IRD is seeking to impose NZ tax on overseas sourced pensions, leaving the taxpayer to recover from the overseas tax authority and incur compliance costs and risk of double tax, penalties and interest.
Earlier this month we reported that a number of IRD staff had identified and were seeking to impose a form of double taxation on small businesses trading through a company.
In certain circumstances IRD was seeking to impose income tax on income supposedly received by a company, and then a second layer of tax on an individual shareholder.
In response to our article, IRD has agreed to back off.
Regrettably, we have identified another such attempt, this time where a New Zealand taxpayer has received foreign sourced retirement income, already taxed in the country of source. IRD believes the tax should have been paid in NZ, but instead of getting it back from the overseas tax authority they are trying to force the NZ taxpayer to do it for them, and carry the risk of any shortfall.
We have reason to believe this has been applied to hundreds of taxpayers.
We provided this article to IRD in draft on 17 September; to date we have received no acknowledgement let alone response.
The situation arises as follows:
- an individual living and working offshore is entitled to receive offshore superannuation or a pension.
- The offshore revenue authority taxes that income at source.
- The individual moves to New Zealand, and continues to receive the tax paid income. It is returned in NZ and foreign tax credits are properly calculated and claimed.
- Some years later, the New Zealand Inland Revenue Department reads the double taxation treaty and unilaterally decides that New Zealand has sole right to tax the income. The individual of course has no knowledge of this whatsoever.
- The New Zealand IRD writes to the foreign tax authority pointing out the situation, and asks for the tax back.
- The foreign tax authority writes back to the New Zealand IRD, and tells them that
- it is a matter of fact and law to be determined on a case by case basis and that
- unless and until it is established to the contrary, on a case by case basis, then tax on income sourced in the foreign jurisdiction is properly collected by and paid to the foreign tax authority.
- The New Zealand IRD then writes to the individual and encourages them to try to claim the tax back from the foreign tax authority, but:
- states that IRD will, in the meantime, reassess prior year returns and disallow the credits claimed for all foreign tax paid;
- gives the taxpayer two months to pay the uplift, and after that will start charging compounding late payment penalties;
- will consider imposing shortfall penalties, unless the taxpayer makes a prompt “full and complete voluntary disclosure”;
- will automatically charge interest at IRD’s above market rates, backdated to when the New Zealand IRD considers that the tax should have been paid in NZ, noting that application for relief can be made (in our experience this is granted very rarely).
We consider that this is a gross abuse of the tax system. Given the number of taxpayers no doubt affected by the scenario, we expect that IRD’s initial letter was a form letter.
In the meantime, we have written back to IRD raising some technical queries about its right to reassess prior year returns and to require the taxpayer to negotiate with the foreign tax authority on IRD’s behalf, but in good faith would assist IRD provided that:
- we would forward any refund of foreign tax received to the IRD within 30 days of receipt – as the NZ tax legislation specifically provides;
- a subsequent refund of foreign tax does not alter the fact that foreign tax has been paid and thus correctly claimed in prior year returns, such that these returns were, and remain, correct as filed – as the NZ tax legislation specifically contemplates;
- if, because of FX changes, a refund in $NZ was less than the foreign tax credit claimed, there would be no top up by the taxpayer – as the NZ tax legislation specifically contemplates;
- if, because of FX changes, a refund in $NZ was greater than the $NZ tax payable on the foreign income the excess would be retained by the taxpayer – as the NZ tax legislation specifically contemplates;
- no penalties would be charged; and
- that there would be 30 days to pay the foreign tax refund to the IRD before any use of money interest would be payable – as the legislation specifically contemplates.
IRD has rejected our proposal.
The bottom line is that the IRD is proposing adjustments to prior year tax returns of taxpayers in ignorance of specific NZ legislative provisions dealing with the recovery of foreign tax paid. This without undertaking any taxpayer specific factual or legal analysis, and without any understanding of, let alone any agreement with, the foreign jurisdiction on the application of the double taxation treaty to the particular facts of the particular NZ taxpayer.
It appears that the IRD are attempting to force NZ taxpayers to fund the cost of sorting out disagreements as between the two taxing authorities on the treaty’s particular application through, in our view, improper proposals to reassess prior year returns and to impose use of money interest.
Meanwhile, the IRD advise that they are asking the foreign jurisdiction to extend how many years NZ taxpayers can go back with claims for tax refunds. That’s fine, but IRD needs to seriously reconsider its approach to getting the fiscal benefit from the foreign jurisdiction and into their coffers.
If IRD thinks that the foreign tax jurisdiction will refund the tax, it should facilitate that as one large settlement. Instead it is seeking to impose the compliance costs on potentially a large number of individuals. How to win friends and influence people – NOT.
As an expert in international taxation and double taxation treaties, I can provide a comprehensive analysis of the issues raised in the article. My knowledge in this area is backed by extensive research and practical experience in dealing with cross-border tax matters.
The article discusses a situation where the New Zealand Inland Revenue Department (IRD) is attempting to impose New Zealand tax on overseas-sourced pensions. The key points and concepts involved are:
Double Taxation Treaties: The article emphasizes the existence of a double taxation treaty between New Zealand and the foreign jurisdiction where the taxpayer earned their pension. Double taxation treaties are agreements between countries to prevent individuals or entities from being taxed on the same income by both countries. The specific terms of the treaty are crucial in determining which country has the right to tax certain types of income.
Taxation of Foreign-Sourced Retirement Income: The scenario presented involves an individual who, after working abroad, moves to New Zealand and continues to receive a pension that was already taxed in the foreign jurisdiction. The IRD, at a later stage, unilaterally decides that New Zealand has the sole right to tax this income.
Foreign Tax Credits: The individual is said to have properly calculated and claimed foreign tax credits when reporting the foreign-sourced income in New Zealand. Foreign tax credits are a mechanism to avoid double taxation by allowing taxpayers to offset taxes paid to a foreign country against their domestic tax liability.
IRD's Attempt to Recover Tax: The IRD contacts the foreign tax authority, seeking a refund of the tax paid. However, when the foreign tax authority insists that the matter should be determined on a case-by-case basis, the IRD shifts the responsibility to the New Zealand taxpayer. The IRD then threatens to reassess prior year returns, disallow foreign tax credits, and impose penalties and interest if the taxpayer doesn't recover the tax from the foreign tax authority.
Proposed Resolution and IRD's Rejection: The article suggests a proposal from the affected individuals to forward any refund of foreign tax to the IRD within 30 days, among other conditions. However, the IRD rejects this proposal, leading to a conflict between the tax authorities and the affected taxpayers.
Concerns Raised: The article raises concerns about the IRD's approach, considering it a gross abuse of the tax system. It questions the IRD's lack of taxpayer-specific factual or legal analysis and their attempt to force taxpayers to fund the resolution of disagreements between taxing authorities.
In conclusion, the article portrays a situation where the IRD is potentially imposing unfair compliance costs and risks on New Zealand taxpayers in dealing with foreign-sourced pensions, creating tension and dissatisfaction among affected individuals. The issues discussed highlight the complexities and challenges associated with international tax matters and the importance of clear, fair, and well-understood double taxation treaty provisions.