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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 5: Payments by New Zealand resident or New Zealand deducting branch producing deduction without income

You could also call this:

“Tax deductions denied for certain overseas payments not treated as income”

This law is about payments made by people or companies in New Zealand to others outside New Zealand. It aims to prevent a situation where the payer gets a tax deduction, but the payment isn’t taxed as income for the receiver.

You might be affected by this law if you’re a New Zealand resident or a New Zealand branch of an overseas company making payments to someone overseas. The law applies when:

  1. You want to claim a tax deduction for the payment.
  2. The country receiving the payment doesn’t treat it as income because of how they view your tax status.
  3. No other country taxes the payment as if it were income.

The law also applies to charges made by overseas companies to their New Zealand branches, if these charges are more than the actual costs incurred.

If this law applies to you, you can’t claim a tax deduction for the payment or the extra charge. The amount you can’t deduct is called a “mismatch amount”. You might be able to use this mismatch amount later to reduce your taxable income, but only in specific situations described in section FH 12.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS65827.

Topics:
Money and consumer rights > Taxes
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FH 4: Receipts under financial instruments producing deduction without income, or

“Taxing payments from overseas that usually wouldn't be income”

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FH 5B: Exception: when payee group not allowed deductions for supplies as prerequisites for payer supplies, or

“Exceptions for tax deductions on prerequisite supplies in cross-border transactions”

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

FH 5Payments by New Zealand resident or New Zealand deducting branch producing deduction without income

  1. This section applies when a person or entity (the payer) incurs an amount of expenditure in an income year relating to a payment to another person and meeting the requirements of subsection (2), or incurs in an income year a charge meeting the requirements of subsection (3), and—

    1. the amount or charge would be allowed as a deduction in the income year for the payer in the absence of this section and sections FH 7 to FH 11; and
      1. the taxation law of a country or territory outside New Zealand (the payee jurisdiction)—
        1. treats the payment or charge as not being received by a person or entity in the payee jurisdiction, because of the tax status of the payer; and
          1. would treat the payment or charge as being received by a person or other entity (the payee) in the payee jurisdiction, if the tax status of the payer were different; and
          2. no country or territory outside New Zealand and the payee jurisdiction imposes tax on the payment or charge under taxation law that includes rules corresponding to the CFC rules and recognises the payment as the equivalent of attributed CFC income of a person in the same control group as the payee.

            1. Expenditure relating to a payment by a payer that is a New Zealand resident, or a New Zealand deducting branch of a non-resident, to a payee meets the requirement of this subsection if—

            2. the payee is a non-resident who receives the payment other than through a New Zealand deducting branch of the payee; and
              1. the payment is made under a structured arrangement or, when the expenditure is incurred, the payer is in a control group with the payee or is the same person as the payee; and
                1. the expenditure is not an amount that is—
                  1. consideration for a supply of goods or services by the payee to the payer meeting the requirements of section FH 5B(1); and
                    1. excluded from being a mismatch amount by section FH 5B(2).

                    2. A charge of an amount meets the requirements of this subsection if the amount—

                    3. is charged by a non-resident to a New Zealand deducting branch of the non-resident; and
                      1. represents amounts, relating to the activities outside New Zealand of the non-resident, allocated to the deducting branch; and
                        1. is not determined by reference to the amount of a payment by the non-resident, or a member of the same control group as the non-resident, to a person other than the non-resident and the members of the control group; and
                          1. exceeds expenditure or loss, incurred by the non-resident or a member of the same control group as the non-resident, that—
                            1. belongs to a category of expenditure or loss equivalent to the category to which the charge belongs; and
                              1. is the reference by which the amount of the charge is determined.

                              2. The payer is denied a deduction for the expenditure or for the amount of the charge that exceeds the expenditure or loss referred to in subsection (3)(d).

                              3. The expenditure or loss for which a deduction is denied under subsection (4) is a mismatch amount from a mismatch situation until the mismatch amount is set off under section FH 12 against surplus assessable income under that section from the mismatch situation.

                              Notes
                              • Section FH 5: 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 5(1)(a): repealed (with effect on 1 July 2018), on , by section 197(1) (and see section 197(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                              • Section FH 5(2)(a): replaced (with effect on 1 July 2018), on , by section 197(2) (and see section 197(3) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                              • Section FH 5(2)(b): amended (with effect on 1 July 2018), on , by section 122(1) (and see section 122(3) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).
                              • Section FH 5(2)(c): inserted (with effect on 1 July 2018), on , by section 122(2) (and see section 122(3) for application) of the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 (2020 No 5).