A Week in Review

AEOI IR Letters

In recent months you may have commenced receiving letters from IR, containing a subject line which reads – “Automatic exchange of financial account information”.

The letters commence with an explanation of the background to the OECD’s AEOI project, which uses a common reporting standard (CRS) to facilitate the sharing of financial account information between the various taxing jurisdictions across the globe.

IR collects financial account information from various reporting entities located in New Zealand, on those entities account holders who have been identified as being foreign tax residents (or in certain cases, in respect of entities that are controlled by foreign tax residents). Since September 2018, IR has annually been automatically sharing the financial account information with the Revenue authorities of foreign jurisdictions with which NZ has signed AEOI agreements, or otherwise upon specific request from those jurisdictions who have not yet signed such agreements with NZ.

Naturally, under the AEOI project, IR has also been receiving foreign account information in respect of NZ tax residents from its foreign counterparts, and having commenced its internal matching processes, are now issuing “please explain” letters to those NZ tax residents whose filed income tax returns make no mention of any foreign-sourced income.

It should be noted that IR is issuing two types of letters. The first simply explains that foreign account information has been received in relation to the client and that if you consider that their tax affairs are correctly up-to-date, then no further action is required (i.e. you do not need to respond to the letter). Alternatively, you are recommended to consider making a voluntary disclosure, to mitigate exposures to shortfall penalties in the event IR carries out a review of your client’s tax affairs and discoveries discrepancies. While IR does leave the ball entirely in your court as to whether you respond or not, there is a suggestion that your client’s file may still be reviewed further, to determine whether based on the nature and extent of the offshore investments, IR would have expected a certain level of income to have been returned.

The second type of letter is essentially the same as the first type, with the exception that direct response is required by your client, and by a given date. This type of letter is clearly indicated that the type of foreign account information IR has received about your client, leaves little doubt in IR’s mind that foreign income should have been disclosed in your client’s recently filed income tax returns, it has not been, so tell us why this is the case.

In the majority of our cases to date, the reason why no foreign income has been disclosed in the income tax return is because we have conducted an in-depth tax residency review in respect of our client, and determined that while they are presently considered to be an NZ tax resident, they are also presented a tax resident of another jurisdiction, and in accordance with application of the double tax treaty agreement (DTA) between NZ and that foreign jurisdiction, our client (via the Article 4 tiebreaker test) is a residence of the foreign jurisdiction, and consequently NZ has no taxing rights over the foreign-sourced income. Alternatively, it may be that our client is still within their transitional tax residency four year grace period, where most foreign-sourced income is not subject to NZ taxation.

We still await responses from IR to our own filed on behalf of our clients. It will be interesting in this regard to see whether they simply accept our residency determinations and the relevant DTA’s application in this regard, whether we will see requests for further details surrounding how we reached our conclusions, or whether (which unfortunately we have experienced in the past), we simply hear nothing further. I will certainly update you all, once the likely IR approach can be determined.

As an aside, and with little doubt my unashamedly marketing pitch for the week, part of my advisory work involves preparing in-depth tax residency opinions for my clients, so if this is an area within which you are not entirely comfortable, then please do not hesitate to reach out for assistance.