New Zealand issues Operational Statement on Administration of imported hybrid mismatch rule

Executive summary

The New Zealand Inland Revenue has released the final Operational Statement OS 21/02 – Administration of the imported mismatch rule – section FH 11(the Operational Statement). The Operational Statement addresses the approach that taxpayers are expected to follow in meeting their self-assessment obligations when applying the imported mismatch rule and how this will be administered by Inland Revenue.

The imported mismatch rule in Section FH 11 of the Income Tax Act 2007 effectively denies a deduction for a payment by a New Zealand taxpayer to the extent such payment funds, directly or indirectly, an offshore hybrid mismatch outcome, subject to certain requirements.

This Alert summarizes the key considerations of the Operational Statement.

Detailed discussion

Inland Revenue’s expected approach

The expected approach relies heavily on taxpayers’ knowledge of group activities, financing structures and supply chain arrangements and their understanding of the tax treatment of payments made between related entities outside New Zealand.

The expected approach for New Zealand taxpayers to comply with the self-assessment obligations under the imported mismatch rule contains three main steps:

  • Step 1 – Identify payments made to nonresident control group members that are tax deductible (before applying the imported mismatch rule).
  • Step 2 – Determine whether such payments are to a person in a jurisdiction that has not implemented equivalent hybrid mismatch provisions.
  • Step 3 – If the answer to Step 2 is affirmative, prior to claiming a deduction, ensure that the group head office tax function has undertaken appropriate work to identify any hybrid mismatches within the group and determine the extent to which these are funded by otherwise deductible payments from New Zealand.
Requirement for written statement

Where the New Zealand taxpayer is part of a group headquartered outside New Zealand, Inland Revenue expects the taxpayer to obtain a written statement from the group’s head office tax function regarding the work undertaken.

While there is no prescribed form for such a statement, the example provided by Inland Revenue indicates the statement is expected to contain a confirmation that:

  • The tax treatment of all deductible cross-border payments by members of the group has been reviewed by suitably qualified personnel to determine whether they give rise to a hybrid mismatch in accordance with the OECD principle.
  • None of the payments made by a New Zealand entity fund directly or indirectly any offshore hybrid mismatches.
  • If the payments fund directly or indirectly any offshore hybrid mismatches, detail such amount paid by a New Zealand entity to be disallowed as a deduction for New Zealand income tax purposes.
Consequences of non-compliance

In the event the New Zealand taxpayer does not receive such a statement from the group’s head office tax function (or in the case of a New Zealand headquartered group, does not have sufficient support for the analysis undertaken), Inland Revenue may request a taxpayer to provide evidence that the imported mismatch rule has been considered. The Commissioner may then deny relevant deductions claimed in New Zealand if a satisfactory response has not been provided within three months.


Key implications and considerations from the Operational Statement include:

  • The Commissioner’s attempt to provide practical guidance given the inherent complexity and compliance burden associated with the application of the imported mismatch rule is positive. However, in practice, the expected approach may not provide material relief.
  • There is an expectation that New Zealand taxpayers should have information or be able to obtain information in relation to group activities, financing structures and supply chain arrangements. While this is often not the case in practice, especially in the context of large complex groups, this requirement is not dissimilar to the approach adopted by tax authorities in other jurisdictions. Practically, this requires New Zealand taxpayers to examine whether any hybrid or branch mismatches exist within the broader group and, if so, whether such mismatches are funded by the New Zealand payments.
  • Material synergies may be obtained where the imported hybrid mismatch assessments are undertaken by the group on a regional or global basis. While New Zealand taxpayers may not merely rely on an analysis undertaken in foreign jurisdictions, holistic reviews are often helpful in terms of understanding the relevant intercompany arrangements, transaction flows, entity classifications and related tax outcomes in a cost-effective manner.
  • The New Zealand approach assumes there is a person within the head office tax function with sufficient understanding of all relevant global arrangements with a direct or indirect nexus to a New Zealand payment. In practice, such person may often not exist or may be reluctant to provide their consent without fully understanding the detailed operation of New Zealand tax law and any related ramifications. In these circumstances, it may be sufficient to obtain multiple confirmations from persons within the group overseeing the tax positions in the respective individual territories to comply with the New Zealand obligations.
  • There is no materiality threshold in applying the imported mismatch rule. Given, in many instances, the New Zealand entity will be a relatively minor player on a global scale, the expected approach may, in some instances, impose obligations on New Zealand taxpayers disproportionate to the amount of tax at risk.
  • Material technical and interpretation complexities in applying the imported mismatch rule still remain to be addressed. For example, there is a degree of uncertainty regarding the requirement to trace the source and allocation of funds between the group members to determine whether a sufficient nexus with the New Zealand payments exist.
  • At this stage, there is no official guidance or list of territories that are considered to have hybrid mismatch rules that, in the Commissioner’s view, correspond with New Zealand’s hybrid mismatch regime. We are hoping such list will be introduced in the future as this would be of practical benefit and would help to aid compliance and reduce risk.
  • Compliance with the expected approach does not guarantee that there will be no deductions disallowed under the imported mismatch rule. However, this will reduce the likelihood of penalties imposed for lack of reasonable care where an imported mismatch is later found to exist.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Limited (New Zealand), Auckland
  • Dean Madsen, International Tax and Transaction Services Leader
  • Polina Belykh, International Tax and Transaction Services
  • Ilsje Erasmus, International Tax and Transaction Services
  • Paul Dunne, New Zealand Tax Policy Leader
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
  • Chris Finnerty
  • Gagan Malik
  • Bee-Khun Yap
  • Dhara Sampat
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
  • Pongpat Kitsanayothin

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.