Land and Income Tax Amendment Act 1964 - Know-how payments and royalties from New Zealand
Archived legislative commentary on Land and Income Tax Amendment Act 1964 - Know-how payments and royalties from New Zealand from PIB vol 20 Mar 1965.
This commentary item was published in Public Information Bulletin Volume 20, March 1965.
Know-how payments and royalties from New Zealand
How they are taxed
Some sections of the Land and Income Tax Amendment Act 1964 have wide application to dividends, interest, royalties and know-how payments flowing from New Zealand to overseas residents.
Know-how defined for first time
For many years there has been legislation dealing with dividends, interest royalties in our tax, law, but this is the first time the Tax Act has defined know-how payments and when they will be assessable to New Zealand tax. This new legislation follows the growing trend overseas to tax know-how payments in the country from which made.
In this article
The purpose of this article is to-
- set out the duty of persons in New Zealand making royalty or know-how payments to deduct non-resident withholding tax;
- give advice on claiming expenses against such payments.
In considering this subject, four basic points should be kept in mind.
- The legislation which deems royalties and know-how payments to be assessable income in certain circumstances. Section 88(e) and 88(ee) of the Land and Income Tax Act 1954 are relevant.
- The circumstances when royalties and know-how payments have a source in New Zealand. Section 167(11) covers this point which is important because under section 165(2) a non-resident is liable for New Zealand tax only on income which has a source in this country.
- Non-resident withholding tax at a flat rate of 15 percent is payable on gross payments to non-resident for both royalty and know-how. However, when a payment tot know-how alone wholly covered by deductible expenditure of the payee applicable to the payment, the know-how is not assessable income and there is no liability for withholding tax.
- The 15 percent on the gross is final for "cultural" royalties. Additional tax will be payable on "industrial" royalties and know-how payments if tax assessed in an annual assessment on the net amount after deducting expenses exceeds the withholding tax. Any other income is also included in the annual assessment.
There are more details on these points in the following paragraphs and in the charts on pages 7 and 8
When royalties and know-how payments are assessable
These are defined in the Tax Act as follows-
Royalty payments - All royalties or other like payments dependant upon production from or the use of any real or personal property,whether or not they are instalments of the purchase price of any property. Section 88(e).
Cultural royalties - A payment of the type mentioned in section 88(e) which is for the use, production or reproduction of, or for the privilege of using, producing or reproducing a literary, dramatic, musical or artistic work in which copy right subsists. Section 203Z.
Know-how payments - All payments for the supply, in connection with the carrying on of a business, of scientific, technical, industrial or commercial knowledge, information or assistance, not being payments which are wholly reimbursement of deductible expenditure of the payee Section 88(ee).
The definition of know-how includes payments whether paid in a lump sum or periodically, in the wide field of commercial knowledge, information or assistance. It applies to payment made to New Zealand residents and to non-residents as from 1 April 1964. The definition would embrace for instance payments for-
- the supply or use of
- a formula, secret process, or design;
- publicity, instructional or marketing material;
- research, administration and accountancy services;
- instruction on how to install, operate, and maintain machinery;
- information on sales promotion.
- but not payments for-
- brokerage or insurance commission for work done overseas;
- personal services performed overseas by an agent or employee;
- internal transfer or credit given by a branch in New Zealand to its head office overseas. However, the deduction allowable against the branch profits liable to New Zealand tax will be limited to the branch proportion of expenses actually incurred.
When royalties and know-how payments have a source in New Zealand
Royalty and know-how payments have a source in New Zealand when-
- paid by a resident in New Zealand unless paid in respect of a business carried on outside New Zealand.
- paid by a person not resident in New Zealand and are deductible in working out his New Zealand income.
The new source in New Zealand rules apply as from 1st April 1964.
From 26 June 1964 royalty and know-how payments having a source in New Zealand and paid or credited to non-resident companies are liable for non-resident withholding tax. Special circumstances apply when royalties are paid or credited to British companies during the period 26 June 1964 to 31 March 1965. These are explained in another article in this Bulletin
To individual non-resident taxpayers the non-resident withholding tax will first apply to payments made or credited to them after 31 March 1965.
When withholding tax should be deducted
Payments may be for combination of industrial royalties and know-how. If so, it is important to note the effect of section 88A - inserted by section 12 of the 1964 Amendment Act. Under this section the Commissioner may apportion a payment when it is partly for know-how and partly for any other purpose for instance, to cover a royalty. The section does not permit a payment made exclusively for know-how to be apportioned between the amount reimbursing expenses and the profit or income content of the payment.
Payment exclusively for know-how
- If the non-resident recipient is able to certify that the deductible outgoings incurred in supplying the know-how are equal to or in excess of the gross payment, the payment is not income and not liable to withholding tax.
- If the non-resident recipient is unable to certify that the payment is wholly a reimbursement of expenditure the 15 percent withholding tax is levied on the gross payment without a deduction for expenses.
- When a non-resident claims that a payment for know-how is wholly covered by deductible expenses, the local Tax Office will require, in the first instance, a certificate to that effect from an overseas auditor or chartered accountant. The certificate will, in clear cut cases, be accepted for several subsequent years provided the circumstances are unchanged
Payment exclusively a royalty
The gross payment is liable to withholding tax at 15 percent. The provision which exempts a know-how payment that is wholly reimbursing does not extend to a payment for royalty. Although revenue outgoings applicable to the royalty may in an extreme case exceed the gross payment, it is still liable to withholding tax.
Payment partly for know-how and partly for royalty
If necessary, an apportionment can be made under section 88A. This will be unnecessary when revenue expenses incurred in supplying the know - how are less than the know-how part of the payment. In these circumstances the 15 percent withholding tax is payable on the total gross payment because the know-how part is not wholly reimbursing. If the know-how part is wholly covered by deductible expenses, the 15 percent withholding tax is only payable on the royalty part of the gross payment.
Minimum tax or annual assessment
The 15 percent withholding tax on the gross payments of industrial royalties and know-how is, generally, a minimum tax. Additional tax wilt be payable after the end of the financial year in which the royalties and payments were derived if tax assessed at annual rates on the net income after allowing deductible expenses exceeds the 15 percent withholding tax.
Here is an example-
Withholding tax on gross payments
Annual tax on net income
less credit for withholding tax
|£ 600. 0.0|
Payable in annual assessment
Issue of assessments: responsibility of agents
The records of non-residents and the issue of assessments will be handled by the Absentee Assessment Centre in the Department's Dunedin office.
The initial responsibility of the payer is to deduct and account for withholding tax. Payment of any further tax assessed after the end of the year is primarily the responsibility of the non-resident recipient. He may appoint an agent to act for him or the payer, as a subsidiary of a non-resident company, may act as agent. The Commissioner may give notice to any payer that he will thereafter be responsible as agent for filing returns and paying the tax assessed.
Assessments may therefore be issued in New Zealand to the appointed agent, the New Zealand subsidiary company or the payer once he has been notified by the Commissioner. It is desirable for practical reasons that the payer establish his position with both the non-resident and the tax office so that he may make arrangements if necessary for payment of any further tax due.
Arbitrary allowances for expenses
It is recognised that overseas recipients may find it difficult to give full details of the expenses applicable to royalties, know-how and similar payments from New Zealand. To help these people the Commissioner will allow, as a minimum deduction in an annual assessment, the following percentages for expenses without supporting claims-
|Nature of payments||Percentage allowable|
|1. Trade mark||25%|
|4. Any combination of 1 or 2 above with 3||40%|
Claims for actual expenses
If it is considered that actual expenses exceed the arbitrary allowance, a tax return, giving details to support the claim for the higher deduction, should be sent in on behalf of the overseas recipient. In the first instance it would be desirable for the claim to be supported by a certificate from an overseas auditor or chartered accountant setting out the amount and how it is arrived at.
The expenses of a non-resident in the production of industrial royalties and know-how from New Zealand may include in addition to actual expenses in New Zealand, the New Zealand proportion of-
- the expenses incurred in developing or acquiring the trade mark, patent, or know-how
- administration and other overhead expenses.
The amount for development or acquisition will generally follow the treatment of such expenditure in the books of the non-resident recipient.
If expenditure on new or continuing research is charged direct to revenue accounts each year the New Zealand proportion may be claimed, even though the patent or knowledge used in New Zealand may have been developed some time in the past.
On the other hand if the original expenses were capitalised, the amount allowable would be the New Zealand proportion of the amount written off during the year.
Expenses relating to know-how payments
When payment is reimbursing
When it is established that the payment for know-how is wholly reimbursing to the payee there is no liability to deduct withholding tax. This will arise, for example, when the payment represents no more than reimbursement of-
- administration and head office overhead expenses for management and technical assistance to a subsidiary company trading in New Zealand;
- the actual salary of a technician supplied under an agreement and paid by the non-resident, plus an agreed and reasonable percentage to cover overheads.
When expenses exceed the payment
The expenses may exceed the payment or that part of a lump sum payment relating to know-how.
- If the payment is for know-how alone, consideration will be given to carry forward the excess. It will be included with the expenses of the following year to determine whether the payment for that year is wholly reimbursing and therefore, not liable for withholding tax.
- If the payment is a mixture of royalty and know-how, the excess may be allowed against the royalty part in the annual assessment, provided the payments for royalty and know-how are closely related, for instance, associated with the one agreement.
Variation in the deduction or payment of withholding tax
Public Information Bulletin 17 notified that the Commissioner would consider requests that payments of non-resident withholding income be made without deduction of withholding tax when-
- tax has already been paid in annual assessments on the non-resident in past years,
- the tax in an annual assessment exceeds the withholding tax which would normally be deducted.
This variation will apply only to payments of industrial royalties, know-how and interest. Payments of dividends and cultural royalties are not included in an annual assessment and the deductions of withholding tax are final.
The Commissioner will also consider variations to provide for centralised accounting in one sum when numerous small payments of royalties. particularly cultural royalties, are made during the year.
The New Zealand tax laws affecting royalty and know-how payments are summarised in the following charts-
|Royalty payments||All royalties or other like payments dependant upon production from or the use of any real or personal property, whether or not they are instalments of the purchase price of any property.||Section 88 (e)|
|Cultural royalties||A payment as defined in section 88(e) which is for the use, production or re- production of, or for the privilege of using, producing or reproducing a literary, dramatic, musical or artistic work in which copy-right subsists.||Section 203Z, inserted by section 17, 1964 Amendment Act.|
|Know-how payments||All payments for the supply, in connection with the carrying on of a business, of scientific, technical, industrial or commercial knowledge, information or assistance, not being payments which are wholly reimbursement of deductable expenditure of the payee.||Section 88(ee) inserted by section 11, 1964 Amendment Act.|
|Payment for know-how and any other purpose||The Commissioner may apportion any payment between the know-how and the other purpose.||Section 88A, inserted by section 12, 1964 Amendment Act.|
Source in New Zealand
|Payment||When payment has a source in New Zealand||Legislation*|
|Royalty and know-how payments.|| Have a source in New Zealand when- ||Section 167(11) inserted by section 15(2), 1964 Amendment Act.|
Liability to withholding tax
|Royalty and know-how payments||Included in non-resident withholding income.||Section 203S, inserted by section 17, 1964 Amendment Act|
|Non-resident withholding tax levied at 15% of gross payment||Section 203T, inserted by section 17, 1964 Amendment Act|
|"Gross" means without deduction of any kind.||Definition in Section 3, 1964 Amendment Act|
|Know-how payments||Not liable if payment is wholly reimbursing||Section 88(ee)|
Withholding tax a final tax in some cases
|Cultural royalties||The withholding tax is a final tax. The liability of the non-resident is finally and exclusively determined by the 15% withholding tax.||Section 203Z, inserted by section 17, 1964 Amendment Act.|
|Dividends||The same provisions apply to dividends|
Withholding tax a minimum tax in some cases
|Know-how payments royalties other than cultural royalties Interest|| The withholding tax will be a final tax when- ||Section 203ZA, inserted by section 17, 1964 Amendment Act.|
* Sections of the Land and Income Tax Act 1954