EY Tax Monthly News Update - Q1 2023

New finalised guidance:

Numerous Inland Revenue guidance items have been finalised this month, these are detailed below:

• CSUM 22/05 – Supreme Court confirms Frucor’s tax avoidance and finds shortfall penalties apply – Frucor Suntory New Zealand limited v Commissioner of Inland revenue [2022] NZSC 113 was a case recently decided by the Supreme Court of New Zealand. In this case, the Supreme Court dismissed Frucor’s appeal to find that tax avoidance did occur and allowed the Commissioner’s cross-appeal, finding that shortfall penalties for taking an abusive tax position also applied. CSUM 22/05 provides a summary of this case and is available on Inland Revenue’s website here.

• QB 22/10 – Can a close company deduct interest on a shareholder loan account where the amount is not known until after balance date – This Question We’ve Been Asked (“QWBA”) concludes that a close company can deduct interest on a shareholder loan account where the amount is not known until after balance date if it has a legal obligation to pay the interest on a shareholder loan account based on a previously agreed formula or method.

        The QWBA also outlines what records companies must keep and what methods of calculating the interest payable could be based on. The QWBA can be found on Inland Revenue’s website here.

• RA 22/01 – Consequences of acquiring, possessing, or using electronic sales suppression tools – This Revenue Alert sets out the Commissioner’s response to a threat arising from electronic sales suppression (ESS) tools. These tools are used for the purposes of evading tax by altering point-of-sale data collected by businesses to understate or completely conceal revenue. This Revenue Alert sets out a number of new measures that have been introduces to discourage the use and spread of these ESS tools within New Zealand. The Revenue Alert can be found on Inland Revenue’s website here.

• IS 23/01 – Tax avoidance and the interpretation of the general anti-avoidance provisions sections BG 1 and GA 1 of the Income Tax Act 2007 – Inland Revenue has finalised its interpretation statement on tax avoidance. The statement sets out the application of sections BG 1 and GA 1 of the Income Tax Act 2007. This includes the Supreme Court decision in Frucor Suntory New Zealand Ltd v CIR [2022] NZSC 113. It also reflects the view of the Supreme Court in Ben Nevis Forestry Ventures Ltd v CIR [2008] NZSC 115 and the application in Penny v CIR [2011] NZSC 95. IS 23/01 replaces IS 13/01 and is available here along with the accompanying fact sheet here.

• BR PUB 23/01 – 23/03 – GST – Directors’ fees and board members’ fees – Inland Revenue has released three Public Rulings concerning the GST treatment of fees paid to directors and board members. The rulings are effective from 1 April 2023 for an indefinite period. The rulings are available here along with an accompanying fact sheet here. Inland Revenue has also released an Operational Position which give guidance on the application of BR PUB 23/01 – 23/03 which can be found here.

• TDS 23/01 – Whether settlement payments were taxable employment income – In this technical decision summary, the Tax Counsel Office (TCO) found that settlement payments received by the taxpayer from their former employer under a settlement agreement were amounts derived in connection with employment or exit inducements. The TCO decided that the settlement payments were not in the nature of payments for hurt and humiliation under s 123(1)(c)(i) of the Employment Relations Act. The TDS can be found here.

• NSC 2023 – National standard costs for specified livestock determination 2023 – This determination lists the national standard costs for specified livestock and is made in terms of section EC 23 of the Income Tax Act 2007. It shall apply to any specified livestock on hand at the end of the 2022 – 2023 income year where the taxpayer has elected to value that livestock under that national standard cost scheme for that income year. The determination can be found here.

• DET EE 23/01 – Declaration of January flood events, beginning 26 January 2023 and Cyclone Gabrielle, which crossed the North Island of New Zealand during the period of 12 February 2023 to 16 February 2023, as emergency events for the purposes of family scheme income – This determination declares the January flood events and Cyclone Gabrielle as emergency events for the purposes of family scheme income and applies to the period between 26 January 2023 – 31 August 2023. A payment made within this period (inclusive of both dates) to relieve the adverse effects of the January flood and Cyclone Gabrielle will not be included in a person’s family scheme income under s MB 13(1) of the Income Tax Act 2007. The determination can be found here.

• SPS 23/01 – Disputes process - This Standard Practice Statement sets out the rights and responsibilities of a taxpayer and the Commissioner when either party commences a dispute in respect of an assessment, adjustment to an assessment or other disputable decision. This SPS applies from 24 February 2023. SPS 23/01 replaces SPS 16/05 and SPS 16/06 and can be found here.

• DET 23/01 – Amortisation Rates for Landfill Cell Construction Expenditure – This determination sets out the amortisation rates for landfill cell construction expenditure as determined by the Commissioner of Inland Revenue. It is made pursuant to s 91 AAN of the Tax Administration Act 1994. This applies to taxpayers, who meet the criteria under s DB 46 of the Income Tax Act 2007, who have incurred landfill cell construction expenditure in an income year starting on or after 1 April 2022. This determination replaces DET 05/02 and can be found here.

• DET EE 004 – Tax treatment of reimbursing payments made to employees who work from home and/or payments made for an employee’s use of personal telecommunications tools and/or usage plans in their employment - This determination sets approved de minimis thresholds for tax-free reimbursements of employee expenditure and can be found here.

• CS 23/01 – Escalation policy for technical issues - This is the CIR’s statement on the Escalation policy, an Inland Revenue process designed to ensure staff apply Inland Revenue’s view of the law consistently while enabling a view to be reconsidered. The statement can be found here.

• ITR34 - 2023 International tax disclosure exemption - This Determination sets out the 2023 international tax disclosure exemption and applies to the tax year ended 31 March 2023. The scope is the same as the 2022 disclosure exemption. Section 61 of the Tax Administration Act 1994 requires taxpayers to disclose interests in foreign entities. This disclosure exemption removes the requirement of a resident to disclose in certain circumstances. This also removes the requirement for a non-resident or transitional resident to disclose interests held in foreign companies and foreign investment funds. The determination can be found here.

• QB 23/03 – Income Tax – Donation tax credits and payments made by parents to childcare centres – This Questions We’ve Been Asked explains when a parent’s payment to their child’s childcare centre will qualify for a donation tax credit. The QWBA can be found here along with the accompanying fact sheet here.

• QB 23/04 – GST – Payments made by parents to childcare centres – This Questions We’ve Been Asked explains the GST treatment of payment made by parents to their child’s childcare centre. The QWBA can be found here along with the accompanying fact sheet here.

January Flood Event and Cyclone Gabrielle relief measures

Various relief measures have been implemented for those adversely affected by the January Flood Event and Cyclone Gabrielle, including:

• Cyclone Gabrielle has been declared an emergency event for the purposes of Use of Money Interest Remission (UOMI) rules. This declaration allows Inland Revenue to remit interest charges on late payments of tax. The Tax Administration (February Cyclone Event) Order 2023 (SL 2023/10) came into force on 20 February 2023. The Commissioner may remit interest charged under Part 7 of the Act if it is equitable that the interest be remitted, the taxpayer asked for the relief as soon as practicable, and the taxpayer made the payment as soon as practicable. The Order expires on 30 June 2023.

• The Tax Administration (January Flood Events) Order 2023 (SL 2023/3) came into force on 8 February 2023 and declared the January flood events to be emergency events for the purpose of s 183ABA of the Tax Administration Act 1994.

• The Tax Administration (Research and Development Tax Credit Deadlines for Taxpayers Affected by Weather Events) Order 2023 (SL 2023/11) came into force on 20 February 2023. The Order extended the filing deadlines under ss 33E, 68CB and 68CC of the Tax Administration Act 1994 in the period starting on 26 January 2023 and ending on 7 March 2023. The Order appointed 31 March 2023 as a further date on or before which these filings must be made. This Order applied to taxpayers affected by the January flooding and/or the February cyclone events.

• The Tax Administration (Extension of Period of Relief for Certain Disposals of Trading Stock) Order 2023 (SL 2023/16) came into force on 31 March 2023. The Order extends the period during which ss GZ 4 and GZ 5 of the Income Tax Act 2007 apply, changing the end date from 31 March 2023 to 31 March 2024. The Order will be revoked on 30 April 2024.

• Inland Revenue has waived penalties for late payments or late filing of returns for those affected by the flooding. This applies to Auckland, Northland, the Bay of Plenty, Thames/Coromandel and Waikato.

New use-of-money interest and fringe benefit tax rates

Two Orders in Council have been made updating the following rates:

• The new underpayment rate for use of money interest is 10.39% (previously 9.21%). The new overpayment rate is 3.53% (previously 2.31%). These rates apply from 9 May 2023.

• The new prescribed rate of 7.89% applies for calculating fringe benefit tax on employer-provided loans from the quarter beginning 1 April 2023 and subsequent quarters.

Guidance on additional trust disclosure reporting requirements

Upon reviewing the new information in the trust income tax returns being filed for the 31 March 2022 income year, Inland Revenue have published guidance on several common errors being made in relation to the additional trust disclosure reporting requirements.

The guidance covers common errors when filling out:

• Details of the person or entity
• The TIN field
• Date of birth
• Details of settlors and settlements
• Financial statements

The guidance can be found on Inland Revenue’s website here.

Further, in an effort to reduce disclosure requirements for small trusts, Inland Revenue are changing the criteria for trusts to declare they are non-active so that they are not required to file returns and or comply with the trust disclosure rules. More details on the updated criteria can be found on Inland Revenue’s website here.

Information release on dividend integrity and personal services income attribution

Inland Revenue have issued an information release on the dividend integrity, personal services income attribution and ASC changes proposed in March 2022. The information release publicly confirms Inland Revenue’s recommendation to put the proposed dividend integrity and personal services income attribution changes on hold. Inland revenue also recommended that if/when work resumes on dividend integrity measures, only related-party transactions should be targeted.

For the ASC changes, the recommendation was to progress by discussion with accounting platform software providers, with a view for the changes to be effective from 1 April 2024.

Australian Treasury releases Exposure Draft Bill

The Australian Treasury released an Exposure Draft Bill to deny deductions for payments by significant global entities (SGEs) to low-tax jurisdictions relating to intangible assets. The proposed measure is intended to deter SGEs from entering into arrangements that are structured so that an associate of an SGE derives income from exploiting intangible assets in a low corporate tax jurisdiction, while deductions for the related payments the SGE made to the associate are claimed in Australia.

For more information see the EY Global Tax News alert here.

EU member states unanimously adopt the Minimum Tax directive via written procedure

On 15 December 2022, European Union (“EU”) member states unanimously adopted the directive ensuring a global minimum level of taxation for multinational enterprise (“MNE”) groups and large-scale domestic groups in the EU.

The Directive introduces minimum effective taxation for large multinationals with annual revenues of at least €750 million. It sets forth a system consisting of two interlocked rules – the income inclusion rule (“IIR”) and the Undertaxed Profit Rule (“UTPR”) – through which an additional amount of tax called a “top-up” tax should be collected each time the effective tax rate due on income of an MNE group in a given jurisdiction is below 15%.

The IIR will be applicable in EU member states for fiscal years starting on or after 31 December 2023, while the Directive provides for the Undertaxed Profit Rule (“UTPR”) to apply for fiscal years starting on or after 31 December 2024. As such, EU member states have until 31 December 2023 to transpose the directive into national legislation.

For more details see the EY Global Tax Alert here.

UAE introduces transfer pricing rules

UAE has introduced transfer pricing (“TP”) rules as part of its Corporate Tax Law. The rules include several TP provisions that are broadly aligned with OECD principles, including:

• Transactions and arrangements between related parties and connected parties should meet the arm’s length standard
• Businesses will be required to maintain TP documentation and submit a disclosure form, subject to meeting certain conditions.
• Free zone persons can continue to maintain their 0% tax position, subject to meeting certain conditions, which includes satisfying TP requirements.
• Businesses may be able to apply for advance pricing agreements.

The Corporate Tax Law for the UAE, along with the TP provisions will be effective from 1 June 2023.

For more details see the EY Global Tax Alert here.