Other policy matters

BETA DEBITS

Clauses 29 and 30

The Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 introduced a number of reforms to the international tax rules. Before the rule changes, New Zealand companies with controlling interests in foreign companies were taxed twice on the income of those companies. Firstly, they were taxed when the company earned the income (the company’s income was “attributed” back to the New Zealand shareholder). Secondly, they were taxed when the money was returned to New Zealand as a dividend.

To prevent double taxation, branch equivalent tax accounts (BETAs) were used. If tax was paid on attributed income first, a credit arose in the BETA and could be used to satisfy any subsequent tax liability relating to a dividend. If tax was paid on a dividend first, a BETA debit arose and could be used to satisfy any subsequent liability for tax on attributed income.

Since the changes to the international tax rules, New Zealand companies with controlling interests in foreign companies are taxable at most once – when the income is earned by the company. BETA accounts can therefore be phased out. [1]

Transitional issues and announcement of transitional period

Although BETA accounts can be phased out, they do need to remain for a transitional period to prevent double taxation that could occur if:

• tax was paid on a dividend from a controlled foreign company, under the old rules; and
• the income from which the dividend was paid is attributed for tax purposes later than the dividend, under the new rules; and
• the attributed income is of a kind that is taxable under the new rules (that is, “passive income” such as interest or royalties).

In that event, BETA debits that arose from tax paid on the dividend should be able to be used – for a limited period – to relieve tax on passive attributed income.

For this reason, it was announced in mid-2008 that existing BETA debits could be retained and used for a period of two years.

The conduit tax relief regime

Overlaying the taxation of interests in controlled foreign companies and the BETA mechanism, were rules to give conduit tax relief. Conduit tax relief meant that if the New Zealand company with the controlling interest in a foreign company was itself owned by a foreigner, New Zealand would not impose any tax on income from the interest (because it was effectively foreign-sourced income of a non-resident, even though passing through a resident company). Even though no tax was imposed by New Zealand when conduit relief was claimed, BETA credits or debits continued to arise and to be used; conduit relief was only claimed when there were insufficient credits or debits to offset all tax liabilities. [2]

The conduit tax relief rules were repealed as part of the international tax change and replaced by an active income exemption and a foreign dividend exemption. No further conduit tax relief will arise.

Developments following changes to the international tax rules

Following the changes to the international tax rules, it was brought to our attention that it was unnecessary to retain BETA debits if conduit tax relief had been claimed on the dividend that generated the debit. If conduit tax relief was claimed when the BETA debits arose, no tax was paid and so there is no double taxation to relieve. The income will be taxed once at most, under the new rules.

The change in the current bill

The purpose of the change in the current bill is to cancel those BETA debits that arose from dividends that were subject to conduit tax relief. There is no need for the BETA debits in that case, because there is no possibility of double taxation.

 

Issue: All BETA debits should be retained for a two-year transitional period

Submissions

(New Zealand Institute of Chartered Accountants, New Zealand Law Society, Corporate Taxpayers Group, PricewaterhouseCoopers, Telecom)

All BETA debits should be retained for a two-year transitional period. (New Zealand Law Society, Corporate Taxpayers Group, PricewaterhouseCoopers, Telecom)

Cancelling BETA debits would have a retrospective effect. (New Zealand Law Society, Corporate Taxpayers Group, PricewaterhouseCoopers, Telecom)

The provision would retrospectively reverse conduit tax relief available before the effective date of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009. The scheme of New Zealand’s old international tax rules was to apply tax (or conduit relief) at the earlier of distribution to a New Zealand resident or attribution to the New Zealand resident under the CFC or FIF rules. (New Zealand Law Society)

Retrospective legislation that has a negative effect on taxpayers should be used sparingly and only when there are serious base maintenance concerns. The group cannot understand how there is now a base maintenance concern that did not exist when the detailed tax reforms began in 2006 and when the press release was issued in 2008. (Corporate Taxpayers Group)

Cancelling BETA debits would impact negatively on businesses that made decisions based on the previously announced two-year window. (New Zealand Law Society, Corporate Taxpayers Group, PricewaterhouseCoopers, Telecom)

New Zealand companies with BETA debit balances have been making decisions, issuing financial reports, and making representations to the market and shareholders on the basis of the previously announced two-year window. Telecom has made key business decisions relying in good faith on what had been, until recently, a clear publicly stated position. The proposed change will have a net cost to Telecom of more than $20 million and will require Telecom to restate its accounts and financial projections. (Telecom)

The proposed measure will negatively impact on ordinary business arrangements in addition to any potential mischief. (New Zealand Institute of Chartered Accountants)

Comment

There are essentially two types of BETA debit: one where the BETA debit was generated as a result of tax being paid on the dividend, and another where the BETA debit was generated even though no actual tax was paid on the dividend because of conduit tax relief.

If tax has been paid on the dividend there is potential for double taxation in the transition to the new international tax rules. Accordingly, it is appropriate to allow companies to continue to use these BETA debits for a two-year transitional period.

If no tax has been paid on the dividend (because of conduit tax relief) there is no potential for double taxation. If these BETA debits are not cancelled, the company that has them can use them to offset any tax on attribution of foreign income, resulting in no taxation at all.

The July 2008 commentary on the Taxation (International Tax, Life Insurance, and Remedial Matters) Bill was explicit that the transitional period for BETA debits was “intended only to prevent double taxation in the rare cases in which dividends have been paid significantly in advance of attributed passive income arising.” [emphasis added]. Double taxation is not an issue for conduit income.

Allowing taxpayers to keep these debits will effectively prolong conduit tax relief and allow non-taxation of passive income for two years. Based on the BETA debit balances that we know about, it is estimated that retaining all BETA debits could have a potential fiscal cost of $200 million or more.

Retrospective impact

The proposed change will cancel BETA debits in cases when there is no possibility that taxation of future income will be double taxation. It will not reverse the conduit relief that applied at the time the dividend was derived and the BETA debit was generated.

However, if attributed income from an interest in a controlled foreign company is subject to tax under the new rules, there will be no further conduit tax relief. This means that companies that entered into arrangements when conduit tax relief was available will not get what they expected.

Sometimes when tax laws are changed, existing arrangements are “grandparented” so that the rules applying when they were entered into continue to apply after the rules changed. However, there was no grandparenting when the international tax rules were changed.

For example, New Zealanders that owned companies in “grey list” countries may have entered into arrangements on the assumption that they would enjoy an exemption from New Zealand tax on their income, but that income will be taxed under the new rules if it is “passive” income. This will occur even if the income is income out of which a dividend was paid under the old rules.

The lack of grandparenting was intentional. The international tax rule changes were part of a package that replaced the comprehensive taxation of controlled foreign company income with an active income exemption and a foreign dividend exemption. As part of the package, conduit tax relief and the grey list exemption were repealed. It was not intended that companies would be able to make use of the active income exemption for some existing arrangements while at the same time continuing to have the benefit of either the conduit or grey list exemptions for other existing arrangements.

Recommendation

That the submissions be declined.

 

Issue: Only those BETA debit balances that were generated after 2 June 2008 (the date of the policy announcement) should be cancelled

Submissions

(New Zealand Law Society, Telecom, PricewaterhouseCoopers)

Any perceived risk to the tax base should exist only through CFCs (and FIFs where relevant) paying disproportionately large dividends to CTR companies, in order to accelerate the taxing point for such income to maximise the extent to which it qualifies for conduit relief. (New Zealand Law Society)

Before 2 June 2008, dividends can reasonably be expected to have been in a “business as usual” category, and not driven by any desire to create BETA debits that could provide a benefit following the repeal of the conduit regime. (New Zealand Law Society)

This would target the potential mischief of companies generating BETA debits after the announcement of the Government’s intention to retain BETA debits for a two-year transitional period. It would also mitigate the business uncertainty and unfairness that would occur from cancelling earlier BETA debits. (Telecom)

The government should introduce a specific avoidance rule if it is concerned about particular mischief arising from the transitional rules. We understand that the mischief the Government is concerned with in relation to the transitional rules is where taxpayers have created BETA debits in anticipation of the conduit tax relief rules being repealed. Specific avoidance rules could be used to target such mischief. (PricewaterhouseCoopers)

Comment

Cancelling only those BETA debit balances that were generated after 2 June 2008 would prevent companies from generating BETA debit balances to take advantage of the two-year transitional window after the policy was announced. Although such behaviour would be worrying, this is not the basic policy concern.

The basic policy concern is that retaining BETA debits arising from conduit relief – whenever they arose – effectively extends the conduit tax regime for some companies. That is, those companies can escape tax on future attributed income from controlled foreign companies, even though the conduit tax relief regime is supposed to have ceased and there is no possibility of double taxation.

In this respect the problem is more about any existing BETA debit balances, rather than newly created BETA debits.

Recommendation

That the submissions be declined.

 

Issue: The drafting of the clauses in the bill does not match the policy intent as expressed in the commentary and should be amended

Submissions

(Telecom, New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers, New Zealand Law Society, Corporate Taxpayers Group)

The bill, as drafted, cancels all BETA debits, including those relating to actual tax paid or foreign dividend withholding payments. Cancelling such BETA debits creates double taxation. (Telecom)

The drafting of the provision means that BETA debits would be cancelled out for all dividends from CFCs rather than just those that were conduit relieved. (New Zealand Institute of Chartered Accountants)

The provision needs to be reworded as this section extinguishes BETA debits that arise from dividends where actual tax was paid, as well as BETA debits that arise where conduit tax relief was claimed in respect of the dividend.
(PricewaterhouseCoopers)

To achieve the policy intent the legislation would need to be quarantined to BETA debits from dividends which have benefited from section RG 7 (that is, dividends that have benefited from conduit relief). (Corporate Taxpayers Group)

The proposed new section OE 11B should be limited to BETA debits arising in respect of conduit-relieved dividends paid from 2 July 2008. (New Zealand Law Society)

Comment

Officials agree that the current drafting does not reflect the policy intent. The policy intent was that BETA debits would only be cancelled to the extent that they arose from dividends that were subject to conduit tax relief. To correct this, a specific reference to those BETA debits that were generated in respect of tax liabilities that were offset by conduit relief under section RG 7 needs to be added to the provision.

Recommendation

That the submissions be accepted.

 

Issue: The application date should be modified to ensure debits can be used against pre-reform CFC income

Submissions

(Ernst & Young)

Some modification of the legislation is required to ensure BETA debit balances remain available for use to offset income tax liabilities on attributed CFC income for pre-reform CFC years.

Comment

The submission identified a technical problem with the application date of the provisions. As the bill stands, BETA debits will be cancelled as soon as the international tax rules apply. This causes a difficulty because a company might not file an income tax return for CFC income that was earned prior to the reforms, until months after the new international tax rules take effect. In such cases the company would be unable to use its BETA debits against pre-reform income (they would already be cancelled).

In general, we accept that companies should be able to use their BETA debits to offset tax on pre-reform income (at least until the complete repeal of BETA accounts). We note that it adds some complexity to the legislation to allow this, in part because measures are required to prevent manipulation.

Recommendation

That the submissions be accepted, subject to appropriate anti-manipulation rules being included.

 

Issue: Clarifying how taxpayers should measure the amount of debit balance which is cancelled

Submissions

(Ernst & Young)

The legislation should clarify how taxpayers should measure the amount of the debit balance which is cancelled. More specifically, ordering rules for BETA debits and credits such as those contained in section OA 8(8)(c) should be included in the provision.

Comment

The policy is to cancel BETA debits arising because a conduit-relieved dividend has been paid and not BETA debits arising for other reasons.

If a company’s BETA debits have arisen only from conduit-relieved dividends, then it is straightforward to work out how many debits to cancel (all of them).

When some BETA debits have arisen for other reasons, and BETA debits have been used to offset tax liabilities, it may be unclear which debits have been offset and which have not.

The submission suggests that the legislation should include an ordering rule to make it clear which debits have been offset and which remain.

Recommendation

That the submissions be accepted.

 

GIFT DUTY EXEMPTIONS

Issue: Support for the proposed exemptions

Submission

(Corporate Taxpayers Group, New Zealand Institute of Chartered Accountants)

Corporate Taxpayers Group supports the proposed exemptions.

New Zealand Institute of Chartered Accountants supports the intent of the proposed exemptions.

Recommendation

That these submissions are noted.

 

Issue: Gifts to central government bodies – clause 82(3)

Submission

(New Zealand Institute of Chartered Accountants)

The rationale for exempting state service bodies covered by “section 2 of the State Sector Act 1988” is not immediately apparent. The submission questions the appropriateness of using the “state services” definition to target the application of the proposed exemption, as this would mean that the exemption would be applicable to organisations that are also subject to income tax – that is, income-tax-paying entities. The breadth of the definition should be carefully reconsidered.

Comment

The proposed exemption is intended to apply to gifts to organisations that are part of the “state services as defined in section 2 of the State Sector Act 1988”, which are not educational institutions and not carried on for the private pecuniary profit of any individual.

We accept that some of the state service bodies that could benefit from the gift duty exemption are also income-tax-paying entities. However, it is important to keep in mind that the policy objectives underlying income tax and gift duty may not necessarily be the same. For example, certain central and local government entities were intended to be explicitly subject to tax to facilitate their commercial focus and to ensure that they did not enjoy an advantage over their competitors.

We also consider that the requirement in the proposed legislation that no person should be able to derive a private pecuniary benefit from a local or central government body, over and above that which would normally be permitted, should provide sufficient comfort that the exemption is appropriately targeted.

Recommendation

That the submission be noted.

 

Issue: Gifts to local authorities and council-controlled organisations – clause 82(4)

Submission

(New Zealand Institute of Chartered Accountants, Russell McVeagh)

If a person makes a gift to either a local authority or a council-controlled organisation, then such gifts should not be subject to gift duty. There are a large number of local authorities that receive gifts or bequests from members of the public which are used for the betterment of the area they administer. (New Zealand Institute of Chartered Accountants)

If there is an amalgamation of various local authorities then gift duty should not apply to that reconstruction. (New Zealand Institute of Chartered Accountants)

The proposed exemption should not be restricted to the tax definition of “council-controlled organisation” contained in the Income Tax Act 2007. Instead, the proposed exemption should use the definition of “council-controlled organisation” in the Local Government Act 2002. (Russell McVeagh, New Zealand Institute of Chartered Accountants)

Comment

The first two submissions are already covered by the proposed exemption. The proposed exemption will exempt from gift duty gifts made to either a local authority, or a council-controlled organisation. It will also cover transfers of property in amalgamation situations.

Officials agree with the third submission. The tax definition of “council-controlled organisation” was intended to exclude non-business, non-corporate entities from being eligible for the charities-related income tax exemption. We accept that this definition is not appropriate for gift duty exemption purposes as it is too restrictive.

Consequently we consider that the local government definition of “council-controlled organisation” should be used instead, as it would better meet the stated policy intentions. The local government definition of “council-controlled organisation” includes council-controlled trusts which are not in the business of making a profit but hold significant funds for charitable (or public) purposes benefiting all or a significant portion of the public within the territory of the local authority. Because there is some uncertainty under the Charities Act 2005 whether such trusts can be registered with the Charities Commission, they would not be eligible for the current gift duty exemption that applies to registered charities and therefore donors would be required to account for gift duty on any gifts over the threshold that they make to council-controlled trusts. For this reason, it would be appropriate for gifts made to these organisations to be eligible for the proposed exemption.

Recommendation

That the third submission be accepted. This means that the local government definition of council-controlled organisation should be used to define council-controlled organisation for gift duty exemption purposes, not the tax definition of council-controlled organisation.

 

Submission
(Deloitte)

The exemption from gift duty for gifts made to local authorities and council- controlled organisations should apply from 1 July 2008.

Comment

The submission seeks to apply the exemption from 1 July 2008, the date on which the tax-related provisions in the Charities Act 2005 were included in the Income Tax Act 2007 and the Estate and Gift Duties Act 1968. Those provisions explicitly linked eligibility for the charities-related income and gift duty exemptions to registration as a charitable entity with the Charities Commission.

Local authorities and council-controlled organisations who were not registered with the Charities Commission prima facie have been subject to gift duty since 1 July 2008. Local authorities cannot be registered as a charitable entity and there is some uncertainty under the Charities Act 2005 as regards the registering of local authority trusts – that is, these entities might not have sufficient dissolution provisions that require charities to apply their funds to a charitable purpose on dissolution.

We note that there was no explicit consideration given to the gift duty treatment of gifts made to local authorities and their council-controlled organisations when the tax-related provisions in the Charities Act 2005 were being considered.

If the exemption were applied from 1 July 2008 it would preserve the exempt status of gifts made to local authorities and their council-controlled organisations without break. If accepted, this measure would have the following implications.

• Revenue cost to the Government, as donors who had paid gift duty for gifts made in the interim period (1 July 2008 to the date of Royal assent of the legislation) would be entitled to a refund. We do not consider that this cost would be large, because the total gift duty revenue collected each year is up to $3 million.
• Administrative costs for Inland Revenue, which would need to undertake reassessments and refund any gift duty paid.
• Compliance costs for donors in seeking reassessments, and compliance savings for those donors who made gifts during the interim period but did not pay the required gift duty on those gifts.

Overall, we expect the impact of this change to be very low. This is largely because of the current gift duty threshold whereby most donors keep their gifting at a rate of under $27,000 per year to avoid having to pay gift duty. There have only been two known occasions where a donor wanted to discuss gifts to a local government authority – they were advised of the potential changes to the bill, and the gifting has yet to take place.

Recommendation

That the submission is accepted.

 

Submission
(PricewaterhouseCoopers)

The wording of the bill does not achieve the policy intent, as the exemption does not extend to transfers of assets by local authorities.

Comment

The policy intention was to exempt from gift duty transfers of assets by local authorities to other local authorities to deal with local authority restructuring transactions. This is achieved by the current provision in the bill. Officials accept, however, that this policy intention was not clear in the Commentary to the bill.

We note that under the current scheme of the Estate and Gift Duties Act 1968, exemption from gift duty applies to gifts made to a particular donor, rather than gifts made by a particular donor. Extending the exemption to apply to gifts made by local authorities would be inconsistent with the current scheme of the Act.

Recommendation

That the submission be noted.

 

Issue: Gifts to donee organisations – clause 82(5)

Submission

(New Zealand Institute of Chartered Accountants)

The exemption from gift duty for gifts to donee organisations should be retrospective to overcome the fact that donations have been made by people in good faith on which no gift duty has been paid.

Comment

The submission is silent on the exact date the exemption should apply from. Officials consider that an appropriate date could be 1 April 2008. This is the date on which the limit on qualifying donations for the purposes of individuals’ donation tax credit was lifted. This change would be consistent with the underlying policy intention of the proposed exemption, which is to align the gift duty treatment with the policy for encouraging greater giving to charitable and philanthropic causes.

We note that the limit on qualifying donations for the purposes of the company deduction for donations was also lifted. This change applied from the 2008–09 income year. However, any retrospective date for the proposed exemption should apply from the same date for simplicity.

As with the previous issue, applying the exemption from 1 April 2008 will involve revenue, administrative and compliance costs to the extent that gift duty has been paid on gifts to donee organisations (which are not registered with the Charities Commission) in the period 1 April 2008 to the date of Royal assent. However, we do not expect these costs to be large because the vast majority of donee organisations are in fact registered with the Charities Commission and so gifts to those organisations would already be covered by the current exemption from gift duty. About 1,400 donee organisations are currently not registered with Charities Commission. Furthermore, Inland Revenue has advised that its processing centre cannot recall coming across a situation where a liable gift had been made to a donee organisation.

Recommendation

That the submission be accepted. We recommend that the proposed exemption for gifts to donee organisations apply from 1 April 2008.

 

Issue: Repeal of gift duty

Submission

(Corporate Taxpayers Group, New Zealand Institute of Chartered Accountants)

Corporate Taxpayers Group (CTG) believes that gift duty should be repealed but it appreciates that this is outside the ambit of the bill. CTG would like to see gift duty restricted to only apply between individuals, or family trusts and individuals. Specifically, CTG submits that there should be no dutiable gift in any transaction between corporate entities (including local authorities). (Corporate Taxpayers Group)

New Zealand Institute of Chartered Accountants believes that there is a good case for gift duty to be repealed. The current exemptions in the Estate and Gift Duties Act 1968 are well out of date. This raises the issue of whether gift duty should play a part in our tax system. Gift duty complicates family and not-for-profit transactions, adding unnecessary compliance costs and delays. Market value rules exist in the Income Tax Act to buttress other tax regimes. (New Zealand Institute of Chartered Accountants)

Comment

Officials consider that these submissions should be taken into account as part of the review of gift duty, which is on the Government’s current tax policy work programme.

The review is focused on developing options for better targeting the application of gift duty. It will seek to ensure that the Government’s intention for gift duty as a means of protecting against income tax avoidance, defeating creditors and social assistance targeting is met, and to ensure that the integrity of the tax system is maintained. Policy options arising from the review will be included in an officials’ issues paper or a government discussion document, and public submissions would be sought. The document is likely to be released mid-year.

Recommendation

That the submissions are noted and will be considered as part of the current review of gift duty.

Issue: Gift duty threshold of $27,000

Submission

(New Zealand Institute of Chartered Accountants)

The gift duty threshold of $27,000 a year per person should be increased to a level commensurate with a value in today’s dollars. In today’s terms, the exemption would be $77,220.

Comment

This issue is being considered as part of the current review of gift duty.

Recommendation

That the submission is noted and will be part of a suite of issues being considered in the current review of gift duty.

 

Issue: Gift duty exemption for small gifts of up to $2,000

Submission

(New Zealand Institute of Chartered Accountants)

The exemption from gift duty for small gifts of up to $2,000 to any one recipient in one calendar year (as long as the gifts are part of the donor’s normal expenses) should be increased to a level commensurate with a value in today’s dollars. In today’s terms, the exemption would be $5,720.

Comment

Officials recommend that this issue be considered in the current review of gift duty.

Recommendation

That this submission is noted and be considered as part of the current review of gift duty.

 

 

 

SUPPLEMENTARY DIVIDEND RULES

Clause 27

Issue: Amendments relating to changes enacted by the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009

Submission

(Ernst & Young)

The submission does not, in fact, relate to clause 27 of the current bill, but to the changes to the supplementary dividend rules (previously known as the foreign investor tax credit rules) made by the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009. Specifically, the submission seeks amendments to:

• allow supplementary dividend holding companies to continue to pay supplementary dividends to any non-resident shareholders (including non-portfolio shareholders) up to the end of an income year that includes 31 March 2011 and to claim related tax credits under section LP 2 of the Income Tax Act 2007;
• expressly provide for supplementary dividends to be paid and for related section LP 2 tax credits to be claimed (subject to the percentage interest test for relevant non-resident beneficiaries) if the registered shareholders hold shares on fixed or discretionary trusts for beneficiaries including non-residents, but those trusts are not bare trusts; and
• provide, under section RF 11B of the Income Tax Act 2007, for a nil rate of non-resident withholding tax on imputed dividends (subject to the percentage interest or tax rate tests for relevant non-resident beneficiaries) if the registered shareholders hold shares on fixed or discretionary trusts for beneficiaries including non-residents, but those trusts are not bare trusts.

Comment

The Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 introduced new rules for dividends paid by New Zealand companies to non-resident shareholders. The Act made changes to the supplementary dividend rules and the non-resident withholding tax (NRWT) rules. The amendments are described in the February 2010 Tax Information Bulletin (Vol. 22, No. 1). These domestic law changes reflect the inclusion of lower limits for NRWT on dividends in some recent tax treaties.

It is sensible to consider this submission in two parts. The first point raised relates to the transitional arrangements for supplementary dividend holding companies. The second and third points relate to the treatment of shares held through trusts (other than bare trusts).

Transitional arrangements for holding companies

The amendments made by the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 mean that, from 1 February 2010, credits are no longer available for supplementary dividends paid to non-residents in respect of non-portfolio (10% or more) interests in New Zealand companies, or if the rate of tax applicable to the dividend is less than 15%. The Act also provides for the repeal of the special supplementary dividend rules for holding companies.

As a transitional measure, credits may continue to be claimed for supplementary dividends paid to supplementary dividend holding companies until 1 April 2011. This allows time for distributions to be paid through a chain of holding companies and on to non-resident portfolio investors. It is intended to deal with the possibility that a lower-tier holding company received a dividend and a supplementary dividend before 1 February 2010 but has not made a corresponding distribution by that date. The timing difference ensures that a higher-tier holding company can continue to receive supplementary dividends and correspondingly adjusted imputation credits, and therefore have a tax liability against which to use a credit claimed under subpart LP of the Income Tax Act 2007, when making a distribution to a portfolio investor.

The submission argues that holding companies should be allowed to continue to claim credits for supplementary dividends paid to non-resident non-portfolio investors until 1 April 2011. However, it would then be straightforward for foreign-owned New Zealand companies to set up holding company structures and thereby continue claiming credits for dividends paid to non-residents in respect of non-portfolio interests after 1 February 2010. This would frustrate the intention of the 2009 amendments.

The submission notes that a holding company receiving a dividend and supplementary dividend will face an additional tax charge, and possibly use-of-money interest, if those amounts are paid on to non-resident non-portfolio investors after 1 February 2010. This is necessary to prevent the use of holding company structures to avoid or defer tax during the transitional period. The granting of credits for supplementary dividends paid to non-residents assumes NRWT of 15% on those dividends, whereas a nil rate now applies to imputed non-portfolio dividends under section RF 11B of the Income Tax Act 2007.

Under section YA 1 of the Income Tax Act 2007, a supplementary dividend holding company must have an ongoing purpose of enabling the payment of a supplementary dividend to a non-resident. Supplementary dividends are no longer payable to non-residents in respect of non-portfolio holdings. Accordingly, we would not expect supplementary dividend holding companies to be maintained beyond 1 February 2010, except when this is necessary to enable payment of supplementary dividends to non-resident portfolio investors before 1 April 2011.

Treatment of shares held through trusts

The amendments made by the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 distinguish between portfolio and non-portfolio interests according to the size of an investor’s “direct voting interest” in a company. If a person has a direct voting interest of 10% or more, or if the tax rate applicable to the dividend is less than 15%, then credits for supplementary dividends are no longer available. Instead, a nil rate of NRWT applies, to the extent the dividends are imputed.

The submission notes that, for interests held through discretionary or fixed trusts, the 10% threshold will apply by reference to the trustee’s holding, rather than according to the proportionate interests of underlying beneficiaries. This is similar to the position before 1996, when the foreign investor tax credit was available only in respect of dividends paid to non-resident portfolio investors. At that time, section LE 1(3) of the Income Tax Act 1994 set out when a person was considered a portfolio investor for these purposes. The core requirement was that they had a voting interest of less than 10% in the company and, if a market value circumstance existed, a market value interest of less than 10%.

The boundary introduced by the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 focuses on direct voting interests, in part for consistency with related provisions in double tax agreements, but also (as before 1996) for reasons of operational simplicity. The corporate look-through provision is disapplied for the same reasons. We do not consider this approach to be inconsistent with the comments made in the Officials’ Report of 23 November 1995 (cited in the submission), nor with the subsequent Tax Information Bulletin (March 1996, Vol. 7, No. 11).

The submission refers to the possibility that the “voting interest” test under domestic law may in certain circumstances be interpreted differently to the equivalent treaty test, which refers to “voting power”. Regardless of an investor’s voting interest, credits for supplementary dividends are unavailable, and a nil rate of NRWT may apply, if the rate of tax for a dividend, after taking account of any double tax agreement, is less than 15%. This ensures consistency of classification under domestic and treaty law.

Recommendation

That the submission be declined.

ANNUAL RATES OF INCOME TAX

Clause 3

Issue: Taxation of lump-sum payments of back-dated ACC compensation

Submission

(New Zealand Institute of Chartered Accountants)

An amendment should be made to the Income Tax Act 2007 to ensure that ACC loss of earnings payments received in relation to an accident in an earlier income year are not overtaxed. This could be achieved by allowing a rebate in the income year the payment is received.

Comment

The issue of the tax burden caused by payment of arrears of earnings-related compensation was raised by the New Zealand Institute of Chartered Accountants in its submission on the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill in 2008. In response to that submission officials advised that they would report to the Minister of Revenue with proposals to address the concerns raised.

The Minister of Revenue has had the opportunity to consider options and has decided that no further work will be done on providing tax relief for lump-sum payments that include arrears of an entitlement to ACC payments, for the reasons outlined below.

It would be very difficult to design tax relief that would restore recipients to the position they would have been in had the payments been made in the earlier years, because of the wide variance in the level of arrears payments, the number of years they might be for and the possibility that a benefit previously paid has had to be repaid. Any potential solution, such as spreading income to earlier years, raises complex issues – for example, the effect on income-contingent entitlements or liabilities, such as Working for Families tax credits and child support. More importantly, spreading income would move away from the fundamental tax concept of taxing the cash receipts of individuals who are not in business, in the year of payment.

An alternative would be to provide a tax credit; however, this requires a trade-off between simplicity and arbitrary results. A flat rate may be simple to administer and understand, but has the potential to both under- and over-compensate the recipient. This trade-off was recognised when options for granting tax relief for redundancy payments were being considered.

Finally, despite a tax credit being available to recipients of redundancy payments, extending this ability to ACC lump-sum arrears payments is likely to lead to further requests for tax concessions for other one-off payments such as retiring allowances and bonuses.

Recommendation

That the submission be declined.EXEMPTION FOR NON-RESIDENT DRILLING RIG OPERATORS

Clause 9

Issue: Scope of the exemption

Submission

(PricewaterhouseCoopers)

The exemption should not distinguish between residents and non-residents. Otherwise it would create a disincentive or competitive disadvantage for non-resident companies that prefer to undertake petroleum exploration via a New Zealand subsidiary.

The exemption should also be extended to apply to income derived from suppliers of specific services to offshore drill rig operators and resident companies such as supply/support vessels.

Comment

New Zealand’s domestic tax rules generally tax non-resident offshore rig operators and seismic vessels on their New Zealand-sourced income. However, in some situations where non-residents come from a country with which New Zealand has a double tax agreement, the non-resident rig operators are exempt from tax in New Zealand if they stay for less than 183 days in any 12-month period. If they stay for more than 183 days all income will result from the first day of presence in New Zealand and will be subject to New Zealand tax.

Because of this rule, prior to the exemption being introduced in 2004, non-resident offshore rig operators and seismic vessels had tended to stay in New Zealand for a period of less than 183 days. Even if further exploration would be desirable beyond the 183 day window, there were strong incentives for rigs to leave by this time. Different rigs were then required to be brought to New Zealand to complete the work, causing extra mobilisation and demobilisation costs. This also disrupted sensible exploration and development programmes.

The bill extends the existing exemption (which was due to expire on 31 December 2009) until 31 December 2014.

The purpose of the exemption is to remove the distortion created by New Zealand’s double tax agreements for non-resident rig operators to operate for less than 183 days. It is not intended to subsidise oil and gas exploration more generally.

If a resident company were to operate a rig in New Zealand it would not get relief under New Zealand’s double tax agreements and so would not face the same incentives to operate for less than 183 days.

Extending the scope of the exemption to cover income from companies that supply ancillary services to an offshore drill rig operator could increase the fiscal cost of the exemption but would be unlikely to further accelerate the exploration of New Zealand’s offshore oil and gas reserves.

Recommendation

That the submission be declined.

 

ADDITIONS TO THE LIST OF CHARITABLE DONEE ORGANISATIONS – SCHEDULE 32

Individuals who donate to charitable donee organisations are entitled to a donations tax credit (formerly the donations rebate) of 33⅓ percent of the amount donated (capped to the amount of the individual’s taxable income). Companies and Māori authorities who donate to charitable donee organisations are entitled to a deduction for donations up to the amount of their net income.

A charitable organisation that applies some or all of their funds outside New Zealand must be approved as a charitable donee organisation by Parliament. These organisations are listed individually in schedule 32 of the Income Tax Act 2007.

There are currently 87 named charitable donee organisations listed in schedule 32. This bill provides that Cure Kids be added to the list. Orphans’ Aid International Charitable Trust has submitted that it also be added to the list.

 

Issue: Orphans’ Aid International Charitable Trust

Submission

(Clause 34 – Parry Field Lawyers)

That Orphans’ Aid International Charitable Trust be added to the list of charitable donee organisations in schedule 32 of the Income Tax Act 2007.

Comment

If an overseas-focussed charitable organisation is seeking a legislative change to be included in schedule 32 of the Income Tax Act 2007, they are currently referred to Inland Revenue tax policy officials, and must provide information about their organisation. Officials then make a recommendation to the Minister of Revenue based on this information and with reference to the Cabinet criteria which guide the policy considerations about whether to include the organisation or not.

Cabinet has established criteria for guiding the policy work around additions to the list of charitable donee organisations. These criteria were formally set out by Cabinet in 1978. The original Cabinet decision was:

Basic criteria for adding an organisation to the list of approved “overseas” charities:

• i the funds of the charity should be principally applied towards:
  • 
    the relief of poverty, hunger, sickness or the ravages of war or natural disaster; or
  • the economy of developing countries*; or
  • raising the educational standards of a developing country*;
• ii charities formed for the principal purpose of fostering or administering any religion, cult or political creed should not qualify;
• iii ….

* developing countries recognised by the United Nations.

To further assist organisations seeking to be included on schedule 32, the Government released a set of guidelines in December 2009 setting out its expectations of these organisations. The guidelines respond to growing interest from organisations that see “donee status” as an endorsement of their overseas activities. The guidelines seek to downplay expectations that additions to the schedule are automatic, by making it clear that the decision by the Government to legislate is a policy decision. [3]

In making this decision, the Government considers whether the organisation is robust, transparent and has an established history of operation. This involves consultation with the Ministry of Foreign Affairs, NZAID and the Police’s Strategic Intelligence Unit. The Charities Commission is also consulted.

The removal of the donations cap on the tax credit and deduction in 2008 also means careful consideration is required on the effectiveness of the organisations concerned and whether any potential exists for taxpayer funds to be misapplied or abused. Left unchecked this could lead to significant fiscal cost. It is important to look at how the organisation is structured and operated both in New Zealand and overseas. The organisation’s transparency is also considered and whether there are adequate checks and balances in the management of the organisation to prevent any risk of “mission drift”. Mission drift describes the situation when an organisation begins to engage in activities that are outside the scope of the organisation’s rules such that, over time, it ends up carrying out activities that the New Zealand government may not want to support.

Officials are considering as many requests as possible each year. Also a wider review on overseas donee status policy scheduled for this year is being fast-tracked by officials.

Given this established process for the consideration of organisations to be included in schedule 32, officials are concerned that organisations should not be able to avoid the process by seeking inclusion in schedule 32 through the select committee process. This would effectively result in organisations jumping the queue and not being fully vetted.

Recommendation

That the submission be declined.

 

Issue: Support for Orphans Aid International Charitable Trust

Submission

(Clause 34 – Foresee Communications Limited)

Foresee Communications Limited supports the Orphans Aid International Charitable Trust’s submission that it be added to schedule 32 of the Income Tax Act 2007.

Recommendation

That the submission be noted.

 

TAX TREATMENT OF EMISSIONS UNITS

Issue: Treatment of units allocated to owners of fishing quota

Submission

(Sandford Limited – submitted by Deloitte)

Emissions trading units allocated to owners of fishing quota should be on capital account and so non-taxable.

Comment

The application of the Emissions Trading Scheme to liquid fossil fuels will increase the cost of diesel, which is one of the major costs in the fishing sector. Recent amendments to the Climate Change Response Act 2002 provide for the allocation of emissions units to owners of fishing quota to compensate them for the fall in value of fishing quota expected to result from the impact of the increase in the cost of diesel.

The default treatment for all unit allocations is revenue account treatment, with the exception of pre-1990 forestry. Revenue account treatment means that a tax liability will arise as a result of receipt of the units, and any increase in their value between the date of receipt and the date of their sale will also be taxable.

However, the underlying rationale for the allocation of units to the owners of fishing quota is the loss of value of that quota, which is a capital loss. It is inconsistent with this rationale for revenue account treatment to be applied to these units – capital account treatment for these units is appropriate.

As allocations to owners of fishing quota are proposed to be made in the second half of 2010, it is recommended that this amendment be made from 1 July 2010.

The Ministry for the Environment has been consulted on this issue.

Recommendation

That the submission be accepted.

 

Issue: Deduction for cost of timber for person carrying on a PFSI forestry business

Submission

(PricewaterhouseCoopers)

There should be a separate tax deduction in the Income Tax Act 2007 for the cost of timber for a person carrying on a permanent forest sink initiative (PFSI) business.

Comment

PFSI foresters are entitled to a tax deduction for the costs incurred in planting and maintaining their trees. All foresters (PFSI and those who grow trees for harvest) who purchase land with part-grown trees on it are required to carry forward the proportion of the purchase price attributable to the trees until those trees are harvested. PFSI foresters can harvest:

• while the PFSI covenant is in force, provided they maintain a “continuous canopy”;
• at any time, if they breach their PFSI covenant;
• 50 years after entering into the covenant, if they withdraw from the covenant;
• 99 years after entering into the covenant.

PFSI foresters will be entitled to claim a deduction for the cost of timber in any of the above situations. A liability to surrender emissions units will also arise. If the emissions units originally allocated have been sold, a deduction will be available for the purchase of units to meet the surrender liability. PFSI foresters will be entitled to claim a deduction for the cost of timber in any of the above situations.

There seems to be no reason why the current, generally taxpayer friendly, forestry tax rules should be changed for PFSI foresters.

The Ministry of Agriculture and Forestry and the Ministry for the Environment have been consulted on this issue.

Recommendation

That the submission be declined.

 

Issue: Market value transfer rules

Submission

(Matter raised by officials)

The application of the market value transfer rule to emissions units should be clarified.

Comment

The Income Tax Act contains provisions which apply to disposals of certain items which deem those disposals to take place at market value, where the parties have used a price below market value. This is to ensure that disposals at below market value are not used as a mechanism to transfer wealth without appropriate tax consequences.

The current form of the legislation relies on trading stock rules in section GC 1 to apply a market value rule to emissions units. However, it is not clear that emissions units are trading stock. We recommend that a specific market value transfer rule be introduced for emissions units, which will also include exemptions where transactions below market value are not carried out for tax purposes.It is recommended this amendment be made from 26 September 2008, the date the former specific anti-avoidance provision was repealed.

The Ministry for the Environment has been consulted on this issue.

Recommendation

That the submission be accepted.

 

Issue: Application of market value transfer rules to forestry rights arrangements

Submission

(Matter raised by officials)

The rule which deems a transfer of emissions units for less than market value to be a transfer at market value should not apply to transfers of emissions units:

• between a forestry rights holder and the landowner which is party to that forestry right;
• where those emissions units were allocated by the Crown in relation to pre-1990 forestry.

Comment

Forestry rights agreements are entered into between a landowner and another party, who will normally take responsibility for planting, maintaining and harvesting the forest. The forestry rights agreement will normally contain a clause under which revenue earned from the forest is shared between the parties. Forestry rights agreements are registered under the Forestry Rights Registration Act 1983.

The Climate Change Response Act 2002 allows only either the landowner or the holder of the forestry right to register to receive all of the units allocated for any particular piece of land, but not both. The party which receives all of the units will normally satisfy its obligations under the forestry rights agreement by transferring a proportion of the units to the other party without consideration. However, current legislation would treat that transfer as a disposal at market value, so triggering a tax liability for the transferee.

Following informal discussions with the Ministry for the Environment, the Ministry of Agriculture and Forestry and foresters outside the legislative process of this bill, we recommend that the Tax Act be modified so that a market value disposal, and a consequent tax liability, is not triggered in these circumstances. It is recommended that this amendment take effect from 1 January 2009, before the first date of allocation of emissions units for forestry.

Recommendation

That this submission be accepted.

 

Issue: Transfer of pre-1990 forestry emissions units to interim entities pending Treaty of Waitangi settlements

Submission

(Matter raised by officials)

The capital treatment of emissions units allocated to interim entities in relation to pre-1990 forestry land should be extended to the ultimate owners of that land where it is eventually transferred under a Treaty settlement.

Comment

A significant proportion of pre-1990 forestry land is currently held by the Crown. We are advised that much of this land is expected to eventually be transferred to Māori under Treaty of Waitangi settlements.

The Climate Change Response Act 2002 provides that the relevant Minister is to appoint a person to apply for emissions units in relation to that land. It is expected that that person will in due course transfer those emissions units to those Māori persons or entities along with the relevant land when the Treaty settlements are implemented.

Emissions units allocated in relation to pre-1990 forestry land are the only types of units which currently receive capital treatment. This is because this allocation is to compensate for the loss in the value of this land resulting from the introduction of the Emissions Trading Scheme. Capital treatment only applies to the initial recipient of the units – once they leave that person’s hands they will normally have revenue account treatment, consistent with the fungible nature of emissions units.

However, this means that those Māori persons or entities who receive the emissions units from the person appointed by the Minister will hold those units on revenue account, and be taxable on any gains made on disposal. Revenue account treatment is not consistent with the underlying purpose and nature of these arrangements. Following informal discussions with the Ministry for the Environment and the Ministry of Agriculture and Forestry outside the legislative process of this bill, we recommend this amendment take effect from 1 April 2010, before the date any transfers of units are expected.

Recommendation

That this submission be accepted.

 

DISTRIBUTIONS TO COOPERATIVE COMPANY MEMBERS

Clauses 6, 7, 12 and 32

The amendments in effect extend a provision in the Income Tax Act 2007 that applies to resident co-operative companies that require members to hold shares in proportion to their trading stock transactions with the company (say, 1 share for each 1kg of meat sold to the co-operative). The existing provision, section CD 34, has been repealed and replaced by new section CD 34B.

Currently, a co-operative can elect to deduct a distribution to a member-shareholder when the distribution is in proportion to the member’s supply of trading stock to the co-operative. The distribution is taxable to the member.

The new provision introduces some flexibility to reduce compliance costs for such co-operatives until a general review of the tax treatment of co-operative distributions takes place, planned for this year.

These co-operatives will be able to elect to deduct a distribution paid on shares that are held to back a member’s expected trading stock transactions, not just actual trading stock transactions. They may also deduct a distribution on a limited number (20 percent) of other shares held by the member.

The new provision also allows a co-operative that elects to deduct distributions some flexibility in setting the date on which members’ entitlement to dividends is determined under the Companies Act 1993.

 

Issue: Consistent terminology

Submission

(Fonterra, Ernst & Young)

Terminology in the existing section DV 11(3) should be amended to match that in the new section CD 34B.

Comment

Section DV 11 permits a co-operative to deduct a distribution described in proposed section CD 34B. Fonterra is concerned that inconsistent terminology between these two provisions may cause confusion, and submit that section DV 11(3) should refer to “the income year to which the distribution relates”.

Recommendation

That the submission be accepted.

 

Issue: Election to deduct distribution

Submission

(Ernst & Young)

There should be no requirement for an irrevocable election to be made, or notice given, before deductible distributions are made. The election provisions in existing section CD 34 should be repeated in new section CD 34B.

Comment

A co-operative currently elects to deduct a distribution by giving the Commissioner notice when providing its tax return for the year in which it claims the deduction. This election then applies for subsequent years.

The timing of the election differs in new section CD 34B because of the link with Companies Act requirements. A co-operative electing to deduct distributions may also choose to be exempt from the Companies Act requirement that there be no more than 20 working days between the date on which an entitlement to dividends is determined and the date the company resolves to pay a dividend.

If a co-operative claims exemption from this requirement, the Registrar of Companies should be notified before a distribution is made. Section 34B provides that one notice serves as an election to the Commissioner and notification to the Registrar of Companies.

Although we consider that the election should therefore continue to be made before the first distribution, we agree that it is not necessary for an election to be irrevocable. In order to reduce compliance costs, companies should continue to elect deductible treatment once rather than annually. However, an election should apply until a company notifies the Commissioner otherwise, rather than being irrevocable.

Recommendation

That the submission be accepted in part and that, once made, an election to deduct distributions should apply for subsequent income years until a co-operative notifies the Commissioner otherwise.

 

Issue: Transition

Submission

(Ernst & Young)

In the transition from section CD 34 to section CD 34B, it should be clear that there are no gaps, and that distributions made after 1 April 2010 representing profits arising in an income year ending before 1 April 2010 are deductible in that year.

Comment

There are no gaps in the transition from section CD 34 to section CD 34B. The new rules apply to any distribution made on or after 1 April 2010. Distributions made after 1 April 2010 that relate to a year ending before that date will be deductible in that year. We have discussed this with Ernst & Young who agree that the legislation works as described.

Recommendation

That the submission be declined.

 

OTHER MATTERS RAISED IN SUBMISSIONS

Transitional imputation over-crediting

Submission

(Deloitte)

The penalty rules for transitional imputation over-crediting should be amended to allow for companies to pass on over-imputed credits attached to dividends received during the transitional period without penalty.

Comment

This submission concerns the penalty designed to ensure that during the two-year transitional period after the 1 April 2008 company tax cut, companies do not distribute too many over-imputed credits.

We agree that the submission is correct and will draft the appropriate amendment.

Recommendation

That the submission be accepted.

 

Petroleum mining foreign branch ring-fencing rules

Submission

(Greymouth Petroleum Holdings Limited)

Greymouth Petroleum Holdings Limited (Greymouth) submits that its investment in Chile should be grandparented from the foreign branch ring-fencing rules that were enacted by the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009. This legislation prevents a petroleum miner offsetting its foreign branch expenditure against its New Zealand income.

Greymouth considers that its Chilean operations meet the normal grandparenting parameters. In particular, Greymouth considers its Chilean investment should be grandparented because:

• On 17 November 2007 it was contractually committed to sign formal contracts, known as CEOPs and undertake the work programmes that were the basis of its winning bids.
• Had it not signed the CEOPs on 30 April 2008, Greymouth would have been legally liable to a claim from the Chilean Government for contractual damages (including consequential losses) and its reputation would have been damaged.

Comment

Greymouth has submitted to the Committee on this matter several times. Additionally, Ministers have also been asked to reconsider this matter a number of times. The most recent response from the Government to Greymouth was on 10 February 2010 when it advised Greymouth of its decision not to amend the petroleum mining foreign branch ring-fencing rules that were brought into effect by the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009.

The following timeline details the relevant aspects of this matter:

June 2007
The Chilean Government announces international bidding round for 10 hydrocarbon blocks.

October 2007
Greymouth posts bid bonds (US$100,000 per bid) and bids on five blocks.

16 November 2007
The Chilean Government announces Greymouth as the successful bidder on four blocks. Under Chilean law, Greymouth as the successful bidder is contractually bound to sign formal contracts.

4 March 2008
The New Zealand Government announces an amendment to the income tax treatment of expenditure incurred, on or after 4 March 2008, through a foreign branch of a petroleum miner. Such expenditure is no longer allowed to be offset against New Zealand petroleum mining income

30 April 2008
Representatives from Greymouth signed formal contracts (CEOPs) with representatives of the Chilean Government. The CEOPs oblige Greymouth to post performance bonds worth $28 million (the amount of expenditure committed under the CEOPs for the first three years).

2 July 2008
The Government introduces the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill that includes the petroleum mining foreign branch ring-fencing rules.

30 June 2009
The Finance and Expenditure Committee report says that the Committee considered and did not accept Greymouth’s submission that its Chilean branch operations should be grandparented from the law change. However, the Committee noted that some petroleum mining companies might have difficulty fulfilling their contractual obligations under these binding contracts entered into before 4 March 2008, but only where expenditure is incurred pursuant to a binding contract entered into before 4 March 2008, and that Inland Revenue may consider recommending legislation in the future to remedy any unintended consequences.

9 October 2009
The Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill is enacted.

Officials generally support grandparenting in cases where taxpayers have invested on the basis of a specific tax legislation consequence. However, grandparenting decisions are subject to some important conditions.

Decisions to grandparent weigh-up the benefits of grandparenting, such as providing investor certainty, against the costs of grandparenting, including the fiscal costs. Grandparenting is generally limited to transactions of a specific nature that can be expected to be completed in a relatively short time.

In this case, officials recommend against grandparenting on the basis that:

• Had Greymouth had not entered into the contracts, as it did on 30 April 2008, officials consider that it would have only forfeited US$400,000 of bid bonds. The formal contracts were entered into after the law change was announced, in full knowledge of the Government’s intention to change the law. This was therefore a commercial decision.
• Grandparenting in this case represents a significant fiscal risk for the Crown. Greymouth is seeking to grandparent five years of expenditure. The formal contracts specify a minimum amount that must be spent over the relevant period (the first seven years). While Greymouth has reduced the period of time it seeks to be grandparented to five years, on the basis of reducing the Crown’s fiscal risk, there is no limit to the amount that Greymouth can spend over the five years in Chile and offset against New Zealand petroleum mining income.
• This fiscal risk is heightened because other taxpayers with overseas operations may also, on the basis of equal treatment, require grandparenting.
• Given that petroleum miners with foreign branches were gaining a tax advantage, not from a deliberate policy standpoint but from a gap in the legislation, it is not unreasonable to expect that at some point the Government would change the tax law to protect its taxing right on New Zealand’s petroleum resources.
• The recent law change was designed to ensure that New Zealand received its proper share of benefit from its petroleum resources. As such, it should apply equally to all petroleum miners operating in New Zealand.

Recommendation

That the submission be declined.