Technical amendments converning the approved issuer levy
(Clauses 79, 102 and 103)
Summary of proposed amendments
The bill introduces a number of amendments to the rules for the approved issuer levy (AIL) in the Tax Administration Act 1994 and the Stamp and Cheque Duties Act 1971. The purpose of these amendments is to clarify the relationship between domestic law and treaty law for interest derived from New Zealand by foreign banks. The amendments will make clear that a borrower can pay AIL in order to qualify for an exemption under a double tax agreement. They will also ensure a better fit between terminology used in the relevant tax treaties and the arrangements whereby a borrower chooses to pay AIL under domestic law.
The amendments will apply from 1 August 2010.
A number of changes are being made to section 32M of the Tax Administration Act 1994:
- As amended, subsection (1) will make clear that a borrower is eligible to elect to pay AIL for the purposes of an exemption under a double tax agreement, as well as for the purposes of the non-resident withholding tax (NRWT) rules. Subsection (2) will set out how the borrower elects to pay AIL in relation to a particular security, by either being or becoming an approved issuer, by applying to register the security, and by paying the levy for the security.
- A person will become an approved issuer by giving notice to the Commissioner of Inland Revenue (the Commissioner) under subsection (2B). The Commissioner may revoke a person’s approved issuer status under subsection (3). By virtue of subsection (4B), such revocation applies from the date of notification under subsection (2B) if given with 20 working days of that date. This replaces the existing arrangements whereby a person must apply for approved issuer status but is deemed to have been granted such status unless notified by the Commissioner within 20 working days that their application has been declined.
- Subsection (5) is being amended to introduce a reference to an exemption under a double tax agreement.
Sections 86I and 86L of the Stamp and Cheque Duties Act 1971 are also amended to introduce references to an exemption under a double tax agreement.
Recently concluded tax treaties with Australia and the United States include a new exemption from source-country tax for interest derived by banks. For interest derived from New Zealand, the availability of this exemption depends on the borrower paying AIL, unless the borrower is not eligible to elect to pay the levy, or there is no such levy, or the rate of the levy exceeds 2 percent of gross payments.
The proposed amendments clarify the circumstances in which a person is eligible to pay AIL. They make clear that a borrower can pay AIL in order to qualify for an exemption under a double tax agreement, even if paying the levy makes no difference to the way the transaction is dealt with under domestic law. This will address uncertainty around the treatment of interest paid to foreign banks operating through a branch in New Zealand. Such interest is not subject to NRWT so the AIL mechanism is not relevant domestically, but the new treaty exemption could still apply if the loan was made from offshore instead of through the New Zealand branch.
More generally, the amendments ensure a better fit between terminology used in the relevant tax treaties and the arrangements whereby a borrower chooses to pay AIL under domestic law. The new treaty provisions ask specifically whether the borrower is “eligible to elect to pay” AIL. The amendments will ensure that domestic law directly addresses this question.
The amendments are intended to make the existing law more transparent, rather than substantively to alter its effect. It is therefore not considered necessary for the amendments to apply retrospectively.