Summary of proposed amendment
Following reforms of the international tax rules, there are concerns that some companies may be able to use their branch equivalent tax accounts (BETA) debit balances to effectively continue conduit tax relief. This is contrary to the intention of the reforms. The proposed amendments therefore cancel those BETA debits that arose from conduit-relieved dividends. Cancellation of these BETA debits will not lead to double taxation because conduit-relieved dividends would not have been taxed in the first place.
Application date
The amendment applies from all income years beginning on or after 1 July 2009.
Key features
A new provision (section OE 11B) generates a BETA credit equal to any BETA debits generated in respect of foreign dividend payment (FDP) liabilities that have been reduced under section RG 7.
The bill also removes subsection OE 7(1)(c)(iii). This is intended to clarify that section OE 7 (which allows companies to use BETA debits to satisfy an income tax liability in relation to attributed controlled foreign company (CFC) does not apply to BETA debits that have been generated on dividends that have been conduit-relieved under section RG 7.
Background
Recent reforms to the international tax rules included the repeal of conduit tax relief and a two-year phase-out period for companies with debit balances in their branch equivalent tax accounts (BETAs).
Repeal of conduit tax relief
Conduit tax relief was a mechanism that relieved tax on income earned in foreign subsidiaries to the extent that the New Zealand parent company was owned by non-residents. The new rules introduced an active income exemption for controlled foreign companies and an exemption for most foreign dividends received by companies, making conduit tax relief largely redundant. Consequently, conduit tax relief was repealed, with application from all income years beginning on or after 1 July 2009.
Phase-out of branch equivalent tax accounts
Under the old international tax rules controlled foreign company (CFC) income was taxed twice: when the income was earned by the CFC and attributed back to its New Zealand shareholders and when the CFC paid a dividend to those shareholders. Branch equivalent tax accounts (BETA) were the mechanism for relieving the double taxation that could otherwise occur from having these two layers of tax.
As part of the international tax reforms, an exemption has been introduced for most types of foreign dividends received by companies. This removes the potential for double taxation and makes it possible to phase out BETA accounts held by companies.
In February 2008 the government announced that once the international tax changes took effect, companies would be able to carry forward and use any existing BETA debit balances for a further two years. This two-year transitional period for BETA debits was intended to relieve the double taxation that could occur when a dividend was taxed under the old rules ahead of the underlying income being taxed again under the new international tax rules.
The problem
Officials have since become aware of a small number of companies with very large BETA debit balances. There is a concern that these BETA debit balances could be used to effectively prolong conduit tax relief for a further two years. This is a particular concern in respect of dividends that have been conduit-relieved as such dividends generate a BETA debit even though no tax has been paid on the dividend. This means that these BETA debits are not needed to relieve double taxation, but can be used to offset tax on some other attributed foreign income.
To address this concern, the proposed amendments cancel those BETA debits that arose from conduit-relieved dividends. Other BETA debits will still be available for use during the two-year transitional period.