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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 12: Offset of mismatch amounts against surplus assessable income

You could also call this:

“Using extra income to offset tax differences between countries”

This law talks about what happens when you have a mismatch amount in your income. A mismatch amount is when the tax rules in New Zealand and another country don’t agree on how to treat some of your money.

If you have a mismatch amount, you can use it to reduce your surplus assessable income. Surplus assessable income is extra money you’ve earned that can be taxed.

To figure out your surplus assessable income, you use a special math formula. This formula looks at things like:

  • Money you had left over from previous years
  • Money you earned this year
  • Money that isn’t taxed in other countries
  • Money protected by tax credits
  • Expenses you can claim

If you use your mismatch amount to reduce your surplus assessable income, you get to claim it as a deduction. This means you might pay less tax.

If you can’t use all of your mismatch amount in one year, you can usually carry it forward to the next year. The same goes for any leftover surplus assessable income.

Sometimes, if a company stops existing, its mismatch amount might become a tax loss for someone else.

Companies in the same group can share their mismatch amounts and surplus assessable income with each other, as long as they follow certain rules.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS65842.

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

FH 12Offset of mismatch amounts against surplus assessable income

  1. This section applies when a person has a mismatch amount under sections FH 5, FH 6, and FH 8 to FH 10 from a mismatch situation for an income year.

  2. The total of mismatch amounts from the mismatch situation for the income year are set off against the person’s total surplus assessable income from the mismatch situation under subsection (3).

  3. The person has an amount of surplus assessable income, for the mismatch situation and the income year, equal to the greater of zero and the amount calculated using the formula—

    earlier + assessable + deductionless − unrecognised − protected − deductions + status.

    Where:

    • In the formula,—

    • earlier is the amount of surplus assessable income for the person from the mismatch situation carried forward to the tax year corresponding to the income year from earlier tax years:
      1. assessable is the amount of assessable income derived from the mismatch situation by the person in the income year:
        1. deductionless is zero, except for a person that is a hybrid entity resident in New Zealand and owned by a non-resident, for which it is the amount of income of the hybrid entity that—
          1. is exempt income under section CW 10 (Dividend within New Zealand wholly-owned group) or excluded income under section CX 60 (Intra-group transactions); and
            1. for an owner of the hybrid entity, is income subject to tax under the taxation law of another country or territory without a credit for tax, other than a withholding tax on the dividend, paid by the person paying the dividend:
            2. unrecognised is the amount of the assessable income of the person from the mismatch situation for the income year that is not subject to tax under the taxation law of the foreign jurisdiction because of the residence of another person, who is not another owner, or because of the source of the income or the tax status of the payer:
              1. protected is the amount of taxable income for which the income tax liability of the person would equal foreign tax credits under subpart LJ (Tax credits for foreign income tax) allowed for the assessable income from the mismatch situation for the income year:
                1. deductions is the amount of deductions allowed for expenditure incurred by the person in the income year in deriving assessable income from the mismatch situation, not including expenditure giving rise to mismatch amounts:
                  1. status is the amount of expenditure on a payment by the person to a payee in New Zealand that is a mismatch amount under section FH 9 and that is not allowed to be deducted against income by the tax law of a country or territory outside New Zealand because of the tax status of the person and the payee.

                    1. If a mismatch amount from a mismatch situation for a person is set off under subsection (2) or (10) in the tax year corresponding to an income year against an amount of surplus assessable income of the person from the mismatch situation, the person has a deduction for the income year equal to the amount of the offset.

                    2. If a mismatch amount from a mismatch situation is not an offset in the tax year corresponding to an income year, the remaining amount is carried forward to the next tax year if it meets the requirements of subsection (8) for that tax year.

                    3. If an amount of surplus assessable income from a mismatch situation is not an offset under subsection (2) or (10) in an income year,—

                    4. the amount is reduced by the amount of corresponding income, that is recognised and taxed as income arising from the mismatch situation by the taxation law of a foreign country or territory, for which the income tax liability of the person would equal credits, equivalent to foreign tax credits under subpart LJ, allowed by the foreign country or territory for the income from the mismatch situation for the income year; and
                      1. the amount remaining is carried forward to the next income year if it meets the requirements of subsection (8) for that income year.

                        1. A mismatch amount, or surplus assessable income, from a mismatch situation may be carried forward to a tax year corresponding to an income year (the carry year) if, for the tax year in which the amount arises (the initial year) and the carry year, a tax loss of the person could be carried forward under Part I (Treatment of tax losses) from the initial year to the carry year in the absence of offsets.

                        2. A mismatch amount under section FH 8(3) that is available to be carried forward from a tax year corresponding to an income year is included as a tax loss component of the New Zealand resident for the next tax year (the release year) if—

                        3. the hybrid entity, or the New Zealand resident with the deducting branch to which the mismatch amount is attributed, ceases to exist before the end of the income year corresponding to the release year; and
                          1. expenditure or loss of the hybrid entity, or of the New Zealand resident attributed to the deducting branch, has not been set off under the taxation law of a country or territory outside New Zealand against income, for the income year in which the mismatch amount arose or for a later income year, that is not assessable income of a person or entity.

                            1. A company (the offset company) may set off in an income year a mismatch amount from a mismatch situation against surplus assessable income of another company (the group company) from another mismatch situation (the income situation) if—

                            2. the companies are in the same wholly-owned group when the mismatch amount and the surplus assessable income arise; and
                              1. the mismatch amount and the surplus assessable income are available after each of the companies has all offsets permitted for the income year of amounts arising from the mismatch situation in which the company is involved; and
                                1. the offset would be permitted if the offset company were substituted for the group company in the income situation.

                                  Notes
                                  • Section FH 12: 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 12(3) formula: amended (with effect on 1 July 2018), on , by section 69(1) (and see section 69(5) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                  • Section FH 12(4)(c): amended (with effect on 1 July 2018), on , by section 69(2) (and see section 69(5) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                  • Section FH 12(4)(c)(i): amended (with effect on 1 July 2018), on , by section 69(3) (and see section 69(5) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                  • Section FH 12(4)(d): amended (with effect on 1 July 2018), on , by section 199(1) (and see section 199(2) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                  • Section FH 12(10): amended (with effect on 1 July 2018), on , by section 69(4) (and see section 69(5) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).