Technical amendments to branch equivalent tax account rules

2007 amendment to the branch equivalent tax account rules clarify that access to debits is limited to the amount necessary to offset tax on foreign income.

Sections MF 5 and MF 10 of the Income Tax Act 1994; sections MF 5 and MF 10 of the Income Tax Act 2004; and sections OE 7 and OP 101 of the Income Tax Act2007

The rules applying to branch equivalent tax accounts (BETAs) have been amended to clarify that for companies and consolidated groups, access to debits is limited to the amount necessary to offset the tax on their foreign income (before any New Zealand losses are taken into account).

Background

BETAs prevent companies being taxed twice on their foreign income. Generally, New Zealand companies are taxed on all foreign income as it is earned (the "accrual taxation" method). Accrual taxation can give rise to economic double taxation if dividend withholding payments (DWP) are also imposed when foreign profits are repatriated as dividends. BETAs provide relief from such double taxation by allowing companies, in effect, to offset tax paid on one stream of income against tax due on the other stream through a system of debits and credits.

The law allows debits in excess of the income tax liability on foreign income (after New Zealand losses have been allowed) to be converted into a loss which can be carried forward and set against future income. These changes make explicit the underlying assumption that debits can only be converted into a loss to the extent that this is necessary to offset income tax on attributed controlled foreign company (CFC) income in the absence of New Zealand losses. If companies could convert debits into losses regardless of the level of their attributed CFC income, they could use those losses to relieve other income that is properly taxable in New Zealand.

Key features

Sections OE 7(2) and (3) and sections OP 101(2) and (6) of the Income Tax Act 2007 provide that a company or a consolidated group may elect to use BETA debits to reduce their liability to tax on attributed CFC income. Sections MF 5(4) and (5) and section MF 10(3) and (4) of the Income Tax Act 2004 and the Income Tax Act 1994 make equivalent provision.

Section OE 7(3B) and section OP 101(2B) have now been added to the Income Tax Act 2007. Likewise, section MF 5(5B) and (5C) and section MF 10(4B) to (4D) have been added to the Income Tax Act 2004 and the Income Tax Act 1994. These new subsections now expressly provide that an election is invalid to the extent to which it, and related elections, would allow the company or consolidated group to access more BETA debits than is necessary to offset the tax on its foreign income before any New Zealand losses are taken into account.

Application date

The changes apply for the 1997-98 and later income years unless a return based on the unamended version of the law was made before 17 May 2007.