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)
17.043