Double tax agreement provide relief from double tax

Background

NZ taxes income on the basis of residence and source. NZ residents are generally taxed on their worldwide income while non-residents are only taxed on their NZ sourced income. Income is treated as having a source in New Zealand when its connection with New Zealand is strong enough for New Zealand to exert taxing rights over that income. However, the point when a connection will be “strong enough” is not always clear and may involve judgement calls that appear arbitrary.

The DTA source rule deems an item of income to have a source in New Zealand if New Zealand has a right to tax that income under a DTA. There are several exceptions to the DTA source rule.

The problem with the DTA source rule is that it can deem income to be sourced in New Zealand in unintended circumstances where the income’s connection with New Zealand is weak, and where NZ did not anticipate collecting tax on that income. Where such overreaches have been identified, amendments have been made so that those amounts are not caught by the DTA source rule. 

Proposed Amendments

The amendments would ensure that the double tax agreement source rule in section YD of the ITA doesn’t apply to technical service fees or certain payments connected to a permanent establishment in a third state.

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