Approved issuer levy: Technical changes
2010 Act has amended legislation to clarify the relationship between domestic law and treaty law for interest derived from NZ by foreign banks.
Sections 86I and 86L of the Stamp and Cheque Duties Act 1971 and section 32M of the Tax Administration Act 1994
Some technical changes have been made to the rules for the approved issuer levy in the Stamp and Cheque Duties Act 1971 and the Tax Administration Act 1994. The purpose of the amendments is to clarify the relationship between domestic law and treaty law for interest derived from New Zealand by foreign banks. The intention is to make the law more transparent rather than to substantively alter its effect.
The approved issuer levy (AIL) is a domestic-law mechanism that can provide relief from non-resident withholding tax (NRWT) on interest paid to non-residents. NRWT on interest paid to an unrelated foreign lender can be reduced to nil if the borrower agrees to pay a 2% levy. Borrowers may agree to do this if the lender would simply demand more interest to cover the NRWT.
Provisions recently included in some of New Zealand's double tax agreements provide an exemption from source-country tax for interest derived by banks. For interest derived from New Zealand, the availability of the exemption depends on the borrower paying AIL, unless the borrower is not eligible to elect to pay the levy, or there is no such levy, or the rate of the levy exceeds 2% of gross payments. (See the Interest Articles of New Zealand's double tax agreements with Australia and the United States.)
The Stamp and Cheque Duties Act 1971 and the Tax Administration Act 1994 have been amended to clarify the circumstances in which a person is eligible to elect to pay AIL. The question of whether a person is eligible to elect to pay AIL under domestic law may now be relevant to a double tax agreement.
As amended, section 32M(1) of the Tax Administration Act 1994 provides that a borrower is eligible to elect to pay AIL for the purposes of an exemption under a double tax agreement, as well as for the purposes of the NRWT rules. This makes it clear that a borrower can pay AIL to qualify the interest for a treaty exemption, even if paying the levy makes no difference to the way a transaction is dealt with under domestic law. Similar changes have been made to Part 6B of the Stamp and Cheque Duties Act 1971.
Section 32M(2) of the Tax Administration Act 1994, together with Part 6B of the Stamp and Cheque Duties Act 1971, now set out the process by which a person elects to pay AIL. Essentially, this process is the same as before but is now clearer that the process of taking the necessary steps constitutes an election and that a person chooses to have approved issuer status rather than applying for it. This ensures consistency with terminology used in the relevant treaty provisions.
The main purpose of these changes is to address uncertainty around the treatment of interest paid to foreign banks operating through a branch in New Zealand. That uncertainty arose from the interaction between domestic law and the new treaty provisions mentioned above. Interest derived by a foreign bank with a New Zealand branch is taxed on a net basis, along with branch income, rather than being subject to NRWT. This means that the AIL mechanism is not relevant domestically. However, the new treaty provisions could still apply to such interest if the loan was made from offshore instead of through the New Zealand branch. It is therefore appropriate to make clear that the borrower can elect to pay AIL for the purposes of a treaty exemption.
It is considered that borrowers were eligible to elect to pay AIL for the purposes of a treaty exemption under the law as it stood before these amendments, including in relation to interest outside the scope of the domestic NRWT rules. The amendments make this transparent. There should be no risk for a taxpayer that relied on this interpretation of the law before the amendments took effect. Where it applies, the relevant treaty exemption requires that, if a borrower is eligible to pay AIL, the levy must be paid for the exemption to apply. This is not the same as the exemption being contingent on the borrower's eligibility to pay AIL. As long as the borrower has paid AIL and the other requirements for the exemption are satisfied, the exemption should apply.
The changes come into force on 1 August 2010.