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Inland Revenue

Tax Policy

Foreign account information-sharing agreement

(Clauses 2(23), 5, 6, 37, 128(1), (2), (5), 123(15), 129, 150, 151, 152 and 158)

Summary of proposed amendments

New Zealand has signalled its intentions to negotiate an inter-governmental agreement (IGA) with the United States to clarify the reporting obligations of New Zealand financial institutions under the United States law commonly known as the Foreign Account Tax Compliance Act (FATCA).

Under the terms of this IGA, New Zealand financial institutions would be required to collect information on their customers that are, or are likely to be United States taxpayers. This information must be sent to Inland Revenue, who in turn would transmit it to United States tax authorities under the existing exchange of information mechanism in the double tax agreement between the two countries. The IGA also provides for reciprocal information to be sent from the United States to Inland Revenue.

Amendments to New Zealand’s tax legislation are required to bring any agreed IGA into domestic law and allow New Zealand financial institutions to comply with its terms. In particular, there are concerns that, in the absence of any specific change, financial institutions may be unable to provide the relevant information to Inland Revenue without breaching the Privacy Act 1993.

The amendments proposed in the bill therefore seek to explicitly authorise financial institutions to obtain and provide to Inland Revenue the information that New Zealand is obliged to obtain and exchange under the IGA.

The proposed amendments are generally drafted in a broad manner to accommodate the possibility of New Zealand entering into similar agreements with other jurisdictions in the future.

FATCA requirements, with or without an IGA are due to take effect from 1 June 2014. Accordingly, this is the effective date for the new provisions.

Application date

The amendments will apply from 1 June 2014.

Key features

The first foreign account information-sharing agreement that the Government anticipates entering into is the IGA with the United States. A model IGA (“Reciprocal Model 1A Agreement, Pre-existing TIEA or DTC”) is available on the United States Treasury website:

This commentary uses the United States’ Treasury model agreement to illustrate examples. It uses terms like “financial institution”, and other terms defined in that model. In doing so, it is recognised that the relevant provisions and terms may be superseded by the specific terms of any IGA formally agreed between the two countries. Equally, these examples may have limited or no application to other similar agreements that may be entered into in the future.

Status of the agreement

The IGA, and other similar agreements that New Zealand may enter into in the future, are defined as “foreign account information-sharing agreements”. The bill introduces this concept as a defined term in section YA 1 of the Income Tax Act 2007. At present, this definition only includes the planned IGA, but it is anticipated that future agreements could be accommodated into the proposed set of rules by simply including them in this definition.

The proposed amendments to sections BB 3(2) and BH 1(4) are intended to clarify that foreign account information-sharing agreements will be “double tax agreements for the purposes of the Income Tax Act”. This means that the agreements, like other double tax agreements and tax information exchange agreements, generally override the Inland Revenue Acts, the Official Information Act and the Privacy Act. A new section BH 1(5) states that proposed part 11B of the Tax Administration Act 1994 applies to these agreements. This simply clarifies that Part 11B sets rules for these agreements despite their generally overriding nature.

Operative provisions

Proposed Part 11B of the Tax Administration Act 1994 contains the operative provisions that will govern how foreign account information-sharing agreements are brought into New Zealand law. Clause 152 contains a consequential amendment that moves the definition of “competent authority” from section 173B to section 3.

Part 11B

Part 11B contains provisions that implement foreign account information-sharing agreements. These provisions are important because, for the New Zealand Government to comply with its obligations under such an agreement, it is required to obtain and exchange certain information with a foreign government. It is necessary to have rules that require the relevant New Zealand taxpayers to acquire this information and provide it to the New Zealand Government, so this exchange can take place.

This Part therefore provides the compulsion for New Zealand taxpayers to obtain this information and pass it on to Inland Revenue. It comprises the following proposed sections:

185E – Purpose

This section sets out the purpose of the Part, which is to give effect to and implement foreign account information-sharing agreements.

Section 185F – Permitted choices

The model IGA contemplates that financial institutions may have choices in the way they comply with the agreement. Equally, the agreement may allow the New Zealand Government to make choices that could have consequences for the affected financial institution. The choices a person makes will determine the way the agreement applies to them. Section 185F is designed to recognise these choices, and then authorises a person to make them and treat such choices as being binding for the purposes of the agreement and the person’s obligations under the agreement.

Proposed section 185F(1) deals with such choices. Section 185F(2) explicitly authorises a person to make such a choice and anything necessarily incidental to give effect to that choice. Section 185F(3) clarifies that a person’s obligations are modified to the extent necessary to give effect to that choice. This is important because financial institutions should not be in a position where they are required to comply with all possible scenarios that an agreement contemplates. An institution that makes a choice should be accountable for the consequences of that choice – but not be punished for failing to take the alternative option.

Example 1

Annex II of the IGA provides a list of entities and products that are exempt from IGA reporting. However, qualification is not always automatic. For instance, a person may qualify as a “financial institution with a local client base” under paragraph III.A only if it has certain “policies and procedures” designed to detect accounts held by United States persons.

Applying these policies and procedures is a choice that the financial institution is entitled to make. However, its choice will have consequences. If it chooses to set up such policies and procedures, it will have the advantage of being non-reporting, but it will need to make sure those policies and procedures continue to meet the requirements set out in the agreement. Equally, if it considers that setting up the policies and procedures represents an unreasonable compliance burden, it can choose not to implement them, but the consequence will be that the exemption will not apply and it must report on relevant accounts in the same way as any other non-exempt institution.

The financial institutions should not be in a position where a customer can claim that it could have been exempt and therefore it should have made that choice. The agreement contemplates the existence of this choice, so the proposed legislation attempts to provide the flexibility for financial institutions to make it.

Example 2

In the same exemption in Annex II, a financial institution that wishes to take advantage of the exemption has a choice in respect of taking customers that are United States citizens that are not also New Zealand-resident. The financial institution can either report on such financial account or close the account. Again, this a choice contemplated by the agreement. A US person residing offshore should not have an action against a financial institution that closes their account just because the institution had an alternative course of action (in this case, reporting on the account). The legislation explicitly authorises the choice to be made because it is contemplated in the agreement.

Under the model IGA, New Zealand has a number of choices it can make at government level. Proposed section 185F caters for these choices and allows the Commissioner of Inland Revenue to publish a choice made or revoked in a publication of the Commissioner’s choosing (see subsection (4)). The method of publication is broad to allow for the fact that the Commissioner may wish to publish a number of choices in, for example, a Tax Information Bulletin, at the time an agreement is signed.

Proposed section 185F(5) clarifies that choices made by the Government or by an affected person are treated as part of the agreement for all aspects of Part 11B and section BH 1 of the Income Tax Act 2007.


Part F of Annex I of the model IGA provides that New Zealand may permit reporting financial institutions to rely on third-party providers to perform due diligence obligations. The “may permit” wording provides New Zealand with a choice about whether it is willing to allow third-party providers. When the Government makes this choice, the Commissioner of Inland Revenue will publish it so that financial institutions are aware of what is acceptable.

If the Government were to allow third-party providers (and published this choice in an appropriate manner), this would then afford financial institutions with a choice of their own: whether to conduct due diligence themselves or outsource to a third party. Again, either of these actions is explicitly sanctioned because it is a legitimate choice that the IGA contemplates financial institutions would have in these circumstances.

There are some choices that the Government may not want people to make. To be as transparent as possible about these choices, the concept of an “excluded choice” is created by proposed section 185F(6) of the Tax Administration Act 1994. A list of excluded choices is contained in section 185F(7). Like the agreements themselves, these choices are defined in accordance with specific agreements so that there is maximum clarity around what the excluded choice is.

In the context of the IGA, the Government is of the view that only accounts that are actually required to be reported on should be submitted to Inland Revenue. In this regard, for example, paragraph II.A of Annex 1 of the model IGA contemplates that a person can elect to report on accounts even if they are below the reporting threshold set out in the IGA. This election can only be made when the implementing rules provide for this election. The effect of section 185F(6) and (7) is that the implementing rules will not provide for such an election – this also applies to other similar “low value threshold” elections contained in the model IGA. Therefore making the choice to report on all accounts below the threshold is not a “permitted choice” for the purposes of the proposed legislation.


A financial institution has nine pre-existing depository accounts held by “US persons” that are individuals. Three of those accounts would be reportable except they have a balance of less than US$50,000, with the others having balances above that threshold. The financial institution does not have the option of reporting on all nine accounts, it must only report on the six that exceed the minimum threshold set out in the model IGA.

Section 185G of the Tax Administration Act – Registration

The model IGA contemplates that financial institutions that meet certain requirements must register with the United States Internal Revenue Service. Proposed section 185G brings the aspects of this registration requirement relevant to the financial institution into New Zealand law.

Section 185H of the Tax Administration Act – Due diligence

The model IGA also sets out detailed due diligence obligations for affected financial institutions. Proposed section 185H therefore clarifies that a financial institution is required to apply the relevant procedures. It is worth noting that the relevant procedures may depend on permitted choices that the Government and/or the financial institution will have made. A financial institution is only required to perform the due diligence procedures that flow from permitted choices they have made.

Section 185I of the Tax Administration Act – Information for New Zealand competent authority

Proposed section 185I is the central provision for ensuring New Zealand’s compliance with foreign account information-sharing agreements. In essence, it says that, if New Zealand is obliged to obtain and exchange information with a foreign competent authority, the person described or contemplated in the agreement as obtaining and providing the information must obtain and provide it to the New Zealand competent authority. All relevant steps in relation to obtaining and proving that information must be done in accordance with the agreement.

In the IGA context, this means that any information the New Zealand Government is obliged to exchange with the United States must be obtained by New Zealand financial institutions and provided to Inland Revenue.

The section also allows the provision of information if it is not required for exchange purposes, as long as obtaining and providing that information is contemplated in the agreement.

As with the other operative provisions, the relevant information may be dependent on choices that the Government and financial institution have made.

The section also clarifies that the Government may wish to make regulations in this area to spell out any finer details in a person’s reporting obligations.

Example 1

If a financial institution chooses to take advantage of an exemption, this will have a direct bearing on the information that New Zealand is expected to provide in respect of accounts held by that institution. The institution is therefore only required to obtain and provide the information that is consistent with its exempt status.

Example 2

Reporting on accounts below certain thresholds is contemplated by the agreement. However, the fact that reporting on these accounts is an “excluded choice” means that they cannot be reported on by a financial institution.

Section 185J of the Tax Administration Act – Information for third parties

Agreements may contemplate that a financial institution has to provide information to third parties. In the IGA context, these third parties could be foreign competent authorities or other financial institutions. Proposed section 185J authorises obtaining and proving this information, provided it is described or contemplated in the agreement. For foreign competent authorities, the request for information must be valid under the terms of the agreement.

Again, a regulatory power is included to allow obligations to be clarified if necessary.

Example 1

Article 5.1 of the model IGA contemplates a foreign competent authority making an enquiry directly to a financial institution “… where it has reason to believe that administration errors or other minor errors may have led to incorrect or incomplete information reporting…”. If a foreign competent authority were to make a request within this framework to a New Zealand financial institution, the institution must provide that information. The institution is not authorised to provide the information if the enquiry is of a substantive nature that is above “administration” or “minor” error.

Example 2

Article 4.1 of the model IGA provides a description of how a financial institution must behave in order to be treated as compliant. One of the requirements (in paragraph (e)) is that, if the institution makes United States sourced payment to a non-participating financial institution, the financial institution must provide information to the immediate payer of that amount (payment intermediary) the information required for withholding and reporting to occur on that payment. A New Zealand financial institution making such a payment to another financial institution is authorised to provide the necessary information to the payment intermediary.

Section 185K of the Tax Administration Act – Prescribed form

Proposed section 185K allows the Commissioner to prescribe the form in which information is received. This is particularly important for foreign account information-sharing agreements because it may be that the form of the information is set by either a foreign competent authority or other international organisation. Some flexibility to set these forms is therefore crucial to the smooth administration of these agreements.

Section 185L of the Tax Administration Act – Anti-avoidance

Proposed section 185L is an anti-avoidance provision that allows an arrangement to be treated as having no effect if the main purpose of entering into the arrangement is to avoid a person’s obligations under Part 11B. This provision is recognition of the fact that some people may not want to report on their customers for commercial/compliance costs reasons. However, in entering into foreign account information-sharing agreements, the Government is agreeing to obtain and provide certain information. The ability to unwind arrangements that avoid reporting is a requirement of the IGA. In any event, it is considered an important tool for the Government to be able to comply with the intended effect of these agreements.

Section 185M of the Tax Administration Act – Timeframes

Foreign account information-sharing agreements may not set a specific reporting period. They might be happy with any period, provided it is at least annual. In the New Zealand context, most businesses have systems designed to report on a tax-year basis. Proposed section 18M therefore clarifies that:

  • When an agreement or regulation does not specify, or is discretionary as to, a reporting period, that period will be a tax year, from 1 April to 31 March. The model IGA anticipates this period being legitimate for the purposes of that agreement.
  • When an agreement or regulation does not specify, or is discretionary about, the time in which a person must provide the information to Inland Revenue, it must be provided within two months of the end of the period. For example, assuming the reporting period ends on 31 March, the information must be provided to Inland Revenue by 31 May of that year.

Other matters

Tax returns

The proposed amendment to the “tax return” definition in section 3 of the Tax Administration Act sets out that information provided in the form set out in section 185K is not a tax return for the purposes of the Act. If the provision of this information was a tax return, various other provisions of the Act, such as the imposition of late filing penalties, would apply. It is not considered necessary to impose late filing penalties because, in many respects, timely filing will be self-policing with inbuilt sanctions for failure.

If a person does not file in time, the information may not be exchanged with the foreign competent authority. In an IGA context, this means that a financial institution runs the risk of being treated as non-compliant. Non-compliant status comes with its own sanctions imposed by the United States. The imposition of a domestic fine of up to $500 arguably does not provide any real motivation for financial institutions and has the potential to create disproportionately large administration costs for Inland Revenue.


The proposed addition of section 22(2)(lb) sets out that a taxpayer must keep sufficient records to allow the Commissioner to readily ascertain the person’s compliance with Part 11B. This makes it a statutory requirement for an affected person to collect and keep the information necessary for compliance with a foreign account information-sharing agreement. It also ensures that the records must be kept for the statutory record-keeping period set out in section 22.

Failure to keep documents required by this provision will result in a strict liability offence under section 143 or a knowledge offence under section 143A, as applicable.


Proposed new sections 143(1)(ab) and 143A(1)(ab) introduce a “strict liability” offence and “knowledge” offence related to a person’s failure to register with a foreign competent authority as required by Part 11B.

These offences are considered necessary to comply with New Zealand’s obligations under the IGA, and possibly future agreements. New Zealand has an obligation under the IGA to rectify what is known as “significant non-compliance” through its domestic law.

It is considered that serious non-compliance will most likely come about in three main ways:

1. A financial institution will fail to register.
2. A financial institution will fail to obtain the required information from its customers.
3. A financial institution will obtain the information but fail to provide it to Inland Revenue.

In cases 2 and 3, it is considered that current legislation gives the Commissioner adequate flexibility to deal with non-compliance. As set out above, if a person does not obtain the required information from its customers, it will have failed to keep documents required by a tax law – resulting in offences being committed under section 143 and (potentially) 143A.

Similarly, if a person obtains records but fails to provide them to Inland Revenue, the Commissioner will have the ability under section 17 of the Act to require their release. If the person does not comply with the section 17 notice, this refusal will also result in offences being committed under section 143 and (potentially) 143A.

However, in case 1, where there has been a failure to register, domestic legislation does not currently have a requirement to register and a sanction for not doing so. As discussed above, proposed section 185G will provide a requirement to register. The proposed changes to sections 143 and 143A will match that requirement with a sanction. By putting this sanction into sections 143 and 143A the changes also mirror the potential outcomes for the other forms of serious non-compliance. However, to recognise the fact that a failure to register may occur for circumstances beyond the control of the person concerned, proposed section 143(2B) provides an exclusion from the absolute liability offence if the relevant failure to register occurred through no fault of the person.

Deductions for withholding

Under section DB 1 of the Income Tax Act, various types of taxes are disallowed as deductions for income tax purposes. Proposed section DB 1(1)(b) clarifies that any FATCA withholding that a person suffers is similarly not available as a deduction, even if the general permissions for deductions are satisfied. It is Inland Revenue’s preliminary view that FATCA withholding will also not be available as a tax credit under subpart LJ of the Income Tax Act. This is because FATCA withholding is more akin to a penalty than a withholding tax.