2006 International Tax Disclosure Exemption

Introduction

Section 61 of the Tax Administration Act 1994 (TAA) requires people to disclose interests they hold 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 interest in a foreign investment fund (FIF) at any time during the income year must disclose the interest held. 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 OB 1) contained in the Income Tax Act 2004 (ITA).

Under section 61(2), the Commissioner has issued an international tax disclosure exemption which applies for the income year ended 31 March 2006. This exemption may be cited as "International Tax Disclosure Exemption ITR17", and the full text appears at the end of this item.

Scope of exemption

The scope of the 2006 disclosure exemption is the same as the 2005 exemption.

Interests held by residents

Disclosure is required by residents for these interests:

• an interest held in an FIF
• an "income interest of 10% or greater" held in a foreign company. The disclosure obligation applies in respect of all foreign companies regardless of the country of residence.

An "income interest of 10% or greater" is defined in section OB 1 of the ITA. For the purposes of determining exemption from disclosure it includes these interests:

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 (that is not a controlled foreign company) as defined by section OD 8 (3) of the ITA.

Example If a husband and wife each hold an income interest of 5% in a Cayman Islands company, the interests would not be exempt from disclosure because the husband and wife are associated persons under section OD 8(3)(d). Under the associated persons test they are each deemed to hold the other's interests, so they each hold an "income interest of 10% or greater" which must be disclosed. They are not required to account for attributed controlled foreign company (CFC) income or loss under the CFC rules. However, they would have to account for FIF income or loss under the FIF rules. In this example the husband and wife must disclose their interests as interests in a foreign company and as interests in an FIF. However, only the FIF interests should be disclosed on an IR439, IR440, IR441, IR442 or IR443 form (see "Overlap of interests" below).

Foreign company interests

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 2006 international tax disclosure exemption also makes no distinction about residence, and any interest in a foreign company which is an "income interest of 10% or greater" must be disclosed. Disclosure is to be made on an IR477 or IR479 Interest in a foreign company disclosure schedule.

The disclosure exemption makes no distinction on the residence of a foreign company for these reasons:

• attributed (non-dividend) repatriation rules apply to an "income interest of 10% or greater" in a controlled foreign company (CFC) regardless of the CFC's country of residence.
• to identify tax preferences applied by the taxpayer (whether or not specified in Schedule 3, Part B of the ITA) in respect of an interest held in a foreign company which is resident in a Schedule 3, Part A of the ITA jurisdiction (ie, Australia, Canada, Federal Republic of Germany, Japan, Norway, United Kingdom and the United States of America).
• the requirement for a CFC which is resident in a country not listed in Schedule 3, Part A of the ITA to attribute foreign income or loss from 1 April 1993.

Foreign investment fund interests

An interest in a foreign entity must be disclosed if it constitutes an "interest in a foreign investment fund" specified within sections CQ 5(1) and DN 6(1) of the ITA. These types of interest must be disclosed:

• 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 4, Part A of the ITA (no entities were listed when this TIB went to press).

However, any interest that does not fall within the above types or which is specifically excluded as an interest in an FIF under sections CQ 5(1) and DN 6 does not have to be disclosed. The following are listed in sections CQ 5(1), DN 6, EX 32-35, EX 36(1) and EX 37(1) as exclusions from what constitutes an interest in an FIF:

• an "income interest of 10% or greater" in a CFC (separate disclosure is required of this as an interest in a foreign company)
• an interest in a foreign company that is resident and liable to income tax in a country or territory specified in Schedule 3, Part A of the ITA (ie, Australia, Canada, Federal Republic of Germany, Japan, Norway, United Kingdom and the United States of America)
• an interest in an employment-related foreign superannuation scheme
• a qualifying foreign private annuity, unless an election has been made to remain within the FIF regime, by the due date for filing the person's 2004 tax return. See Inland Revenue's booklet Overseas pensions and annuity schemes (IR257) for more information
• interests in foreign entities held by a natural person other than in that person's capacity as a trustee, if the aggregate cost or expenditure incurred in acquiring the interests remains under $50,000 at all times during the income year
• 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
• an interest in a foreign life insurance policy or foreign superannuation scheme acquired by a natural person before he or she became a New Zealand resident for the first time, for a period of up to four years.

A resident who holds an interest in an FIF at any time during the 2006 income year must disclose the interest and calculate FIF income or loss on the form Interest in Foreign Investment Fund Disclosure Schedule (IR439, IR440, IR441, IR442, IR443). The FIF rules allow a person four options to calculate FIF income or loss (accounting profits, branch equivalent, comparative value and deemed rate of return method), so the Commissioner has prescribed five forms to disclose and calculate FIF income or loss from an interest in a FIF using one of these methods. The respective forms to use for whichever FIF income calculation method you choose to apply is as follows:

• IR439 form for the accounting profits method
• IR440 form for the branch equivalent method
• IR441 form for the comparative value method
• IR442 form for the comparative value method and multiple interests
• IR443 form for the deemed rate of return 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 interest in an 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 interest held in an FIF.

However, to meet the disclosure obligations only one disclosure return (either the IR477 or IR479 form or the IR439, IR440, IR441 or IR443 form) is required for each interest 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, IR441, IR442 or IR443 form to disclose all FIF interests, and in particular:
   • an interest in a foreign company which is not resident in a Schedule 3, Part A country and is not a CFC (regardless of the level of interest held)
   • an income interest of less than 10% in a CFC which is not resident in a Schedule 3, Part A country
   • an interest in a foreign life insurance policy or foreign superannuation scheme, regardless of the country or territory in which the entity was resident.
2. Use the IR477 or IR479 forms to disclose:
   • an "income interest of 10% or greater" in a foreign company (regardless of the country of residence) that is not being disclosed on the IR439, IR440, IR441, IR442 or IR443 forms.

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 FIF interest. An example is an interest which is covered by the Schedule 3, Part A exclusion from the FIF rules.

Interests held by non-residents

The 2006 disclosure exemption removes the need for interests held by non-residents in foreign companies and FIFs 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.

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 are not required to calculate or attribute income under the CFC regime (sections CQ 2(1) and DN 2 of the ITA 2004). In addition, under sections CQ 5(1)(e) and DN 6(1)(e) of the ITA 2004 a non-resident is not to be treated as deriving or incurring any FIF income or loss. The disclosure of non-residents' holdings in foreign companies or FIFs is not necessary for the administration of the international tax rules.

Summary

The 2006 international tax disclosure exemption removes the requirement of a resident to disclose an interest held in a foreign company (if the interest is not also an interest in a FIF) that does not constitute an "income interest of 10% or greater" (ie, it is less than 10%). The disclosure exemption is not affected by the foreign company's country of residence. Further, an interest in an FIF must be disclosed.

The 2006 disclosure exemption also removes the requirement for a non-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 ITR17".

1. Reference
   This exemption is made under section 61(2) of the Tax Administration Act 1994. It details interests in foreign companies 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 ending 31 March 2006. This exemption does not apply to interests in foreign companies which are interests in foreign investment funds, unless that interest is held by a non-resident of New Zealand.
2. Interpretation
   In this exemption, unless the context otherwise requires, expressions used have the same meaning as in section OB 1 of the Income Tax Act 2004.
3. Exemption
   
   1. Any person who has an income interest or a control interest in a foreign company (not being an interest in a foreign investment fund), in the income year ending 31 March 2006, is not required to comply with section 61(1) of the Tax Administration Act 1994 in respect of that interest and that income year, unless the interest held by that person during any accounting period of the foreign company (the last day of which falls within that income year of the person), would constitute an "income interest of 10% or greater", as defined by section OB 1 of the Income Tax Act 1994, as if the foreign company was a controlled foreign company.
   2. Any non-resident person who has an income interest or a control interest in a foreign company or an interest in a foreign investment fund in the income year ending 31 March 2006, 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 by virtue of sections CQ 2(1) and DN 2 of the Income Tax Act 2004, and/or
      • No foreign investment fund income or loss arises in respect of that interest in that foreign investment fund by virtue of sections CQ 5(1)(e) and DN 6(1)(e) of the Income Tax Act 2004.
   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 9th day of March 2006.

Martin Scott
Acting Group Manager, Corporates