An area the Investigation Unit is currently focusing on is restrictions around use-of-money interest (UOMI). Generally, a taxpayer will receive UOMI on overpaid provisional tax. However, a little known provision in the Tax Administration Act restricts the amount of overpaid tax that the UOMI is calculated on to the balance in the taxpayer’s imputation credit account (ICA).
For example, if a taxpayer has a refund of $10,000 but only has imputation credits of $5,000, not only will the taxpayer only receive a refund of $5,000 (being the balance of the ICA) but UOMI will only be calculated on the $5,000, not the $10,000 refund.
The Investigation Unit continues to issue questionnaires to taxpayers. The typical questionnaires are:
- Transfer Pricing (focus on cross-border related party transactions)
- Financing (focus on hybrid instruments, thin capitalisation)
- Company Audit (focus on internal workpapers and board minutes, indirect taxes, computer audit)
- Employee Remuneration (focus on share schemes, allowances, benefits).
Investigations tend to be by one of three methods: desktop review, risk review and an audit. A desktop review is a high level review of information filed with the tax return. The review may result in an “information request” and progress to an audit. For a risk review, the taxpayer completes a detailed questionnaire which the IRD then ranks according to specific risk factors. Depending on the rating allocated, an audit may result. An audit is the full review of a taxpayer’s tax affairs.
Another area the IRD’s Investigation Unit is currently focusing on is the impact of companies adopting International Financial Reporting Standards (IFRS) and the IRD is closely monitoring the accounts and tax returns of entities that have recently implemented IFRS. In particular, the IRD is reviewing the IFRS adjustments and monitoring the effect of these adjustments on tax payments. Common adjustments the IRD is monitoring include reclassification (e.g. software assets reclassified as intangible assets) and the treatment of financial arrangements (e.g. adjustments spreading the income and expenditure over the life of a financial arrangement).
If you do receive a questionnaire or information request from the IRD, it is best to advise your Hayes Knight adviser as soon as possible. Any voluntary disclosures made before formal notification of an audit can reduce any shortfall penalties imposed and you can also exercise your right of non-disclosure of any tax advice documents.
If you would like to discuss this article further or are contacted by the IRD requesting any information relating to your business affairs contact Phil Barlow and Shelley-ann Brinkley or your Hayes Knight adviser.