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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 11: Residents, or non-residents with deducting branches, having expenditure funding overseas hybrid mismatches

You could also call this:

“Tax rules for payments that could fund overseas tax avoidance schemes”

This law is about how New Zealand deals with certain money payments that could be used to avoid taxes in other countries. Here’s what you need to know:

You might be affected by this law if you’re living in New Zealand and you send money to someone in another country, or if you’re a business from another country with a branch in New Zealand that charges money to that branch.

The law applies when the money you send ends up being used for a payment between two other parties in different countries. This is called a ‘funded payment’. The problem is that this funded payment might be used to avoid taxes, which is called a ‘hybrid mismatch’.

If this happens, you might not be allowed to claim the money you sent as a tax deduction. The amount you can’t claim depends on how much of the funded payment would be disallowed if the other country had similar laws to New Zealand.

The law also says how to figure out if your payment is actually funding one of these problematic payments. It follows rules set out in some international reports about tax avoidance.

If you’re not allowed to claim a deduction because of this law, you might be able to claim it later if the other country would allow it and if the rules about carrying forward tax losses allow it.

This law is quite complex and is designed to stop people from using complicated arrangements across different countries to pay less tax than they should.

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 It might be out of date or be missing some parts.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=LMS65839.

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 11Residents, or non-residents with deducting branches, having expenditure funding overseas hybrid mismatches

  1. This section applies for a person (the funder) and an income year when the funder is—

  2. a New Zealand resident who makes a payment (the original payment) to a person in a country or territory outside New Zealand that does not have hybrid mismatch legislation and the original payment meets the requirements of subsection (1B); or
    1. a deducting branch in New Zealand of a non-resident, who is resident in a country or territory outside New Zealand that does not have legislation having the same effect as this subpart, and who makes a charge to the deducting branch that meets the requirements of subsection (1B).

      1. An original payment or a charge by a funder meets the requirements of this subsection if—

      2. the original payment or charge provides funds for a payment (the funded payment) from a person or other entity (the payer) in a country or territory outside New Zealand (the payer jurisdiction) to a person or other entity (the payee), in the same or another country or territory outside New Zealand (the payee jurisdiction); and
        1. the funds are provided to the payer directly, or indirectly through a series of further transactions (the intermediate transaction chain) that are each governed by the tax laws of countries or territories outside New Zealand; and
          1. for each transaction in an intermediate transaction chain, each country or territory with tax laws that govern the transaction does not have legislation having the same effect as this subpart; and
            1. a deduction for the original payment, or the charge, would be allowed for the funder in the absence of this section and sections FH 8 to FH 10; and
              1. the original payment, or the charge, is made under a structured arrangement giving rise to the hybrid mismatch referred to in paragraph (f) or the funder and the payer, when the original payment is incurred or the charge is made, are members of a control group; and
                1. the funded payment gives rise to a hybrid mismatch; and
                  1. the payee jurisdiction does not have hybrid mismatch legislation.

                    1. Subject to subsections (5) and (6), the funder is denied a deduction in a tax year for an amount that is given by—

                    2. subsection (3), if the payment is made under a structured arrangement giving rise to the hybrid mismatch; or
                      1. subsection (4), if paragraph (a) does not apply.

                        1. Under this subsection, the amount of the denial is the lesser of—

                        2. the amount of the deduction that would be allowed for the payment in the absence of this section and sections FH 8 to FH 10:
                          1. the amount of the funded payment that, if hybrid mismatch legislation were applied by the payer jurisdiction, would be disallowed as a deduction against income or equivalent tax relief.

                            1. Under this subsection, the amount of the denial is the amount of the payment by the funder that can fairly and reasonably be treated as providing, directly or indirectly, funds for an amount of the funded payment that, if hybrid mismatch legislation were applied by the payer jurisdiction, would be disallowed as a deduction against income or equivalent tax relief.

                            2. Whether a payment or charge by a funder provides funds for a funded payment under subsection (1B)(a) and, if so, the amount under subsection (4) that the funder is denied as a deduction, are determined consistently with the approaches described in chapter 8 of the hybrid mismatch report and chapter 5 of the branch mismatch report.

                            3. A deduction (the denied deduction) that is for a payment or charge that provides funds for a funded payment, and is denied under subsection (2) in the income year in which the payment or charge is incurred, is allowed in a later income year to the extent to which—

                            4. the payer jurisdiction would allow a deduction in the later income year for the funded payment if hybrid mismatch legislation were applied by the payer jurisdiction; and
                              1. the denied deduction meets the requirements of section FH 12(8) to be carried forward to the later income year as a mismatch amount.

                                Notes
                                • Section FH 11: inserted, on , by section 35(1) (and see section 35(2) and (4) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                • Section FH 11(1) heading: replaced (with effect on 1 July 2018), on , by section 105(1) (and see section 105(6) and (8) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section FH 11(1): replaced (with effect on 1 July 2018), on , by section 105(1) (and see section 105(6) and (8) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section FH 11(1B) heading: inserted (with effect on 1 July 2018), on , by section 105(1) (and see section 105(6) and (8) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section FH 11(1B): inserted (with effect on 1 July 2018), on , by section 105(1) (and see section 105(6) and (8) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section FH 11(2): amended (with effect on 1 July 2018), on , by section 105(2) (and see section 105(6) and (8) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section FH 11(4): replaced (with effect on 1 July 2018), on , by section 105(3) (and see section 105(7) and (8) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section FH 11(5) heading: replaced (with effect on 1 July 2018), on , by section 105(4) (and see section 105(6) and (8) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section FH 11(5): replaced (with effect on 1 July 2018), on , by section 105(4) (and see section 105(6) and (8) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section FH 11(6) heading: inserted (with effect on 1 July 2018), on , by section 105(5) (and see section 105(6) and (8) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                • Section FH 11(6): inserted (with effect on 1 July 2018), on , by section 105(5) (and see section 105(6) and (8) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).