Inland Revenue Approval: “Income tax – Currency conversions for branches”

Tax Alert - November 2015

By Emma Marr and Lori Liu

Our July Tax Alert covered the Inland Revenue’s proposed approved methods for converting foreign currency amounts into New Zealand Dollars (“NZD”) for tax returns involving branches. This included annual and monthly methods and, in some cases, currency conversion methods adopted under IFRS.  At the time we noted that although the draft was a welcome development, there were a few unanswered questions in the draft, and some potential areas for improvement. 

It is pleasing to see, therefore, that Inland Revenue has taken on board many submissions on those points, and incorporated them in the final version of the “Approval - Income tax - Currency conversions for branches”, published in the October Tax Information Bulletin.

We have summarised below the main concerns with the exposure draft, and the way Inland Revenue has dealt with those concerns in the final Approval. For more detail on the exposure draft, refer to our earlier article from the July Tax Alert.

NZ$10m group turnover limit

  • Inland Revenue proposed that the annual methods would be available only to taxpayers who are members of a group with an annual worldwide turnover of less than NZ$10m.  This would preclude those taxpayers who may be large globally, but have a small New Zealand presence and ultimately a low New Zealand tax liability.
  • Following submissions on this point, we are pleased to see that the final Approval has been amended so that the NZ$10m threshold will apply only to the New Zealand group (both the branch and any associated New Zealand entities) rather than the worldwide group.  This is a much more sensible position for small branches of multinational corporations. 

Notification of change in method

  • The Approval has been amended so that if a taxpayer no longer qualifies to use the annual method because it breaches the NZ$10m threshold, it is not mandatory to notify the Commissioner.  The taxpayer will simply transition to one of the new approved methods, and would only notify the Commissioner if the taxpayer wants approval to continue using one of the annual methods or an alternative currency conversion method.

Amounts already converted by bank

  • Originally the exposure draft stated that if a foreign currency amount has been directly credited to a New Zealand bank account, and the bank has converted that amount to NZ$, that NZ$ amount must be used for tax purposes and the other conversion methods would not be available. This would result in the taxpayer having to split out and exclude those transactions from their chosen conversion method.
  • Following submissions, this requirement has been removed from the final Approval, so an entity has the option of using any of the currency conversion methods for which it qualifies.  Again, this is a practical position and the Inland Revenue’s change in approach is welcomed. 

Using the IFRS method when no separate branch financial statements prepared

  • The exposure draft allowed entities to use IFRS compliance conversion methods if the entity prepared financial accounts that complied with IFRS.  It wasn’t clear whether this included branches that didn’t prepare separate financial statements, but were included within main entity’s accounts that were prepared in accordance with IFRS.  The Approval clarified that a branch can use the IFRS method when the entity (of which the taxpayer is a part) prepares IFRS financial statements that include the branch.

Conversion of financial arrangements

  • Despite submissions that it would be useful for the Approval to provide for a simpler way of converting financial arrangements in a foreign branch, the final Approval remains unchanged in requiring entities to use a specific conversion method if prescribed by tax legislation.  In that case an entity can’t use the annual or monthly conversion methods for that particular transaction, and will have to thoroughly examine its accounts to identify and carve out such transactions.

As a final note, it would have been preferable if the Approval applied not only to branches, but also to New Zealand companies who have non-NZ$ presentational currencies.  However, the final Approval is a real improvement on the draft proposals, and the development of this document is an excellent example of the policy development process working in favour of taxpayers and allowing policymakers to take helpful feedback on board.


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