12 May 2017

Tax: Lin v. Inland Revenue

Chinese policy excusing payment of tax has tripped up New Zealand resident taxpayers caught by CFC tax rules when investing in China.
Inland Revenue attributed New Zealand tax resident Patty Lin with income totalling $4.6 million for the five tax years ending 2009 because of her then thirty per cent controlling interest in two British Virgin Island companies which in turn owned several Chinese companies.  She never physically received this income; it was deemed to be her income under New Zealand’s controlled foreign corporation (CFC) tax regime.  The CFC rules catch taxable income held off-shore.
The High Court was told Inland Revenue assessed Ms Lin as liable for some $1.8 million in tax.  It allowed a tax credit of $926,900, representing her deemed portion of tax paid in China by her CFC companies but did not include a further $588,100 tax “spared” by the Chinese authorities.  China excuses or “spares” many businesses full payment of tax as an economic incentive to promote growth.  Inland Revenue said no New Zealand tax credit can be given for a tax not paid.
Justice Thomas ruled wording of the 1986 double tax treaty agreed with China deems income received by a CFC to be income of its New Zealand owner and consequently a deemed credit applies for tax paid or payable including tax spared.
Ms Lin’s disputed tax bill for the five years to 2009 was reduced to just under $281,000.  The court was told she restructured her foreign investment holdings in 2011.  CFC rules were amended in 2009 to draw a distinction between passive and active income.
Lin v. Inland Revenue – High Court (12.05.17)

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