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We have been asked to clarify Inland Revenue's position as to whether taxpayers are required to provide financial and other underlying records including evidence of foreign tax paid, in English for any controlled foreign companies ("CFCs") or foreign investment fund ("FIFs") they may hold when using the branch equivalent tax calculation method.
There have been a number of instances when verification by the Commissioner of branch equivalent tax calculations has been affected by taxpayers not being able to provide the underlying records in English. This issue has highlighted that some taxpayers are not aware of their obligation, to keep in New Zealand, sufficient records in the English language to enable the Commissioner to readily ascertain their attributed income.
The legislation requires that any taxpayer that holds interests in any CFC or FIF, where the branch equivalent tax calculation method is adopted, has an obligation to provide upon request financial and other underlying records, for that entity, in English.
|Application of Section 22 of the Tax Administration Act (TAA) 1994|
|Section 22 (2) of the TAA states as follows:|
|"...every person who -|
|(a)||Carries on any business in New Zealand:|
|(b)||Carries on any other activity (not being the carrying on of employment as an employee) in New Zealand for the purpose of deriving assessable income;...|
|(d)||Makes, holds, or disposes of, for the purpose of deriving assessable income, any investment;...|
|(f)||Is a company that is... a branch equivalent tax account company...|
|shall keep in New Zealand sufficient records in the English language to enable the ascertainment readily by the Commissioner, or any officer authorised by the Commissioner in that behalf, of -|
|(g)||The assessable income derived by that person from the carrying on of that business, or the carrying on of that other activity, or the making or holding or disposing of that investment; and|
|(h)||The allowable deductions of that person in the carrying on of that business, or the carrying on of that other activity, or the making or holding or disposing of that investment; and ...|
|(k)||Every credit and debit to the...branch equivalent tax account;...|
|and shall retain in New Zealand all such records for a period of at least 7 years..."(emphasis added)|
The Commissioner's position is that should the records of the various CFCs and FIFs not be provided in the English language, the attributed CFC or FIF income (being assessable income) or attributed CFC or FIF losses (being allowable deductions) cannot be readily ascertained. Nor is the Commissioner in the position of being able to readily ascertain the accuracy in such situations of the resulting entries to the branch equivalent tax account.
Where the financial and other underlying records, including evidence of foreign tax paid, are not maintained in English, the Commissioner considers that upon request there is a requirement for taxpayers to provide such information in English in a timely manner, to ensure the Commissioner can readily ascertain the matters referred to above.
The exception to such a requirement is under section 22(2) of the TAA 1994:
"... the Commissioner may, on application in writing being made to the Commissioner in that behalf, authorise any such person, by notice, to keep and retain outside New Zealand or as the case may be, in a language other than the English language, such of those records as the Commissioner determines".
Such applications will be considered on a case by case basis, taking into account the degree of difficulty which maintaining records in a language other than English would cause for Inland Revenue, the compliance history of the taxpayer, whether alternative sources of relevant information are available and the relative cost to the taxpayer in meeting their obligation.