5 minimum standard on harmful tax practices. Eswatini and Honduras made government commitments, and therefore, three regimes are now in the process of being amended/eliminated. Three regimes have been amended to be in line with the standard and are now not harmful (Costa Rica, Greece and Kazakhstan). Italy abolished its patent box regime. Furthermore, three regimes were concluded as potentially harmful (Armenia and Pakistan); the FHTP will assess at its next meeting if these regimes are actually harmful. Finally, one new regime from Cabo Verde is under review.

Deloitte Global News and Resources

2022 Global Tax Survey: Beyond BEPS

The annual Deloitte Global Tax Survey of multinationals provides valuable insight into the strategies of some of the world’s largest multinational companies in the face of changes in the international tax framework. In this survey Deloitte asked tax and finance managers and executives from across the globe about topics that were high on their agenda in 2022:

• The Pillar One/Pillar Two project
• Tax governance
• Tax transparency
• Digital taxation
• Effect of EU tax directives on tax compliance
• Progress of BEPS related measures

Some key points from the survey:

• Tax governance remains high on the Board’s agenda.
• The Pillar One/Pillar Two project remains a ‘hot topic’ and businesses are preparing for impact.
• Voluntary tax transparency standards are increasingly being adopted by businesses.
• EU tax directives are seen as increasing rather than simplifying tax compliance.

The full survey results, an executive summary, a narrative paper, and an infographic can be found on Deloitte.com.

Deloitte and SAP – Transforming Tax Together

You can now check out the Deloitte and SAP: Transforming Tax Together website and learn how Deloitte and SAP are supporting customers’ tax departments with their digital transformation enabled by SAP S/4HANA Cloud, analytics, and next-generation best practices.

Global Trends in Tax Controversy

The 2022 Deloitte Tax Controversy Research Report “Age of Controversy”, conducted by the International Tax Review, surveyed more than 300 companies around the globe and across all major sectors. The survey’s goal is to illuminate the most frequent areas for controversy, how companies formulate responses and what drives their decision-making. The survey concluded that:

• Tax controversy levels have risen, and involve multiple jurisdictions
• Disputes are taking longer to resolve
• Experience is crucial in resolving controversies
• Companies value a strong, established relationship with tax authorities
• Companies value advisors with prior experience in tax controversy cases
• It is important to embed strong dispute resolution processes in the wider tax governance and keep senior management in the loop
• Companies have responded by hiring dedicated resource in tax departments
• “Best in class” businesses typically support in-house teams with a combination for risk and project management tools, external advisors, good comms channels with internal and external stakeholders and a well-understood decision tree

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