Large enterprises update (formerly Corporates contact) - 2007

Large enterprises update - Number two: December 2007

• Business tax changes
• Changes afoot for KiwiSaver
• Results from large enterprises survey
• Email pilot with large enterprises
• New technology
• Consolidated imputation groups
• Tax mistakes made by large enterprises
• Struck-off companies
• Buyer-created tax invoices
• Large employers
• Tax pooling
• Multi-national restructuring: ten questions that need answering
• From the editor

Business tax changes

Two important business tax changes were announced in the 2007 Budget: a cut in the company tax rate from 33% to 30%, and a proposed 15% tax credit for businesses doing eligible research and development (R&D).

The legislation for the company tax rate reduction and the flow-on impacts for the calculation of provisional tax was enacted on 21 May 2007. This applies to companies, including other entities defined as companies by the Income Tax Act and certain savings vehicles. See our Tax Information Bulletin Vol 19, No 6 (July 2007) for more detail.

A bill introducing the R&D tax credit and some other changes relating to the company tax rate is before parliament. It is expected to be enacted this month, with the changes taking effect from the 2008-09 income year.

To be eligible for the R&D tax credit a business must operate in New Zealand. It must carry out eligible R&D activities related to its business.

It must also control the R&D, bear the financial and technical risk and own the results. Eligible expenditure must exceed $20,000 (unless using a research provider listed by Inland Revenue).

Businesses will be able to claim the tax credit in conjunction with their annual income tax return process. They will need to file a detailed R&D tax credit claim form, which must be done online.

A draft R&D tax credit guide will be available for consultation on Inland Revenue's website as soon as possible after the legislation is passed.

Changes afoot for KiwiSaver

In the May 2007 Budget, changes were announced about KiwiSaver. These changes are due to become law this month.

The major changes affecting employers are:

• From 1 April 2008, all employers will be required to match the contributions of their employees who are members of KiwiSaver or a complying fund. The level of contribution will be phased in over four years, starting at 1% of an employee's gross salary or wage from 1 April 2008, rising to 4% by1 April 2011.
• To offset contributions, there will be an employer tax credit of up to $20 per week, per employee. To minimise compliance costs and impacts on cash flow, these tax credits will be paid regularly to employers through the PAYE system and means that for employees who earn up to $104,000 gross per year, the compulsory contributions won't cost employers anything in the first 12 months.

At the same time as the legislation is passed, we'll send you mail giving an overview of all the changes and where to go for more information. Keeping up-to-date with the changes is easy with our regular email updates containing information on how the changes affect you. Register online at www.ird.govt.nz/kiwisaver/employers

We will send all employers a revised KiwiSaver employer guide in February which will detail the new processes, and an example of the revised KiwiSaver employee information pack.

In the meantime you can find further information about the changes at www.kiwisaver.govt.nz and www.ird.govt.nz/kiwisaver/employers

The Bill is public information and is available on our website www.taxpolicy.ird.govt.nz/news/archive.php

Results from large enterprises survey

This year we conducted a second survey of our large enterprise customers. The results have now been analysed. We've found that you're expressing many of the same concerns that you did last year in our first survey.

So what are you telling us?

We could do better in three key areas:

1. Audits
2. Commercial awareness
3. Customer education.

Around February next year, in our third survey, we'll revisit each of these key areas and ask you for more specific feedback. We want to be sure we have an accurate understanding of where you're coming from.

Then we can work on improving our performance. In fact, as you can see below, we've already made a start!

Improving our audits

Your biggest concern is that our audits, and the disputes process, sometimes take too long. We recognise audits can be disruptive, so we're looking at ways we can be more efficient.

Our investigators are getting up to speed with eCase, and learning how to get the most out of it. eCase is an electronic tool that helps us manage "cases" - for example, debt cases, and audits. Investigators can follow standardised audit case plans, set reminders for key milestones and keep track of the hours spent on the audit.

We're also giving investigators refreshers on "best practice" procedures.

Improving our commercial awareness

You're saying we lack commercial awareness, which sometimes puts a strain on our relationships with our customers.

We recognise we need to understand our customers better. Your business processes, issues, and pressures. Then we can, where possible, tailor our approach to take into account your needs and preferences.

What are we doing about it?

We've been talking to the experts. Recently, we invited a number of private sector executives to talk to our staff about their world, and the realities of running a large enterprise.

An economist gave us an overview of the New Zealand economy.

We're asking our staff to meet face-to-face with our customers more often. That way we can improve our relationship with you, and get your feedback on a regular basis.

Improving customer education

The survey tells us that we could present our educational materials differently. You'd like us to email tax information to you. And if the law, or our policy changes, you'd like us to notify you of the changes by email too.

Our Customer Insight team is currently considering your suggestions, and other ways we can let customers know about their obligations and entitlements.

About the survey

The survey asked 100 randomly-selected large enterprises to give their opinions about tax compliance and Inland Revenue's performance. An external research company conducted the survey. We wanted to ensure respondents would remain anonymous to us.

Email pilot with large enterprises

Inland Revenue is about to run a pilot to assess the practicality of using standard email to communicate with large enterprises.

For a while now, you've been able to email us during an investigation. But we've always responded by phone or by letter. Inland Revenue has an obligation to protect the privacy of taxpayers' personal information, so we're very careful to make sure unauthorised people are not viewing your correspondence.

Which brings us to the pilot.

We recognise that emails have a number of advantages - for example, quicker response times. So we want to find out if large enterprises would be comfortable if we started communicating by standard email.

We're conducting the pilot with a small sample of our large enterprise customers. Specifically, those that have an annual turnover of greater than $300 million, and operate their own email servers.

Does your enterprise meet these criteria? If it does, and we commence an investigation or risk assessment of your business after 1 November 2007, we'll ask you if you'd like to take part in the pilot. If you're happy to go ahead and complete the "opt in" process, our investigators will start communicating with you by email where appropriate.

The pilot will finish in April 2008.

At that stage, we'll survey all participants. You'll be able to give us your views on the whole "email experience". Would you like us to carry on emailing you? Or do the drawbacks outweigh the benefits?

We'll let you know the survey results, and the future of Inland Revenue email communications, sometime next year in Large Enterprises Update.

If you have any questions about the pilot, please call Tony Morris on 07 959 0483.

New technology

To speed up our processing, when we receive paper GST and payroll returns, we load them onto our system using a scanner. In some cases the scanner can't read the returns properly. How you complete the returns makes a difference! Please follow these simple tips and help us capture your information accurately:

• Use a black or dark blue biro. We've found that "Vivid" pens, red pens, light blue pens, and "sparkly" pens don't work nearly as well.
• Don't use a highlighter
• If you want to record a monetary value of "zero" (0), simply leave the box blank. "Nil" is sometimes picked up as "411", and dashes and zeros can cause problems.
• If you're stamping the return, keep well away from barcodes and the DLN (the 14 digit number).
• If you're a "small" employer and you need to add a new employee to your employer monthly schedule, please record the employee details on a new line. Don't cross out the pre-printed details of another employee, and write over the top.

Thank you for your cooperation.

Consolidation imputation groups

If you're forming a new consolidated imputation group that does not include the members of an existing consolidated imputation group, remember that the opening balance of the group's imputation credit account (ICA) must be nil.

We've found that some of our customers haven't been commencing with nil balances when they should have been. So in July this year, we started a national project to address the issue. The project is proving to be a success. We have identified the affected customers, and we're contacting them on an ongoing basis. A number of cases with adjustments are now closed, after agreement with the customer.

Inland Revenue is committed to educating customers about their tax obligations. We believe the "national project" is a good way of going about it for common errors. That way each customer is treated consistently, no matter where they're based. You can expect to hear about other national projects in the future.

Tax mistakes made by large enterprises

Every year, our investigators collect additional revenue as a result of tax audits. While large enterprises are a diverse group, and every audit is different, there are some "tax mistakes" that keep cropping up.

What mistakes account for the most additional revenue? We'll reveal them to you over the next few issues of Large Enterprises Update. If you're faced with any of the situations discussed, we recommend you double-check your calculations before you file your return. It could save you money!

This issue's list of "common mistakes":

Company losses

• Claiming a loss twice. Happens with groups of companies. Sometimes a loss is claimed in a member's return, and the same loss is claimed as part of the aggregated loss in the consolidated return.
• Carrying forward a loss despite a breach in shareholder continuity. Remember you can only carry a loss forward if the company maintains a common ownership of 49%.
• Loss offsets not balancing within a group of companies. For example, the losses offset by the profit companies don't equal the loss incurred by the loss company.

Capital expenditure

Some large enterprises are incorrectly claiming a deduction for capital expenditure. Most commonly, difficulties arise during a construction project. Are these costs repairs and maintenance, improvements, or even, are we creating a new asset? The "capital/revenue" distinction isn't always easy to make, and you may face a shortfall penalty if you interpret the law incorrectly.

We recommend you minimise your risk by disclosing your interpretation upfront, by completing a Statement in support of a tax position (IR282).

If you send us the IR282 at the time you file your tax return, any shortfall penalty will be reduced by 75%.

You can get a copy of an IR282 from our site. You'll find it under "Forms and guides" in the right-hand margin of the homepage.

Imputation

Some of the errors made with imputation mirror those made with company losses.

• Recording a credit twice in group accounts. Sometimes a credit is recorded in a member's imputation credit account (ICA), and the same credit is recorded as part of the aggregated figure in the consolidated ICA.
• Carrying forward credits despite a breach in shareholder continuity. You can only carry your credits forward if the company maintains a common ownership of 66%.

Curency conversion

Some large enterprises are incorrectly converting foreign currency to New Zealand dollars by using forecasted rates. The correct rates are shown on our website.

Made a mistake?

We recommend you tell us about it by making a voluntary disclosure. Please note the benefits are greater if you make the disclosure before we notify you of a pending audit.

Struck-off companies

Are you about to strike off a company? We recommend you contact us first. Otherwise you'll lose your claim to any money that we may owe you.

When a company is struck off, all company assets become the property of the crown - section 324 of the companies Act 1993, and section 99(1)(c) of the public trust Act 2001. "Company assets" include any tax credits, refunds and overpayments held in your account with Inland Revenue.

Once the crown takes possession of the assets, we are unable to refund any money to the company, its directors or its shareholders. But if you contact us before strike-off, we'll make sure you receive your full entitlements. please be aware however, that some credits can't be determined until we receive the final company tax returns.

It's worth noting that when a company with branches (each with its own IRD number) is struck off, we've sometimes found that one of the smaller branches has credits in its account. And the company accountants aren't always aware of this!

If you're involved in a company amalgamation, please send us a Declaration of an amalgamation (IR432) within 63 working days of delivering the amalgamation documents to the Registrar of companies. Then we can check the records of the companies that will cease to exist, and ensure you don't miss out on any credits.

Buyer created tax invoices

Sometimes, when a sale takes place, the buyer (not the supplier) issues the invoice.

Think of a freezing works that buys livestock from a farmer. The freezing works weighs the livestock and values it. So, the freezing works is in the best position to issue the invoice for the supply.

Are you a buyer who decides the sales price? If you are, write to us for approval to issue "buyer-created tax invoices". You need an approved buyer-created tax invoice before you can claim the GST you pay to your supplier.

Please note
You still need to apply for approval, even if we've recognised that buyer-created tax invoices are appropriate in your industry as a whole. There are some requirements each individual business must meet (explained below).

What does a buyer-created tax invoice look like?

First of all, it has to meet the requirements for a regular tax invoice. For example, you need to show the supplier's name and GST number.

In addition, you must include the words: "buyer-created tax invoice - IRD approved" in a prominent place on the invoice.

If you're charging the supplier for costs, show the sale and costs separately. Don't just provide the net figure. And be sure to add your own GSt number to the invoice.

Here's an example for a buyer-created tax invoice issued by a
freezing works:

What must your application letter cover?

Please address these points:

• Confirm you help determine the value of the supply.
• Is buyer-created invoicing the normal business practice for you?
• Tell us how approval would help you and your suppliers comply with the GSt Act.
• Confirm that you and your suppliers have agreed that only you will issue a tax invoice - there won't be any "double-ups".
• Confirm both you and your suppliers will keep a copy of the invoice.

Please also include a copy of your proposed invoice with your letter so we can make sure the invoice meets the requirements.

Not sure if you're approved?

We've found that some large enterprises have been issuing buyer-created tax invoices without first getting the proper approval. If you have any doubts, call us so we can check our records. Your GSt claims may be disallowed if you don't hold approved buyer-created tax invoices.

Large employers

You're classed as a large employer if, over the year, your gross employee pAYe and SScWt deductions come to $100,000 or more. please refer to sections nc 15(1)(a) and (b) of the Income tax Act 2004.

How does it work for groups of companies, where each member company has its own IRD number?

If the total annual PAYE and SSCWT deductions for the group equals or exceeds $100,000, each member of the group is considered to be a large employer. even members paying deductions of less than $100,000. please refer to section nc 15(5)(a) of the Income tax Act 2004.

Example
There are three companies in a group. In the 2007 year, they paid PAYE as follows: Company A $ 175,000 Company B $ 150,000 Company C $ 27,000 Total PAYE $ 352,000 Because the total annual PAYE for the group is more than $100,000, each member is considered to be a large employer, even Company C.

Restructuring? If members of your group are large employers, they will still be large employers after a restructure - provided that total annual deductions for the group continue to amount to $100,000 or more.

If a company has branches, each with its own IRD number, the "large employer" rules (as above) apply as if the company was a group.

Registering as a new employer

Our registration forms don't have a box for you to indicate you're a large employer. If you're registering on paper, please tell us you're a large employer by making a note on the form. If you're registering online, please let us know over the phone. call your account manager, or call us on 0800 443 773. large employers have different filing dates from small employers (see the next section), so it may be a hassle for you later on when we have to "convert you over".

Payroll and large employers

The PAYE rules are a bit different for large employers. You must:

• pay your employee deductions to Inland Revenue twice a month, and
• file your employer monthly schedule electronically.

Both of these requirements are found in sections NC 15(1)(a) and (b) of the Income tax Act 2004.

Employee deductions

These must be paid to Inland Revenue as follows:

Wages paid	Deductions due by
Between the 1st and the 15th of the month	The 20th of the same month
Between the 16th and the end of the month	The 5th of the following month*

* If you pay wages for the period between 16 December and the end of December, the employee deductions must be paid to Inland Revenue by 15 January.

We recommend you file your IR 345 or IR 346 (the employer deductions forms) electronically. It will help us credit your payments to your account faster.

However, if you have a 'nil return', you'll need to file it on paper. A systems fault means you can't file "nil returns" electronically at the moment.

Do you pay your employees once a month? If you do, you can pay your employee deductions once a month. please call your account manager, or 0800 443 773, and we'll arrange it for you. Your due date will depend on when you pay the wages - follow the guidelines in the table above.

Employer monthly schedules

As a large employer, you must file your employer monthly schedules (EMSs) electronically by ir-File unless you apply to us for (and are granted) an exemption under section 36B of the Tax Administration Act 1994. You may qualify for the exemption if your accounting system is incapable of providing the EMS in the prescribed electronic format.

Filing paper copies of your EMSs? Please start using ir-File as soon as possible if:

• You don't qualify for an exemption under section 36B, or
• You were previously granted an exemption, but your accounting system is now capable of providing EMSs.

Schedules are due by the 5th of the following month. Recently, we've noticed that some schedules are being filed after the due date. Late schedules may incur a late filing penalty of $250, and can also negatively affect your employees. Please don't get into a habit of filing late schedules. Whenever we take compliance action - for example, imposing a shortfall penalty, or planning an audit - we must take into account a customer's compliance history.

If you're having difficulties filing electronically, please tell us before the due date. We can help you sort it out, and avoid a penalty. call our ir-File helpdesk on 0800 473 249. If the helpdesk can't resolve the issue, call 0800 443 773, and we can file the EMS on your behalf.

KiwiSaver - helpful tips

• Please file your KS 1s (employee enrolment forms) and KS 10s (employee opt-out requests) electronically. Your records will be updated faster.
• File them twice a month, along with your PAYE deductions. Your employer monthly schedule will "go through our system" more smoothly.

For more information about KiwiSaver and ir-File, please read pages 36-61 of Payroll specification document 1 April 2007 to 31 March 2008.

Fringe benefit tax and large employers

If you're a large employer, you must account for your fringe benefit tax (FBT) quarterly, using the IR420 return. You don't qualify for the income year return (IR421) or the annual return (IR422). Please refer to sections ND 13, 14, and 15 of the Income tax Act 2004.

Your returns (together with any payments) are due as follows:

Return	Due date
March	31 may (the later date in may is to give you time to do any multi-rate calculations.)
June	20 July
September	20 October
December	20 January

Liable for FBT, but not receiving quarterly FBT returns? Please call your account manager, or 0800 443 773, and we can arrange to send the returns out to you, and at the same time, update our records.

Remember that you may need to pay goods and services tax (GST) on some of the fringe benefits you provide. You account for the GST in box 7 of your FBT return. Page 49 of our booklet Fringe benefit tax guide (IR409) explains how to do the calculation. Note that you divide the FBT taxable value figure by nine (after removing any GST zero-rated or GST-exempt fringe benefits). We're finding that some of our customers are doing this calculation incorrectly.

Made a mistake in an FBT return? If you’ve overpaid your tax (or received a refund that was less than it should have been) you need to make a section 113 request. If you've underpaid your tax (or received a refund that was larger than it should have been) you should make a voluntary disclosure.

FBT returns can be filed electronically. It's quick and secure. Why not file your December return this way, so you can relax and enjoy your holiday a bit more? Remember to pay your FBT as well! You can do it online through your bank's website, or by sending us a cheque.

Tax pooling

Do you plan to purchase funds from a tax pool to pay a non-provisional tax debt (for example, your GST or PAYE)? If you do, please note that the effective date of transfer will be the date of the request to make the transfer, not the date the money was originally deposited to the pool.

We've noticed that some customers have been using incorrect effective dates.

We won't be reviewing the effective dates of transfers that took place on or before 29 May 2007, but after 29 may we'll no longer transfer funds unless the correct effective date is used.

Need more information? For an overview of tax pooling, please see pages 64-67 of Tax Information Bulletin (TIB) Vol 15, No 5 (May 2003). For a more in-depth discussion of effective dates, refer to our flyer, Tax pooling.

Multi-national restructuring: ten questions that need answering

Change is constant, particularly for mult-nationals endeavouring to drive efficiencies from their global supply chains. New Zealand is no exception, and Inland Revenue has recently examined several major cross-border restructures involving associated parties.

In documenting such restructures to ensure compliance with our transfer pricing rules, the following questions need to be addressed by companies and their tax advisors:

• What is the fundamental basis for restructuring:
  • group-wide restructure?
  • regional restructure?
  • one-off local restructure?
• Has a three-step functional analysis been carried out:
  • before restructure?
  • acquisitions and disposals identified?
  • after restructuring?
• What consideration has passed:
  • for the transfer of tangible assets and liabilities?
  • for the transfer of intangibles (description required)?
  • for compensation?
• Does the acquirer of the functions, assets and risks have the capital and human capability to support the acquisition?
• Does the reduced entity provide functions previously undertaken as part of its business activity as a service to the new business owner?
• Is the reduced entity rewarded for all functions, assets and risks including those that were not specifically transferred and can still be regarded as profit drivers?
• Does the new owner of the restructured business:
  • carry on business wholly or partly in New Zealand?
  • have a permanent establishment in New Zealand?
• Who has borne the restructuring costs and has any deduction been claimed on fixed life intangible property as a result of the restructure?

• Have valuations been prepared for all asset transfers?
• Is documentation available for transfer pricing before and after the restructuring and are documents available in support of the restructuring itself (such as feasibility studies, business plans and consultants' reports)?

Remember, it is the responsibility of local management to ensure a company's transfer prices are in accordance with the arm's-length principle. For complex restructures, we suggest you seriously consider the possibility of working cooperatively with Inland Revenue and obtaining an advance pricing agreement.

If you have any queries about the above, please contact one of our national advisors (transfer pricing):

Keith Edwards (Telephone:09 984 4340)
Mike Spelman (Telephone: 09 984 4327)
Kriti Velji (Telephone: 04 890 3246)

From the Editor

Disclaimer

Large Enterprises Update comments generally on topical tax issues relevant to large enterprises. While every attempt is made to ensure that the law is correctly interpreted, articles are intended to be a brief overview only and are not a full commentary or analysis of the law. the examples provided are not intended to cover every possible factual situation.

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Date published: 10 Apr 2008

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