APAC Tax Matters: November 2012
At a glance
- New Zealand Inland Revenue releases its Compliance Focus for 2012 - 2013
New Zealand Inland Revenue releases its Compliance Focus for 2012 – 2013
The New Zealand Inland Revenue has released its Compliance Focus for the 2012 – 13 tax year (Compliance Focus). The Compliance Focus details the Inland Revenue’s compliance priorities and perceived risk areas for the coming tax year.
The Compliance Focus reaffirms the Inland Revenue’s commitment to assisting taxpayers comply with their tax obligations but also highlights the Inland Revenue’s areas of focus, and where it intends to deploy resources and adopt a more aggressive approach.
The Inland Revenue’s compliance areas are grouped into key themes which indentify numerous compliance risk areas upon which the Inland Revenue will focus. Some of the compliance risk areas identified as having a medium-high or high impact on revenue collection and the integrity of the tax system are discussed below.
Following from the Inland Revenue’s success in Alesco v CIR (2011) 25 NZTC 20,099 (currently on appeal and listed for hearing in October), the Inland Revenue remains focused on cross-border funding arrangements entered into by large enterprises.
The Inland Revenue is looking for funding arrangements that it considers “may not be commercially justified” and which may deliver a disproportionate tax advantage. The Inland Revenue states that the differences between New Zealand and Australian debt/equity rules make this an ongoing problem for trans-Tasman financing.
As a business imperative, cross-border financing remains critical to managing an organization’s capital structure and costs of investment in New Zealand. Whilst the design of New Zealand’s corporate tax system enables corporations to choose debt or equity to fund investments into the country, the Inland Revenue is reviewing transactions with increasing intensity in the context of an organized cross border financing project.
From our experience, we are aware that the Inland Revenue now audits a much broader range of cross-border financing transactions, including those it has long accepted as valid; those for which it has previously issued favorable binding rulings and determinations; and those it may have previously reviewed without issue.
The Inland Revenue has also included ordinary loans in this financing project, and has said on its website that it will be looking at situations where it would appear that a third party bank would not have lent to a party in the terms that financing has occurred between related companies, or where the level of borrowing (even if it is within the statutory thin capitalization limits) appears excessive in the commercial circumstances.
Audits now often involve an extensive examination of an organization’s internal documentation and the information gathering process can be costly and time consuming, sometimes involving requests for information being made through Tax Authorities of other countries.
Where the Inland Revenue considers that the relevant documentation demonstrates an absence of commercial drivers, they may conclude a transaction or business structure is tax driven. Thereafter, the transaction or structure can be open to attack by application of the general anti-avoidance provision.
To balance the commercial needs of financing against a potential future challenge by the Inland Revenue, we strongly recommend that clients ensure that the commercial drivers for all transactions are clearly documented, and not just the tax considerations (although it is generally accepted that tax is a legitimate matter to consider when deciding on the form of financing to be adopted).
Offshore and international issues
The Inland Revenue has reiterated that it will continue to focus on offshore and international issues, with particular reference to high wealth and high income individuals who, in the Inland Revenue’s view, use “offshore schemes and bank accounts to evade tax by misrepresenting how much they earn”.
The use of the word “evade” rather than “avoid” is a good indication as to how Inland Revenue is viewing this issue, the former being a potentially a criminal matter, and the latter only civil.
The Inland Revenue warns that it has close working relationships with its major tax treaty partners and is an active participant in both bilateral and multilateral audit projects. The Inland Revenue has also signed tax information exchange agreements with 20 offshore finance centres which give them access to key ownership and banking information.
Loss Generation and Usage
The Inland Revenue will be reviewing arrangements that create deductions for items that are not real economic losses and schemes that misuse losses or retain losses that should be forfeited. The Inland Revenue will also examine both the creation of and use of losses by trusts.