2009 International Tax Disclosure Exemption

Introduction

Section 61 of the Tax Administration Act 1994 (TAA) requires disclosure of interests in foreign entities.

Under section 61(1) of the TAA, a person who has a control or income interest in a foreign company or an attributing interest in a foreign investment fund (FIF) at any time during an income year must disclose the interest held.¹ However, section 61(2) allows the Commissioner of Inland Revenue to exempt any person or class of persons from this requirement if disclosure is not necessary for the administration of the international tax rules (as defined by section YA 1) contained in the Income Tax Act 2007 (ITA).

To balance the revenue forecasting and risk assessment needs of the Commissioner with the compliance costs of taxpayers providing the information, the Commissioner has issued an international tax disclosure exemption under section 61(2) which applies for the income year corresponding to the tax year ended 31 March 2009. This exemption may be cited as “International Tax Disclosure Exemption ITR20” and the full text appears at the end of this item.

Scope of exemption

The scope of the 2009 disclosure exemption is the same as for the 2008 exemption.

Interests held by residents

Disclosure is required by residents holding these interests:

1. an attributing interest in a FIF in respect of which FIF income or FIF loss arises where the:
   1. branch equivalent, accounting profits, deemed rate of return or cost method of calculation is used, or
   2. fair dividend rate or comparative value method of calculation is used and the resident is a “widely held entity”, or
   3. fair dividend rate or comparative value method of calculation is used and the resident is not a widely held entity. In this case disclosure is required if the FIF in which there is an attributing interest is incorporated (in the case of a foreign company) or otherwise tax resident, in a country with which New Zealand does not have a double tax agreement in force as at 31 March 2009. The countries with which New Zealand does have a double tax agreement in force as at 31 March 2009 are listed below.

No disclosure is required by non-widely held taxpayers for attributing interests in FIFs that are incorporated or tax resident in a treaty country, if the fair dividend rate or comparative value methods of calculation are used.

A widely held entity for the purposes of this disclosure is one which is a:

• portfolio investment entity (this now includes a portfolio investment-linked life fund), or
• widely held company, or
• widely held superannuation fund, or
• widely held GIF.

Portfolio investment entity, widely held company, widely held superannuation fund and widely held GIF are all defined in section YA 1 of the ITA.

The disclosure required by widely held entities of attributing interests in FIFs which use the fair dividend rate or the comparative value method of calculation is that, for each calculation method, they disclose the end-of-year New Zealand dollar market value of investments split by the jurisdiction in which the attributing interest in a FIF is held or listed. A split by the currency in which the investment is held, will be also accepted as long as it is a reasonable proxy - that is at least 90-95% accurate - for the underlying jurisdictions. For example, investments denominated in euros will not be able to meet this test and so euro-based investments will need to be split into the underlying jurisdictions.

2. an income interest of 10% or more held in a foreign company. The disclosure obligation applies in respect of all foreign companies regardless of the country of residence. For this purpose the following interests are counted:
   1. an income interest held directly in a foreign company
   2. an income interest held indirectly through any interposed foreign company
   3. an income interest held by an associated person (not being a controlled foreign company) as defined by the parts of subpart YB of the ITA that apply for the purposes of the “1988 version provisions”.

For determining an income interest of 10% or more for controlled foreign companies, sections EX 14 to EX 17 of the ITA apply.  For determining an income interest of 10% or more for entities that are not controlled foreign companies (CFCs), for the purpose of this exemption, sections EX 14 to EX 17 of the ITA are to be applied as if the foreign company were a CFC.

Foreign company interests

Under section 61, a resident who holds a control or income interest in a foreign company must disclose that interest, regardless of the company's country of residence. The 2009 international tax disclosure exemption also makes no distinction about residence for any interest in a foreign company which is an income interest of 10% or more. Disclosure is to be made on an IR477 or IR479 Interest in a foreign company disclosure schedule form.

The disclosure exemption makes no distinction on the residence of a foreign company with income interests of 10% or more for these reasons:

• attributed (non-dividend) repatriation rules apply to an income interest of 10% or more in a CFC regardless of the CFC’s country of residence
• identifying tax preferences applied by the taxpayer (whether or not specified in Schedule 24, Part B of the ITA) in respect of an interest held in a foreign company which is resident in the “grey list”, that is, a jurisdiction listed in schedule 24, Part A of the ITA (Australia, Canada, Federal Republic of Germany, Japan, Norway, Spain, United Kingdom and the United States of America).

Foreign investment fund interests

The types of interest that fall within the scope of section 61(1) of the TAA are:

• rights in a foreign company or anything deemed to be a company for the purposes of the ITA (eg, a unit trust)
• an entitlement to benefit from a foreign superannuation scheme
• an entitlement to benefit from a foreign life insurance policy
• an interest in an entity specified in schedule 25, part A of the ITA (no entities were listed when this TIB went to press).

However, the following interests are exempt (under sections EX 31 to EX 43) from being an attributing interest in a FIF and do not have to be disclosed:

• an income interest of 10% or more in a CFC (separate disclosure is required of this as an interest in a foreign company)
• certain interests in Australian resident companies listed on an approved index of the Australian Stock Exchange and required to maintain a franking account
• an interest in an Australian unit trust that has an RWT proxy with either a high turnover or high distributions
• an interest of 10% or more in a foreign company that is treated as resident in a country or territory specified in the grey list
• an interest in certain grey-list companies.  Only interests in Guinness Peat Group plc qualify for this exemption
• an interest in an employment-related foreign superannuation scheme
• certain foreign pensions or annuities.  See Inland Revenue's booklet Overseas private pensions (IR 257) for more information
• an interest in certain venture capital investments in New Zealand resident start-up companies that migrate to a grey list country
• an interest in certain grey list companies owning New Zealand venture capital companies
• an interest in certain grey list companies resulting from shares acquired under a venture investment agreement
• an interest in certain grey list companies resulting from the acquisition of shares under an employee share scheme
• an interest held by a natural person in a foreign entity located in a country where exchange controls prevent the person deriving any profit or gain or disposing of the interest for New Zealand currency or consideration readily convertible to New Zealand currency.

Interests in foreign entities held by a natural person not acting as a trustee also do not have to be disclosed if the total cost of the interests remains under $50,000 at all times during the income year. This disclosure exemption is made because no FIF income under section CQ 5 or FIF loss under section DN 6 arises in respect of these interests.

The respective forms to use for whichever FIF calculation method you apply are as follows:²

• IR439 form for the accounting profits method
• IR440 form for the branch equivalent method
• IR 443 form for the deemed rate of return method
• IR 445 form for the fair dividend rate method by widely held entities
• IR 446 form for the comparative value method by widely held entities
• IR 447 form for the fair dividend rate by individuals or non-widely held entities
• IR 448 form for the comparative value method by individuals or non-widely held entities
• IR 449 for the cost method

Overlap of interests

A situation may arise where a person is required to furnish a disclosure for an interest in a foreign company which is also an attributing interest in a FIF.  For example, a person with an income interest of 10% or greater in a foreign company which is not a CFC is strictly required to disclose both an interest held in a foreign company and an attributing interest held in a FIF.

However, to meet the disclosure obligations, only one disclosure return (either the IR477 or IR479 form, or the IR439, IR440, IR443, IR 445, IR 446, IR 447, IR 448 or IR 449 form) is required for each interest, or group of interests in the case of fair dividend rate or comparative value method, a person holds in a foreign entity.

Here are the general rules for determining which disclosure return to file:

1. Use the appropriate IR439, IR440, IR443, IR 445, IR 446, IR 447, IR 448 or IR 449 form to disclose all attributing interests in FIFs, and in particular:
   • an income interest of less than 10% in a CFC
   • an interest in a foreign life insurance policy or foreign superannuation scheme
2. Use an IR477 or IR479 form to disclose:
   • an income interest of 10% or more in a foreign company (regardless of the country of residence) that is not being disclosed on an IR439, IR440, IR443, IR 445, IR 446, IR 447, IR 448 or IR 449 form.

Disclosure is not required on any of the forms for an income interest of less than 10% in a foreign company (whether a CFC or not) which is also not an attributing interest in a FIF or is an attributing interest in a FIF in respect of which no FIF income or loss arises under sections CQ 5(1)(d) or DN 6(1)(d).  Examples include an interest which is covered by the Australian listed company exemption from the FIF rules or interests held by a natural person, not acting in the capacity of a trustee, with a total cost of below $50,000.

Interests held by non-residents and transitional residents

Interests held by non-residents and transitional residents in foreign companies and FIFs do not need to be disclosed.

This would apply for example to an overseas company operating in New Zealand (through a branch) in respect of its interests in foreign companies and FIFs or to a transitional resident with interests in a foreign company or an attributing interest in a FIF.

The purpose of the international tax rules is to make sure that New Zealand residents are taxed on their share of the income of any overseas interests they hold.  However, under the international tax rules non-residents and transitional residents are not required to calculate or attribute income under the CFC or FIF rules.  The disclosure of non-residents' or transitional residents' holdings in foreign companies or FIFs is not necessary for the administration of the international tax rules. 

Summary

The 2009 international tax disclosure exemption removes the requirement of a resident to disclose:

• a less than 10% interest in a foreign company that is not an attributing interest in a FIF or is an attributing interest in a FIF in respect of which no FIF income or loss arises
• where the taxpayer is not a widely held entity, an attributing interest in a FIF that does not constitute an income interest of 10% or more (ie, it is less than 10%) where the foreign entity is incorporated (in the case of a company) or otherwise tax resident in a treaty country, and the fair dividend rate or comparative value method of calculation is used.
• where the taxpayer is a widely held entity, it limits disclosure to the end-of-year New Zealand dollar market value of investments split by the jurisdiction in which the attributing interest in a FIF is held or listed in cases where the fair dividend rate or comparative value method is used.

The 2009 disclosure exemption also removes the requirement for a non-resident or transitional resident to disclose interests held in foreign companies and FIFs.

Persons not required to comply with section 61 of the Tax Administration Act 1994

This exemption may be cited as “International Tax Disclosure Exemption ITR20”.

1. Reference

This exemption is made under section 61(2) of the Tax Administration Act 1994. It details interests in foreign companies and attributing interests in foreign investment funds (FIFs) in relation to which any person is not required to comply with the requirement in section 61 of the Tax Administration Act 1994 to make disclosure of their interests, for the income year corresponding to the tax year ending 31 March 2009.

2. Interpretation

For the purpose of this disclosure exemption to determine an income interest of 10% or more, sections EX 14 to EX 17 of the Income Tax Act 2007 apply for interests in controlled foreign companies. In the case of attributing interests in FIFs, those sections are to be applied as if the FIF were a CFC.

The relevant definition of associated persons is contained in the parts of subpart YB of the Income Tax Act 2007 that apply for the purposes of the “1988 version provisions”.

Otherwise, unless the context requires, expressions used have the same meaning as in section YA 1 of the Income Tax Act 2007.

3. Exemption

1. Any person who holds an income interest of less than 10% in a foreign company, including interests held by associated persons, that is not an attributing interest in a FIF, or that is an attributing interest in a FIF in respect of which no FIF income or loss arises under either section CQ 5(1)(d) or section DN 6(1)(d), is not required to comply with section 61(1) of the Tax Administration Act 1994 for that interest and that income year.
2. Any person who is a portfolio investment entity, widely-held company, widely-held superannuation fund or widely-held GIF, who has an attributing interest in a FIF, other than a direct income interest of 10% or more in a foreign company that is not a foreign investment vehicle, and uses the fair dividend rate or comparative value calculation method for that interest, is not required to comply with section 61(1) of the Tax Administration Act 1994 in respect of that interest and that income year, if the person discloses the end-of-year New Zealand dollar market value of investments, in an electronic format prescribed by the Commissioner, split by the jurisdiction in which the attributing interest in a FIF is held or listed.
3. Any person who is not a portfolio investment entity, widely-held company, widely-held superannuation fund or widely-held GIF, who has an attributing interest in a FIF, other than a direct income interest of 10% or more, and uses the fair dividend rate or comparative value calculation method is not required to comply with section 61(1) of the Tax Administration Act 1994 in respect of that interest and that income year, to the extent that the FIF is incorporated or tax resident in a country with which New Zealand has a double tax agreement in force at 31 March 2009.
4. Any non-resident person or transitional resident who has an income interest or a control interest in a foreign company or an attributing interest in a FIF in the income year corresponding to the tax year ending 31 March 2009, is not required to comply with section 61(1) of the Tax Administration Act 1994 in respect of that interest and that income year if either or both of the following apply:
   • no attributed CFC income or loss arises in respect of that interest in that foreign company under sections CQ 2(1)(d) or DN 2(d) and/or
   • no FIF income or loss arises in respect of that interest in that FIF under sections CQ 5(1)(f) or DN 6(1)(f).

This exemption is made by me acting under delegated authority from the Commissioner of Inland Revenue pursuant to section 7 of the Tax Administration Act 1994.

This exemption is signed on the 4th day of March 2009.

Tony Morris
Assurance Manager (Large Enterprises)

¹  In the case of partnerships, however, disclosure will need to be made by the individual partners in the partnership. The partnership itself is not required to disclose.

²  In the case of forms IR 445 to 449 relating to the fair dividend rate, comparative value and cost method of calculation, the intention is that at a future date section 35 of the TAA will require mandatory electronic filing.  For the time being, however, filing will still be paper-based for the IR 449 - cost method - and IR 447 and 448 - fair dividend rate and comparative value methods for non-widely held entities.