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Income Tax Act 2007

Recharacterisation of certain transactions - Hybrid and branch mismatches of deductions and income from multi-jurisdictional arrangements

FH 1: Subpart implements OECD recommendations for domestic law

You could also call this:

“This law puts OECD suggestions into action to address international tax issues”

This part of the law helps to put into action some suggestions made by the OECD. These suggestions are about how countries should change their laws to stop certain tax problems. The problems happen when different countries treat money or businesses differently for tax reasons.

The law explains what each section does. For example, section FH 3 puts in place a rule about hybrid financial instruments. Section FH 4 is a backup version of this rule.

Other sections deal with different tax issues. For instance, section FH 5 is about payments that some countries ignore for tax purposes. Section FH 7 deals with reverse hybrid situations.

The law also includes some extra rules. Section FH 12 lets you use extra taxable income to balance out some tax differences. Section FH 13 lets borrowers choose to treat a loan as if it were a share in their company.

Section FH 15 explains some important words used in the law. For example, it tells you what a ‘mismatch amount’ is and what ‘surplus assessable income’ means.

This law might be a bit different from what the OECD suggested. These changes are meant to make it easier to use and apply the rules.

This text is automatically generated. It might be out of date or be missing some parts. Find out more about how we do this.

View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS65818.

Topics:
Money and consumer rights > Taxes
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Part F Recharacterisation of certain transactions
Hybrid and branch mismatches of deductions and income from multi-jurisdictional arrangements

FH 1Subpart implements OECD recommendations for domestic law

  1. This section and section FH 2 are intended to be a guide to the background and general scheme and effect of this subpart.

  2. This subpart implements recommendations, for the domestic law of countries and territories, that are made by the OECD in the hybrid mismatch report and the branch mismatch report (the reports) and are intended to be implemented as rules neutralising certain mismatches—

  3. arising from arrangements called hybrid mismatch arrangements and branch mismatch arrangements in the reports; and
    1. between income assessed and deductions against income or equivalent tax relief allowed for parties to international transactions; and
      1. resulting from differences, between the taxation laws of different countries and territories having rights to tax the parties, in the classification of financial arrangements or the tax treatment of entities or branches.

        1. If 2 rules are recommended by a report for a situation, the recommended rules are called primary and defensive by the report, which states that the defensive rule should not apply to the situation except if the country or territory in the position to apply the recommended primary rule has not implemented the recommendation.

        2. In this subpart,—

        3. section FH 3 implements the primary version of the rule for recommendation 1 of the hybrid mismatch report, called the hybrid financial instrument rule in the report:
          1. section FH 4 implements the defensive version of the rule for recommendation 1 of the hybrid mismatch report:
            1. section FH 5 implements the primary version of the rule for recommendation 3 of the hybrid mismatch report, called the disregarded hybrid payments rule in the report, and the rule for recommendation 3 of the branch mismatch report:
              1. section FH 5B gives the requirements for an exception to section FH 5:
                1. section FH 6 implements the defensive version of the rule for recommendation 3 of the hybrid mismatch report, and a defensive version of the rule for recommendation 3 of the branch mismatch report:
                  1. section FH 7 implements recommendation 4 of the hybrid mismatch report, called the reverse hybrid rule in the report, and recommendation 2 of the branch mismatch report:
                    1. section FH 8 implements the primary version of the rule for recommendation 6 of the hybrid mismatch report, called the deductible hybrid payments rule in the report, and the rule for recommendation 4 of the branch mismatch report:
                      1. section FH 9 implements the defensive version of the rule for recommendation 6 of the hybrid mismatch report, and a defensive version of the rule for recommendation 4 of the branch mismatch report:
                        1. section FH 10 implements recommendation 7 of the hybrid mismatch report, called the dual-resident payer rule in the report:
                          1. section FH 11 implements recommendation 8 of the hybrid mismatch report, called the imported mismatch rule in the report, and recommendation 5 of the branch mismatch report.

                            1. In addition to the recommended rules,—

                            2. section FH 12 provides for the setting off, against amounts called surplus assessable income, of amounts called mismatch amounts that arise under several of the sections and, until set off, represent deductions denied or assessable income derived:
                              1. section FH 13 provides for an election, by a borrower under a financial arrangement to which the section applies, that the financial arrangement be treated as a share issued by the borrower to the lender:
                                1. section FH 14 provides for an irrevocable election, by an owner of a hybrid entity, that the hybrid entity be treated as a company.

                                  1. Section FH 15 contains definitions for the purpose of the Act of some terms used in the reports and of terms used in the Act that differ from terms used in the reports, including—

                                  2. deducting branch, which refers to the activities to which the recommendations of the branch mismatch report are intended to apply:
                                    1. mismatch amount, which is the amount of a hybrid mismatch or branch mismatch:
                                      1. mismatch situation, which is the situation giving rise to a hybrid mismatch or branch mismatch:
                                        1. surplus assessable income, which performs the same function as “dual inclusion income” but is defined in a different way.

                                          1. Variations of the implementing provisions from details of the recommendations in the report are intended to assist in the implementation and application of the recommendations.

                                          Notes
                                          • Section FH 1: inserted, on , by section 35(1) (and see section 35(2) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                          • Section FH 1(4)(cb): inserted (with effect on 1 July 2018), on , by section 121(1) (and see section 121(2) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).