Currency conversions for branches – draft released

Tax Alert - July 2015

By Stephen Walker

On the 10 June 2015, Inland Revenue released for consultation an exposure draft outlining the Commissioner’s proposed approved methods for converting foreign currency amounts into New Zealand Dollars (“NZD”) for tax returns involving branches.

Historically, many taxpayers have been required to perform detailed, time consuming and often complex calculations in order to comply with the technically correct requirements of the New Zealand tax legislation and convert their foreign currency amounts into NZD based on the close of trading spot exchange rate.  In many cases, the effort required to perform such calculations is disproportionate to the amount of tax at stake, leading the vast majority of taxpayers to adopt more simplified pragmatic methods in practice.

The subject matter of the exposure draft is therefore a welcome one in that it signals Inland Revenue’s acceptance of some of those simplified methods currently used by taxpayers.  However, the proposed approved methods, as they are currently drafted, do leave a number of questions unanswered and raise a few new ones.  In addition, there are some New Zealand companies, not just branches, who have non-NZD presentational currencies, for whom these proposals may also be useful.  However, as it currently stands, these proposals would not apply to them.

What’s covered?

The proposed acceptable conversion methods outlined in the exposure draft for determining the NZD equivalent of profit before tax are the IFRS method, the annual methods, the monthly methods and the close of trading spot exchange rate method, which is the default method that is currently outlined in the legislation.  The exposure draft also covers the limitations for using each method, how certain tax adjustments should be converted, acceptable foreign exchange rate sources to use, and the notification requirements for a taxpayer choosing or changing to a particular method and/or exchange rate source.  Inland Revenue is keen to hear of any other methods adopted by taxpayers as they may seek to approve these too.  In addition, the exposure draft reiterates that taxpayers can still seek their own taxpayer specific approved methods if they so wish and these new proposals would not override existing or new methods, agreed directly with Inland Revenue.

IFRS method

The good news is that, under the proposed IFRS method, if you already prepare financial statements for a New Zealand branch or a New Zealand parent entity of an overseas branch, these are prepared under the New Zealand equivalent to IFRS (“NZ IFRS”), and they are already in NZD, then the conversion method adopted under NZ IFRS will be acceptable to the Commissioner.  This would likely be in line with the current practice of the majority of New Zealand taxpayers operating branches.

If you do not, or are no longer required to prepare financial statements under NZ IFRS, a scenario which many taxpayers may soon find themselves in following the recent changes to the financial reporting requirements for branches of small overseas companies, then you may need to consider one of the annual, monthly or the existing default conversion methods instead.  

Annual and monthly methods

Under current proposals, choosing one of the annual methods would require you to aggregate the branch’s income and expenditure for the year, converting them into NZD at the end of the year using either the annual average of the end-of-month exchange rates, or the annual average of the mid-month exchange rates (based on the 15th of the month).  The monthly conversion methods are similarly applied to each month’s aggregated income and expenditure, but using either the exchange rate on the 15th day of that month, the exchange rate on the last day of that month, or the average exchange rate for that month.

The annual methods would appear to be the simplest of the methods to apply, however, under the current proposals, the annual methods will only be available for use by those taxpayers who are members of a group whose annual worldwide turnover is less than NZD10m.

The comments included in the exposure draft suggest that as the annual methods represent a significant departure from the default close of trading spot exchange rate method, the Commissioner is keen to limit the use of the annual methods to small taxpayers, hence the NZD10m limitation.  However, the worldwide turnover threshold is likely to rule out the annual methods for those taxpayers who may be large globally, but have a small New Zealand presence and ultimately a low New Zealand tax liability.  

In the interests of trying to simplify and reduce the compliance burden for such taxpayers, it would perhaps make more sense to apply the turnover limitation to the New Zealand group turnover (including any foreign branches) in order to balance addressing the Commissioner’s concerns and simplifying the calculation methods for many taxpayers.

Tax adjustments

The exposure draft also provides some guidelines as to how to calculate annual tax adjustments when using either one of the annual or monthly methods.   The base requirement is that the adjustments should be consistent with the nature of the item being adjusted.  Examples given include;

  • Adding back non-deductible legal fees, the value of which would be the NZD amount in the profit and loss, converted using the relevant method.
  • For items such as depreciation (both accounting and tax) the document suggests that using an average annual rate for converting the amounts would be acceptable.  Note that the annual conversion rate for such adjustments appears to be applicable under both the annual and monthly conversion methods.   This helpfully negates the need to carry out monthly tax calculations under the monthly method.
  • For balance sheet adjustments, which would include items such as general accruals, holiday pay, bonuses etc, the amount to be adjusted could be calculated by reference to the balance date spot rate.

Foreign tax credits

Where a branch has paid foreign income tax, the amount being claimed as a foreign tax credit in an entity’s New Zealand income tax return should be the amount in NZD converted at the exchange rate on the date the foreign tax was paid.

Foreign exchange rate sources

The exposure draft proposes five approved sources of exchange rates for use by both foreign and New Zealand branches.  The first, not surprisingly, is the Inland Revenue’s own rates, as published on their website.  Others include those rates published on the website of the Reserve Bank of New Zealand (“RBNZ”), foreign exchange rates from one of New Zealand’s registered banks (as registered on the RBNZ website), and any reputable externally-sourced exchange rate.

The proposals do not state any particular order in which the above should be considered which is helpful in that it allows a taxpayer some flexibility in terms of choosing whichever source is more practical given their specific circumstances.  For example, the RBNZ rates are available in excel format, which can make them easier to use if you are performing manual calculations.  Alternatively, if you are a registered bank looking to use your own rates for conversion, you would be able to do so.

There are no comments or examples as to which external rate sources Inland Revenue would consider reputable.  Presumably, Inland Revenue are looking to include widely available public sources of exchange rate information from the internet, but it would be helpful if this was clarified and some examples of reputable sources given by Inland Revenue in their final document.

The fifth approved exchange rate source is the effective exchange rate applied by a bank to those branches that operate a NZD bank account.  As the exposure draft is currently worded, if a foreign currency amount has been directly credited to a New Zealand bank account, and the bank has converted that amount to NZD, the NZD amount received is the amount that must be used for tax purposes and the other methods will not apply.

From a practical perspective, the use of the words “must be used” in this context suggests that, whatever your particular circumstances, and despite the preferred and most practical conversion method you may have chosen for other transactions, if you operate a NZD bank account for your branch, then you will need to identify and split out those transactions already converted in the NZD bank account from your annual, monthly or transaction spot-rate conversion calculations.

Whilst not all branches may operate both a foreign currency and a NZD bank account, if these proposals stay in the final document, operators of such branches will really need to think about whether they need to use one or the other rather than both currency accounts if they want currency conversion to be simpler.

Consistency requirements

There will not be any requirement to notify the Commissioner that you will be using either one of the conversion methods or one of the foreign exchange rate sources outlined above.  However, once a method or exchange rate source is adopted, you will need to continue using that method and source consistently for future periods, and if you want to change to another method and/or rate source, then you will need to apply to the Commissioner for approval to do so.  There are also some specific consistency proposals around the use of one of the annual methods.


As well as the annual methods’ specific turnover limitation outlined above, if the current tax legislation currently prescribes a method to be used for a particular transaction, then under the currently worded exposure draft, you would not be able to use any of the annual or monthly methods for that particular transaction.  Examples given include calculating income or loss for foreign investment funds and financial arrangements under the financial arrangement rules.  This latter exclusion may make these provisions difficult to apply in practice.

Take the example of a New Zealand branch, with an Australian Dollar (“AUD”) presentational currency looking to file its New Zealand income tax return.  In this context there are likely to be some transactions that are financial arrangements.  These will require you to go through the balance sheet, identifying and carving out the financial arrangements from your annual or monthly calculation and calculating them on a spot-rate basis.  If you also have an NZD bank account, then as outlined previously, you will also be required to split out and exclude those transactions from your chosen conversion method.   Suddenly, under the currently worded exposure draft, we seem to be moving away from simplifying the foreign exchange calculations, and moving towards something that is potentially more complex than the current close of trading spot exchange default method.  Also linked with foreign exchange gains, the exposure draft makes no reference to the appropriate treatment of any gains and losses already included in the AUD profit and loss account.  Such balances could be made up of both existing NZD and other third currency denominated transactions.  What should taxpayers do to convert such items to NZD?


The exposure draft can be found here: and if you would like to provide your comments on the items raised in the document, either directly or through Deloitte, the deadline for them to be submitted to Inland Revenue is 22 July 2015.  Please feel free to contact your usual Deloitte Tax advisor for further information.


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