International Tax Disclosure Exemption issued
For those of you who have clients with control or income interests in a foreign company or an attributing interest in a FIF at any time during a particular income year, section 61(1) of the Tax Administration Act would usually require a disclosure of that interest to IR.
However in the interest of mitigating compliance costs, section 61(2) permits the Commissioner to exempt any person or class of persons from those disclosure requirements. To facilitate the use of this legislative discretion, IR issues what is known as the International Tax Disclosure Exemption, and the latest version in respect of the 2021 income year has just been released – ‘International Tax Disclosure Exemption ITR32 (the 2021 disclosure exemption’.
The scope of the 2021 exemption, identical in vein to its 2020 predecessor, removes the requirement of a resident to disclose:
- An interest in a foreign company if the resident has an income interest of less than 10% in that company and either that income interest is not an attributing interest in a FIF or it falls within the $50,000 de minimis exemption.
- If the resident is not a widely held entity, an attributing interest in a FIF that is a direct 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 a direct income interest of less than 10% (or a direct income interest in a foreign PIE equivalent) if the fair dividend rate or comparative value method is used for the interest. The resident is instead required to disclose the end-of-year New Zealand dollar market value of all such investments split by the jurisdiction in which the attributing interest in a FIF is held or listed.
The 2021 disclosure exemption also removes the requirement for a non-resident or transitional resident to disclose interests held in foreign companies and FIFs.
You can find more detailed commentary surrounding each of the above categories, as well as a list of the DTA countries covered and what income interests are considered to not be an attributing interest in a FIF, in the ‘determinations’ section of IR’s tax technical website.
CRS jurisdiction update
The world is certainly becoming a much smaller place to hide for those who wish to. The latest release of the Common Reporting Standard (CRS) jurisdiction determination AE 21/01 reflects as further countries are added to the participating jurisdictions list.
The determination adds Albania, New Caledonia, Nigeria, Peru, and Turkey to the list, while also containing a full list of participating jurisdictions from 1 April 2021.
IR continues to prepare its troops for battle
With the increase in the top personal tax rate to 39% where taxable income exceeds $180,000 now in effect, IR has again signalled its clear intentions to launch an attack against those who clearly attempt to make use of interposed entities (companies/trusts etc) to mitigate their exposure to the extra 6%.
Last week we saw the release of RA 21/01 – diverting personal services income by structuring revenue earning activities through a related entity such as, a trading trust or a company (the circumstances when Inland Revenue will consider this arrangement is, tax avoidance).
RA 21/01 is in essence a re-release of RA 11/02. It reiterates the Commissioner’s view on the income diversion topic, which followed the Supreme Court’s decision in Penny and Hooper v CIR  NZSC 95. While it is clear that IR has released the document in conjunction with the marginal tax rate increase, they do however, remind you that these principles should be applied regardless of the particular marginal tax rates.
Now IR does admit that the use of interposed entities itself does not amount to tax avoidance arrangements on its own, however, they will certainly be taking a closer look at scenarios where the business involves predominantly the provision of personal services.
A core principle stemming from the Penny & Hooper decision, (for those who do not remember) is that income substantially generated by the direct personal skills, experience or labour of an individual should generally be subject to tax in the hands of that individual. The individual’s contribution to the business should be properly reflected in the income returned by that individual – either through an appropriate salary or other taxable distributions to the individual.
In this regard, RA 21/01 lists both factors of concern which may cause IR to look at your client and their view of the profit driver indicators of a business, which are likely to support what level of profit should be able to be legitimately retained by the business owners, and what level of remuneration IR would expect to see the actual personal service providers themselves derive, and therefore be subject to taxation thereon.
Finally, note that IR still suggests that scenarios where less than 80% of the total distributions received by an individual, their family and related entities are received by the individual service provided (and therefore taxed accordingly) are indicative of tax avoidance arrangements being in play. So in this regard, be battle ready!
This article from the ‘A Week in Review’ newsletter was originally published Tuesday 6th April 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me firstname.lastname@example.org.
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