Attributing telecommunications income
Most income of a CFC from services performed in New Zealand is attributable (that is, subject to New Zealand tax under the CFC rules). However, a concession was made for certain telecommunications income, subject to certain limitations. The Act replaces these limitations with requirements for the person performing the service in New Zealand.
Sections EX 20B(11)(c) and (d)
Most income of a CFC from services performed in New Zealand is attributable (that is, subject to New Zealand tax under the CFC rules). This is to prevent income that should properly be entirely within the New Zealand tax base from being diverted to an exempt offshore company.
However, a concession was made for certain telecommunications income, on the grounds that a service is unavoidably performed in New Zealand when a CFC connects calls from its country to New Zealand. This concession is currently limited to cases in which the CFC does not use its own equipment or staff, or those of an associated CFC, to perform the service in New Zealand. These limitations have caused difficulties in practice.
The Act replaces these limitations with requirements that the person performing the service in New Zealand:
- is not the CFC;
- is subject to New Zealand tax on income that they receive from performing the service (either because they are resident in New Zealand or earn the income through a fixed establishment in New Zealand), and;
- performs the service as part of a substantial telecommunications business in New Zealand.
This amendment is designed to maintain protection of the New Zealand tax base while accommodating commercial arrangements that existed before the enactment of the recent CFC rules.