2012 International tax disclosure exemption

Introduction

Section 61 of the Tax Administration Act 1994 ("TAA") requires taxpayers to disclose interests in foreign entities.

Section 61(1) of the TAA states that 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 the income year must disclose the interest held.¹ However, section 61(2) of the TAA 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 in 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) of the TAA that applies for the income year corresponding to the tax year ended 31 March 2012. This exemption may be cited as "International Tax Disclosure Exemption ITR23" and the full text appears at the end of this item.

We note at the time of writing, the Taxation (International Investment and Remedial Matters) Bill, which is due to bring in an active income exemption for holdings above 10% in foreign companies that are not CFCs, has yet to be enacted. As the amendments apply for balance dates starting from 1 July 2011 to 30 September 2011, this disclosure exemption will apply to those taxpayers.

Scope of exemption

The scope of the 2012 exemption is the same as the 2011 exemption.

Application date

This exemption applies for the income year corresponding to the tax year ending 31 March 2012.

Summary

In summary, the 2012 international tax disclosure exemption removes the requirement of a resident to disclose:

• portfolio investments that fall within the $50,000 de minimis, that is, an interest of less than 10% 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 under either section CQ 5(1)(d) or section DN 6(1)(d) of the ITA ²
• if the resident is not a widely-held entity, an attributing interest in a FIF that is an income interest of less than 10%, if the foreign entity is incorporated (in the case of a company) or otherwise tax resident in a treaty country or territory, and the fair dividend rate or comparative value method of calculation is used
• if the resident is a widely-held entity, an attributing interest in a FIF that is an income interest of less than 10% and the fair dividend rate or comparative value method is used. The resident is instead required to disclose the end-of-year New Zealand dollar market value of such investments split by the jurisdiction in which the attributing interest in a FIF is held or listed.

The 2012 disclosure exemption also removes the requirement for a non-resident or transitional resident to disclose interests held in foreign companies and FIFs.

Commentary

Generally, residents who hold an income interest or a control interest in a foreign company, or an attributing interest in a FIF are required to disclose these interests to the Commissioner. These interests are considered in further detail below.

Attributing interest in a FIF

A resident is required to disclose an attributing interest in a FIF if FIF income or a FIF loss arises through the use of one of the following calculation methods:

• branch equivalent, accounting profits, deemed rate of return or cost methods; or
• fair dividend rate or comparative value methods if the resident is a "widely-held entity"; or
• fair dividend rate or comparative value methods, the resident is not a widely-held entity and the country in which the attributing interest is incorporated or otherwise tax resident in a country or territory that New Zealand does not have a double tax agreement in force as at 31 March 2012.

The 37 countries or territories that New Zealand does have a double tax agreement in force as at 31 March 2012 are listed below.

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

A "widely-held entity" for the purposes of this disclosure is an entity which is a:

• portfolio investment entity (this includes a portfolio investment-linked life fund); or
• widely-held company; or
• widely-held superannuation fund; or
• widely-held group investment fund ("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, listed, organised or managed. In the event that tax residence is not easily determined, a further option of a split by currency in which the investment is held will also be accepted as long as it is a reasonable proxy - that is at least 90-95% accurate - for the underlying jurisdictions in which the FIF is held, listed, organised or managed. 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.

FIF interests

The types of interests 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 schedule25, part A of the ITA (no entities were listed when the Tax Information Bulletin Vol 24, No 3 went to press).

However, the following interests are exempt (under sections EX 31 to EX 43 of the ITA) 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 (although 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 (refer to the IR871 form that can be found on Inland Revenue’s website www.ird.govt.nz (keywords: other exemptions))
• 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. Note that for income years beginning on or after 1 July 2011, the grey list should be replaced by an exemption for interests of 10% or more in companies that are resident and subject to tax in Australia.
• an interest in certain grey-list companies (only interests in Guinness Peat Group plc qualify for this exemption)
• an interest in a superannuation scheme that qualifies for the new resident’s accrued superannuation entitlement exemption
• certain foreign pensions or annuities (see Inland Revenue’s guide Overseas pensions and annuity schemes (IR257) 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.

De minimis

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 - the de minimis exemption. This disclosure exemption is made because no FIF income under section CQ 5 of the ITA or FIF loss under section DN 6 arises in respect of these interests.

We note that from 1 April 2012 in the event that legislation is passed to allow an opt-out of the de minimis, disclosure may be required if it would have been required had the cost of the person’s FIF interest exceeded the de minimis.

Format of disclosure

The forms for the disclosure of FIF interests are as follows:

• IR439 form for the accounting profits method
• IR440 form for the branch equivalent method
• IR443 form for the deemed rate of return method
• IR445 form for the fair dividend rate method (for widely-held entities)
• IR446 form for the comparative value method (for widely-held entities)
• IR447 form for the fair dividend rate method (for individuals or non-widely-held entities)
• IR448 form for the comparative value method (for individuals or non-widely-held entities)
• IR449 form for the cost method.

FIF disclosure forms (of methods that will be unaffected by the potential law change to bring in an active income exemption), have been updated and online filing improved.

In particular, improvements have been made to the Foreign investment fund disclosure (IR445) or (IR447), Interest in a foreign investment fund disclosure schedule (cost method) (IR449), Interest in a foreign investment fund disclosure schedule (deemed rate of return method) (IR443) and Comparative value disclosures (IR446) or (IR448).

It is now possible to download a spreadsheet as a working paper or complete the disclosures online. If you’re downloading the spreadsheet you will be able to save it as a working paper on your computer and when completed submit the form by using Inland Revenue’s online services.

You will still able to complete the disclosure online without downloading a spreadsheet by directly entering the disclosure online.

The IR445 and IR446 forms, which reflect the disclosure for fair dividend rate and comparative value for widely-held entities must be completed online. As discussed above this disclosure is by country rather than by individual investment as is the general requirement of section 61. In order to be exempt from the general requirements, the alternative disclosure must be made electronically.

The IR447, IR448 and IR449 forms, applying to the fair dividend rate and comparative value methods for individuals or non-widely-held entities as well as the cost method for all taxpayers may be completed online. The online forms can be found at www.ird.govt.nz "Get it done online", "Foreign investment fund disclosure".

Income years starting after 30 June 2011

Once enacted, the Taxation (International Investment and Remedial Matters) Bill will affect some taxpayers with balance dates starting after 30 June 2011. More specifically these taxpayers will:

• be able to use an active income exemption for interests of 10% or more in foreign companies (non-portfolio FIFs). The active income exemption is based on the CFC rules and will be known as the attributable FIF income method. The attributable FIF income method replaces the branch equivalent method. For taxpayers with balance dates starting from 1 July 2011 until 30 September 2011, to whom the proposed change would apply, mandatory electronic disclosure will be required. This will be able to be found at the "Get it done online", "Foreign investment fund disclosure" part of our website (www.ird.govt.nz) soon after the bill is passed.
• be able to use the fair dividend rate and cost methods for any attributing interest in a FIF where previously this was limited to interests of less than 10% in a FIF
• not be able to use the accounting profits method as it will have been repealed.

Situation before application of proposed law change

Until the proposed extension of the active income exemption is passed into law, or for taxpayers for whom the change does not apply in the 2012 tax year, a transitional measure for non-portfolio FIFs using the branch equivalent or accounting profits, namely an alternative to using the IR439 and IR440 forms, is acceptable for the income year corresponding to the tax year ending 31 March 2012. For each calculation method, an acceptable alternative disclosure will be a schedule outlining all the FIF interests of a particular taxpayer and must, as a minimum, include the following information:

• details of the taxpayer filing the form, including name, IRD number, contact details
• details of the FIF, including name, business activity, balance date, country of residence, address
• nature of the taxpayer’s FIF interest (ie, shares or units)
• details of the taxpayer’s income interest percentage (including details of the measurement basis used)
• currency the financial statements were prepared in
• calculation of FIF income or loss including conversion rate and NZD conversion calculation
• details of any loss offset or loss to carry forward
• details of any foreign tax credit available (including details of NZD conversion calculation).

A scanned copy of the audited financial statements of the FIF must also accompany the schedule(s).

The alternative disclosure schedules and audited financial accounts should be sent to the following email address: [email protected]

The alternative disclosure schedule filed must also be printed, dated and signed by the taxpayer as true and correct. This should be held on file by the taxpayer and may be requested by the Commissioner.

Income interest of 10% or more in a foreign company

A resident is required to disclose an income interest of 10% or more in a foreign company. This obligation to disclose applies to all foreign companies regardless of the country of residence. For this purpose, the following interests need to be considered:

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 subpart YB of the ITA.

To determine whether a resident has an income interest of 10% or more for CFCs, sections EX 14 to EX 17 of the ITA should be applied. To determine whether a resident has an income interest of 10% or more in any entity that is not a CFC, for the purposes of this exemption, sections EX 14 to EX 17 should be applied to the foreign company as if it were a CFC.

Format of disclosure

Disclosure of all interests in a controlled foreign company is required using a Controlled foreign companies disclosure (IR458) form. This form, which involves uploading a prescribed spreadsheet, can cater for up to 500 individual disclosures.

The IR458 form must be completed online at www.ird.govt.nz (keyword: ir458). Please note that electronic filing is a mandatory requirement for CFC disclosure.

Overlap of interests

It is possible that a resident may be required to disclose an interest in a foreign company that also constitutes an attributing interest in a FIF. For example, a person with an income interest of 10% or greater in a foreign company that is not a CFC is strictly required to disclose both an interest held in a foreign company and an attributing interest in a FIF.

To meet disclosure requirements, only one form of disclosure is required for each interest. If the interest is an attributing interest in a FIF, then the appropriate disclosure for the calculation method, as discussed previously, must be made.

In all other cases, where the interest in a foreign company is not an attributing interest in a FIF, the IR458 for controlled foreign companies must be filed.

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.

Under the international tax rules, non-residents and transitional residents are not required to calculate or attribute income under either the CFC or FIF rules. Therefore disclosure of non-residents’ or transitional residents’ holdings in foreign companies or FIFs is not necessary for the administration of the international tax rules and so an exemption is made for this group.

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

This exemption may be cited as "International Tax Disclosure Exemption ITR23".

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 FIFs in relation to which any person is not required to comply with the requirements in section 61 of the Tax Administration Act 1994 to make disclosure of their interests, for the income year ending 31 March 2012.

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, and
• double tax agreement means a double tax agreement in force as at 31 March 2012 in one of the 37 countries or territories as set out in the commentary.

The relevant definition of "associated persons" is contained in the parts of subpart YB of the Income Tax Act 2007.

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) of the Income Tax Act 2007, 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 interest of 10% or more in a foreign company that is not a foreign PIE equivalent, 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 or territory with which New Zealand has a double tax agreement in force at 31 March 2012.
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 2012, 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(1)(d) of the Income Tax Act 2007; 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) of the Income Tax Act 2007.

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 8th of March 2012.

Peter Loerscher
Principal Advisor (International Tax)

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

2: We note that the proposed ability to opt out of the de minimis cannot apply until 1 April 2012 and so is outside the scope of this disclosure exemption.