INTERNATIONAL TAX PLAZA - New Zealand: Approval - income tax

Details: Published: 23 September 2015

(September 23, 2015)

On September 22, 2015 on its website the New Zealand Inland Revenue published an item titled: “Approval - income tax - currency conversion for branches”.

The item starts with providing the following summary:

1. The Act requires foreign currency amounts to be converted to New Zealand dollars to calculate a taxpayer's New Zealand income tax liability.

2. In some cases, the Act may prescribe a currency conversion method or foreign exchange rate source to use, but in most cases it does not. Section YF 1(2) applies where the Act does not provide a specific currency conversion method or exchange rate source to use. It requires taxpayers to convert foreign currency amounts to New Zealand dollars by applying the close of trading spot exchange rate on the date the amount is required to be measured or calculated.

3. However, the Act gives the Commissioner the power to approve alternative currency conversion methods and foreign exchange rate sources. The following currency conversion methods have been approved by the Commissioner for branches:

· Entities that prepare financial statements that comply with International Financial Reporting Standards (IFRS) (as defined in s YA 1) may use the currency conversion method and rates adopted under IFRS to convert their branch's foreign currency amounts to New Zealand dollars (the IFRS method).

· Non-IFRS taxpayers may use:

o the average mid-month exchange rate method;

o the average end-of-month exchange rate method;

o the mid-month exchange rate method;

o the end-of-month exchange rate method; or

o the monthly average exchange rate method.

4. Use of the annual and monthly methods is subject to certain conditions and thresholds that are discussed later in this item.

5. Entities using one of the approved currency conversion methods may need to make tax adjustments. Where relevant, entities using the IFRS method should use the actual amounts, as already converted to New Zealand dollars, in their financial statements (see para [13]). When making tax adjustments under an annual or monthly method, the adjustments should be consistent with the nature of the item being adjusted (see para [25]).

6. The Commissioner also approves the following alternative foreign exchange rate sources for branches under ss YF 1(5) and YF 2(2), subject to conditions outlined at [34] to [42]:

The foreign exchange rates published on the Inland Revenue website.
The foreign exchange rates published on the Reserve Bank of New Zealand website: www.rbnz.govt.nz.
Foreign exchange rates from one of New Zealand's registered banks.
Any reputable externally-sourced exchange rate that is appropriate given the nature of the branch's business.

7. All of the methods and exchange rate sources are approved for a foreign branch of a New Zealand entity's business or a New Zealand branch of a foreign entity's business.

8. This Approval does not apply to financial arrangements. Financial arrangements must be converted to New Zealand dollars using the methods and rates prescribed under the financial arrangements rules.

9. If a taxpayer is using, or would like to use, a method or rate source not outlined in this Approval, the taxpayer may apply to the Commissioner under ss YF 1(5), YF 1(6) or YF 2(2) for approval to use that method or rate source. (Applications can be emailed to: This email address is being protected from spambots. You need JavaScript enabled to view it..)

10. This Approval updates and replaces "Tax effects of exchange alterations on 21 November 1967" Public Information Bulletin No 44 (February/March 1968), and "How revaluation affects tax" Public Information Bulletin No 75 (November 1973).

Subsequently the item discusses a.o. the following subjects:

· Interpretation

· IFRS method

· Annual methods

o Average mid-month exchange rate method

o Average end-of-month exchange rate method

· Monthly methods

o Mid-month exchange rate method

o End-of-month exchange rate method

o Monthly average exchange rate method

· Annual tax adjustments under the annual and monthly methods

· Conditions for use of currency conversion methods