TAX TIPS AUGUST 2018 - PWC

 
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TAX TIPS AUGUST 2018 - PWC
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                          Tax Tips
                          August 2018

In this issue:
   New tax bill
   simplifies taxation
   of individual
   income

   New tax bill impacts
   not-for-profit
   entities

   New tax bill
   proposes changes to
   the binding rulings
   regime

   Changes to our
   international tax
   regime: Six things
   you need to know

   Update on
   the Customs and
   Excise Act 2018:
   Immediate action
   required for
   importers under
   the provisional
   value scheme
TAX TIPS AUGUST 2018 - PWC
New tax bill simplifies taxation of
individual income
The Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Bill
contains proposed changes for the next stage of Inland Revenue’s business transformation programme.
The Bill was introduced on 28 June and has passed its first reading in Parliament.

The draft legislation follows earlier        • If an individual is using an “unsuitable”     2. Making year end obligations as
consultation in June last year and builds      rate for resident withholding tax             simple as possible
on recently enacted changes relating           (RWT) withheld from their investment
to employment and investment income            income, Inland Revenue may contact            Again, the changes around year end
reporting, which we discussed in our April     an individual regarding this. Inland          obligations hinge on Inland Revenue
2018 issue of Tax Tips.                        Revenue will instruct the investment          receiving more timely information about
                                               income payer to update the rate used if       individuals. Simplifying the end of year
The Bill introduces changes focussed on                                                      income tax process is the key change.
                                               the individual accepts the suggested rate
three key areas. Note that the following
                                               or if no response is received within 20       The current process will be replaced with
proposals do not remove a taxpayer’s
                                               working days. The proposed 20 working         a pre-populated account that includes
ability to complete a paper-based form
                                               day rule is based on the premise that the     all income information Inland Revenue
should they wish to do so.
                                               amount of money involved in the area          holds about the individual. Individuals
                                               of investment income is usually much          who only earn “reportable income” will
1. Ensuring individuals are taxed
                                               smaller than that of employment income.       not have to do anything unless they know
most appropriately throughout the
                                               Thus, there is less risk of the proposed      the reportable income information is
tax year                                       change leading to unsuitable amounts of       incomplete.
The proposals in this area hinge on            withholding.
Inland Revenue’s ability to use timely                                                       Only those people who earn income, or
                                             • The current “special tax codes” will be       have deductions Inland Revenue does not
employment and investment income               replaced with “tailored tax codes”. A
information to determine whether                                                             already know about (“other income”), will
                                               new online application process will be        have to provide further information to
taxpayers are using the most appropriate       implemented for tailored tax codes.
tax codes and rates during the year. The                                                     Inland Revenue.
                                               Inland Revenue will be able to contact
proposals are:                                 individuals to suggest a tailored tax code.
• If an individual who receives                This proposal aims to reduce the cash
  employment income is on an                   flow burden that secondary tax codes can
  “unsuitable” tax code, Inland Revenue        impose on people with multiple jobs or
  may suggest a change to the tax code.        income sources.
  If the individual consents, Inland
  Revenue will notify the employer of
  this change. This builds on the current
  practice whereby Inland Revenue notifies
  individuals and employers of incorrect
  tax codes, which must be corrected.

PwC                                                                                                          Tax Tips August 2018   2
TAX TIPS AUGUST 2018 - PWC
An individual’s tax assessment will occur
when either:                                    Our thoughts
• they have confirmed the tax information       We welcome these changes as they should make it much easier for individuals to
  is complete, or                               interact with Inland Revenue and to ensure the right amount of tax is paid at the
• when Inland Revenue is reasonably             right time.
  satisfied that the information is complete.   Ensuring individuals are taxed appropriately throughout the year has been a social
If Inland Revenue is not satisfied that         issue for some time now, with those on secondary tax codes often feeling penalised
the information is complete, a default          for having a second job. If Inland Revenue has the capacity to interact with these
assessment may be issued.                       individuals proactively, they will benefit from these proposed changes once enacted.

The Bill also proposes an error correction      Having a pre-populated account in MyIR will also save time for many individuals,
process for adjustments made before and         especially those who only have reportable income.
after an assessment has occurred.               The changes to donation tax credits should result in many more people claiming
As Inland Revenue will calculate many           these credits, which may encourage further charitable giving – the current process
individuals’ taxable income automatically,      is onerous and discourages many taxpayers from submitting a claim.
the Bill proposes that Inland Revenue will      In our submission on the discussion document last year, one of our key themes was
issue refunds automatically as well.            ensuring that individuals were not absolved from taking responsibility for their
3. Donation tax credits                         own taxes. In our view, the proposals strike the right balance between making it
                                                easier to interact with Inland Revenue, while still putting some responsibility on the
The Bill also introduces changes to             individual to be aware of their tax position.
simplify the process for claiming donation
tax credits:
• Donation receipts will be submitted
  during the year, and can be submitted
  electronically.
• Donation tax credits can be claimed as
  part of the income tax year end process.
• If an individual has already submitted
  receipts during the year, these will
  automatically be taken into account.
  The individual will not have to fill in a
  separate claim form.

PwC                                                                                                           Tax Tips August 2018   3
New tax bill impacts not-for-profit
entities
Several changes in the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and
Remedial Matters) Bill affect the charitable and not-for-profit sector. We acknowledge a number of the
proposed changes are intended to ensure the current rules reflect policy intent. To a large extent, the
changes are taxpayer friendly. However, not-for-profit entities need to be aware of the proposed changes
and determine whether any action is required.

Proposed changes affecting not-for-              Proposed changes to                             • There will be a carve-out for marae assets
profit entities                                  the deregistration rules                          on reservation land established under the
                                                                                                   Te Ture Whenua Māori Act 1993 so that
• The business income exemption under            The Bill proposes a number of remedial            the value of the land and improvements
  section CW 42 of the Income Tax Act            changes to the current tax rules for              on the land will be excluded from net
  2007 will only apply to entities that are      deregistered charities.                           asset calculation.
  registered under the Charities Act 2005.
                                                 Under the charity deregistration tax rules,     • Market value will need to be used when
• The deemed disposal provisions for             the net assets of a deregistered charity          calculating the entity’s net assets unless
  depreciation recovery income will              must be transferred or disposed of for            a prescribed method is required for a
  apply when a taxable entity becomes a          charitable purposes or in accordance              particular asset.
  registered charity.                            with the charity’s rules contained on
                                                                                                 • The Bill clarifies that assets transferred
• Entities seeking donee status for              the Charities Services register within 12
                                                                                                   to another charity in accordance with the
  donation tax credit, gift deduction, or        months. Otherwise, the value of those net
                                                                                                   deregistration rules do not also qualify
  fringe benefit tax exemption purposes          assets will be subject to income tax. The
                                                                                                   for a gift deduction thereby removing the
  must obtain approval from the                  calculation of net assets excludes assets
                                                                                                   ability to both reduce the deregistration
  Commissioner of Inland Revenue.                received from the Crown in relation to a
                                                                                                   tax liability and be eligible for a gift
                                                 Treaty of Waitangi settlement claim or
• Entities with charitable purposes must                                                           deduction under the charitable giving
                                                 under the Māori Fisheries Act 2004 as well
  be registered charities in order to obtain                                                       rules.
                                                 as any non-cash assets gifted to the entity
  donee status.
                                                 when it was exempt from income tax.             • There will be a de minimis threshold
• Penalties, use-of-money interest, and                                                            of $5,000 in net assets so that small
  avoidance provisions will apply to             The proposed changes are:
                                                                                                   charities are excluded from the
  donation tax credits that have been            • Potential over-taxation of deregistered         deregistration tax rules.
  overpaid.                                        charities will be prevented in group
                                                                                                 The proposed changes, if enacted, will
• The disclosure requirements that apply           structures where multiple members in
                                                                                                 apply from 1 April 2019. However, the
  to foreign trusts will also apply to foreign     the group deregister together by allowing
                                                                                                 amendments relating to marae assets
  trusts that are registered charities.            the value of the parent’s shares in the
                                                                                                 and the availability of a gift deduction
                                                   subsidiary to be ignored.
The proposed changes, if enacted, may                                                            for assets transferred to another charity
                                                 • Where a charity sells an interest in a        will apply retrospectively from 14 April
apply from the Bill’s date of introduction,
                                                   subsidiary at arm’s length for market         2014 (when the tax rules for deregistered
enactment date, or from 1 April 2019.
                                                   value, the deregistration tax will            charities were first enacted).
Therefore, it is important that affected
                                                   not apply to that subsidiary if it is
entities act soon to ensure they do not fall
                                                   deregistered as a result of the sale. This
outside the charitable tax rules. This is
                                                   reflects the fact that no actual value
especially important in relation to donee
                                                   leaves the charitable group as market
status.
                                                   value is received for the disposal.

                                                              Get in touch
                                                              We strongly encourage not-for-profit entities to review the proposed changes
                                                              to ensure they will continue to fall within the ambit of the charitable giving
                                                              rules and determine whether they need to seek donee status.
                                                              Please get in touch with your usual PwC adviser if you would like to discuss
                                                              the potential impact of the proposed changes.

PwC                                                                                                                Tax Tips August 2018      4
New tax bill proposes changes to
the binding rulings regime
The Taxation (Annual Rates for 2018-19,           In more detail
Modernising Tax Administration, and
Remedial Matters) Bill also contains
                                                  Short-form ruling                                Expanding the scope of binding
amendments to the binding rulings regime
that will both:                                   The current ruling process can be                rulings
• provide a short-form means for small-to-        complicated and expensive and, therefore,        Under current law, the binding rulings
  medium enterprises (SMEs) to obtain a           out of the reach of small and medium sized       regime only allows Inland Revenue
  binding ruling from Inland Revenue at a         taxpayers. For example, it requires taxpayers    to provide rulings in relation to “an
  lower cost, and                                 to set out in the application each of the        arrangement”. Practically, this has meant that
                                                  taxation laws and the propositions of law for    Inland Revenue is unable to provide rulings
• expand the scope of issues that Inland          which the ruling is sought, and how these        on factual matters, such as a taxpayer’s
  Revenue will be able to rule on (both           laws apply to the facts of the taxpayer’s        purpose or intention when acquiring
  under the proposed short-form                   arrangements. This generally necessitates        property, a taxpayer’s residence, or the value
  application process and the process that        taxpayers engaging a tax adviser to prepare      of property or services.
  currently exists).                              a detailed application, adding further cost to
                                                  the process of obtaining a ruling.               The proposed amendments will introduce
The binding rulings system is an important                                                         a list of matters that Inland Revenue will
feature of the New Zealand tax system.            A short-form ruling process will be available    specifically be able to rule on, including:
It allows taxpayers to obtain certainty in        for taxpayers where:
relation to their tax positions without the                                                        • whether a person is resident or non-
need to resort to the disputes process and        • the taxpayer’s gross income for the              resident in New Zealand
litigation. However, the complexity of the          tax year before the year in which the
                                                                                                   • whether a person has a fixed
process to obtain a binding ruling means            application is made is $5 million or less,
                                                                                                     establishment or a permanent
that, for many SMEs, obtaining a ruling is          and
                                                                                                     establishment in New Zealand
not a practical option. In addition, there are    • the ruling relates to tax that is expected
                                                                                                   • whether two persons are associated
currently a number of issues that Inland            to be less than $1 million.
Revenue cannot rule on (in particular                                                              • whether a person acquired property with
                                                  Under the short-form ruling process, a             the purpose or intention of disposal.
factual, rather than legal, issues).
                                                  taxpayer will still need to describe and
The short-form, low-cost rulings process          disclose all relevant facts and documents.
should result in increasing the availability      However, the taxpayer will only need to state      Our thoughts
of rulings for SMEs. Further, by expanding        the general tax outcome in relation to which
                                                                                                     These amendments should increase
the scope of the issues that Inland Revenue       the ruling is sought.
                                                                                                     the utility of the binding rulings regime
can rule on, the Bill will also increase the
                                                  Currently, Inland Revenue charges fees for         where currently the certainty sought
potential utility of rulings for all taxpayers.
                                                  reviewing and providing a ruling set at a GST      can be undermined by the inability of
For these reasons we support the proposed
                                                  inclusive rate of $161 per hour, along with a      Inland Revenue to rule on the facts.
amendments.
                                                  $322 filing fee. The proposed amendments           However, the practical effect of these
                                                  will also provide Inland Revenue with the          amendments will ultimately depend
                                                  ability to charge lower fees for a short-form      on the reasonableness of Inland
                                                  ruling (although how low these rates will be       Revenue’s approach when considering
                                                  have yet to be determined).                        applications on these factual issues
                                                                                                     and, in particular, the number of the
                                                    Our thoughts                                     assumptions that might be required in
                                                                                                     order to provide a ruling.
                                                    We support the proposed simplified
                                                    ruling options for small and medium
                                                    sized taxpayers. It should provide SME
                                                    taxpayers with greater access to upfront
                                                    certainty on their tax positions and will
                                                    hopefully also lead to a reduction in the
                                                    number of costly, time-consuming tax
                                                    disputes that SMEs currently face.

PwC                                                                                                                  Tax Tips August 2018    5
Changes to our international tax
regime: Six things you need to know
Significant changes to New Zealand’s tax regime for cross-border relationships and transactions are
now enacted. See Tax Tips December 2017 and May 2018 for the technical details of these amendments
targeting base erosion and profit shifting (BEPS).

The impact of the new rules is being felt immediately. All businesses that operate offshore, are part of an overseas based group, or are based
offshore but have a New Zealand presence in any way, shape, or form need to proactively assess how they fit into the rules. Even businesses
operating under long-established and accepted business models may need to start making changes now. The rules come into effect for income
years beginning on or after 1 July 2018.
Here are six things you need to know based on our observations to date:
1. 5% - 15% rise in thin capitalisation         4. Increased transfer pricing                    6. Tax treaties now a sword?
   ratios                                          documentation requirements                       Tax treaties are traditionally thought
   With the tightening of the thin                 The changes to New Zealand’s                     of as a shield from unfair double tax
   capitalisation regime, and ‘safe harbour’       transfer pricing regime place a greater          outcomes rather than a sword that can
   calculation undertaken (broadly) net of         expectation on businesses to prepare             be used to impose tax. The new source
   non-debt liabilities, we are seeing thin        New Zealand specific documentation               rules challenge this way of thinking.
   capitalisation gearing ratios rise between      with a clear focus on the economic               Some of our overseas clients who have
   5% and 15%, and even more in some               substance of an arrangement rather               historically taken the view that income
   cases. It is critical that your business        than just the legal form. To date, this          linked with New Zealand in some way
   forecasts its year-end results and models       has resulted in (i) clients who have not         does not have a New Zealand source are
   the impact of these changes on your             previously had documentation looking             taking steps now to confirm whether
   ratio, particularly where debt to asset         to put the processes in place to ensure          this remains the case.
   ratios have been 40% to 60% in the past.        compliance, and (ii) for businesses with
                                                   documentation, clients reflecting on          And more change is coming …
2. Related-party debt over $10m
                                                   whether their file requires updating in
   All clients subject to the new, stricter                                                      Despite some improvements in drafting
                                                   its format to align to the revised OECD
   requirements of the restricted transfer                                                       and design in various areas through the
                                                   Guidelines.
   pricing rule need to review the pricing                                                       submissions process, errors have been
   of their related party cross-border          5. What’s next for permanent                     picked up as taxpayers have begun to
   debt in detail. Clients we have spoken          establishments?                               navigate the rules in practice. This clearly
   with already are expecting a material           Businesses that would have a deemed           indicates the complexity of the new rules,
   reduction in their New Zealand tax              permanent establishment (PE) arise            and the insufficient time allowed for testing
   deductions for interest payments going          in New Zealand under the new rules            to ensure the rules are correct, workable,
   forward. In line with policy intent,            have started, or are considering options      and indeed capture what and who was
   in many cases an amendment of the               for, restructuring their operations           intended to be captured from the date of
   loan agreement or refinancing of the            to combat the adverse New Zealand             enactment.
   debt is being considered to align the           tax outcomes. This is in line with the        Watch this space as we expect to see the first
   commercial and tax outcome of the               policy intent behind the new rules.           set of remedial changes later this year.
   interest payments, and minimise NRWT            This also has significant impact on how
   inefficiencies.                                 businesses will operate commercially          We also look forward to the release of
                                                   including contractual arrangements            guidance and examples from Policy Officials
3. Unexpected hybrids                                                                            to clarify the scenarios that are intended to
                                                   with third parties (customer, supplier,
   For 30 June balance date clients (where         and employee) and updating internal           be captured and those that are not. We have
   the rules are in effect from 1 July), we        systems to align to the new contractual       strongly encouraged Officials to provide
   are seeing a variety of arrangements /          flows. Therefore, sufficient lead time for    detailed guidance about the circumstances
   structures subject to the new hybrid rules      implementation is crucial.                    in which the rules are and are not intended
   in unexpected circumstances. In some                                                          to apply - we know this guidance will be
   cases, changes to the group structure or                                                      vital given the inherent complexities of the
   business operations are being worked                                                          new rules.
   through to mitigate the effect of the new
   rules. Focus now turns to businesses with
   later balance dates. In our experience,
   New Zealand clients getting the required
   information from overseas parties has
   been sometimes burdensome, and
   businesses should ensure that they allow
   for sufficient lead time to assess their
   operations.

PwC                                                                                                                Tax Tips August 2018    6
Update on the Customs and Excise
Act 2018: Immediate action
required for importers under
the provisional value scheme
The new Customs and Excise Act 2018 (the Act) applies from 1 October 2018. In our June issue of Tax Tips,
we reported on the rewritten legislation and summarised the main changes for businesses.
The “provisional values” scheme is one of the important new measures introduced by the Act. This is
relevant to importers who cannot establish the customs value of goods at the time of importation. It allows
those importers within the scheme to enter a “provisional value” at the time of importation and a final
value later when full information is available. Compensatory interest and penalties (also introduced by
the Act) will not be charged on any difference between provisional and final values.

Importers will qualify to use provisional      An importer who qualifies automatically
values automatically if:                       must notify Customs that they wish to use         If you are an importer
                                               provisional values.
• They have a binding ruling in relation to                                                      and cannot establish
  a transfer pricing agreement (such as an     New Zealand Customs also has discretion           customs value at the time of
  advance pricing agreement (APA)) that        to allow an importer to use the scheme
  involves the acquisition of goods, and       if the importer cannot determine the
                                                                                                 importation of goods, you
  because of that agreement the importer       final Customs value of goods at the time          need to consider whether
  cannot determine the value of the goods      of importation but does not qualify               you should register for the
  at the time of importation.                  automatically to use provisional values.
                                               This might be the case, for example, if the
                                                                                                 provisional value scheme.
• They use the “transaction value” method
  of valuing goods and the following           price paid for goods will change because          New Zealand Customs has
  further adjustments to the value need to     of transfer pricing but the importer does         announced that applications
  be made after importation of goods:          not have an APA or the final value and / or
                                               contract payment are not known when the
                                                                                                 are expected to take up to
   (i)    royalty or licence fees              goods are first imported.                         30 working days to process.
          payments that the buyer
          must pay (directly or                Further information is available on the New       This means, if you wish to
          indirectly) as a condition of        Zealand Customs website at:                       use provisional values from
          sale of the goods for export         https://www.customs.govt.nz/2018-act-             1 October, you will need to
          to New Zealand; or                   education/                                        submit your application with
   (ii)   proceeds of any subsequent                                                             supporting information
          resale, disposal, or use of the
          goods by the buyer that are                                                            by 20 August.
          to accrue to the seller.

Get in touch
If you would like to discuss provisional values or any of the other customs and excise changes, please contact your usual PwC adviser or one
of our Indirect Taxes specialists including:
Eugen Trombitas                                Ian Rowe                                        Kazune Obata
Partner                                        Director                                        Manager
T: +64 9 355 8686                              T: +64 4 462 7274                               T: +64 9 355 8090
M: +64 21 493 903                              M: +64 27 274 2698                              M: +64 21 266 3287
E: eugen.x.trombitas@pwc.com                   E: ian.rowe@pwc.com                             E: kazune.s.obata@pwc.com

Phil Fisher                                    Catherine Francis
Partner                                        Director
T: +64 4 462 7159                              T: +64 9 355 8801
M: +64 27 462 7505                             M: +64 20 406 76744
E: phil.j.fisher@pwc.com                       E: catherine.d.francis@pwc.com

PwC                                                                                                              Tax Tips August 2018   7
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Contributors
Phil Fisher                                        Peter Boyce
Partner                                            Partner
T: +64 4 462 7159                                  T: +64 9 355 8547
E: phil.j.fisher@pwc.com                           E: peter.boyce@pwc.com

Eugen Trombitas                                    Erin Venter
Partner                                            Partner
T: +64 9 355 8686                                  T: +64 9 355 8862
E: eugen.x.trombitas@pwc.com                       E: erin.l.venter@pwc.com

Briar Williams                                     Sandy Lau
Partner                                            Director
T +64 9 355 8531                                   T: +64 4 462 7523
E: briar.s.williams@pwc.com                        E: sandy.m.lau@pwc.com

Helen Johnson                                      Emma Richards
Director, PwC Legal                                Director, PwC Legal
T: +64 9 355 8501                                  T: +64 4 462 7162
E: helen.n.johnson@pwc.com                         E: emma.h.richards@pwc.com

Catherine Francis                                  Briar Paterson
Director                                           Director
T: +64 9 355 8801                                  T: +64 9 355 8236
E: catherine.d.francis@pwc.com                     E: briar.k.paterson@pwc.com

Harry Cundy                                        Josie Goddard
Senior Manager, PwC Legal                          Senior Manager
T: +64 9 355 8623                                  T: +64 4 462 7160
E: harry.r.cundy@pwc.com                           E: josie.r.goddard@pwc.com

Laura Lee
Senior Associate
T: +64 9 355 8346
E: laura.e.lee@pwc.com

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