Calculating foreign tax credits

IR has released a draft interpretation statement titled “Income tax – foreign tax credits – how to calculate a foreign tax credit”. The document reference is PUB00370. 

The commentary explains how to calculate a foreign tax credit under subpart LJ of the Income Tax Act 2007. Its introduction section states: 

  • an important part of this calculation is to divide the foreign-sourced income into segments. To do this, the foreign-sourced income must first be divided by country and then further divided by source or by nature (s LJ 4).  
  • once the foreign-sourced income has been segmented, the person’s notional New Zealand income tax liability must be calculated. A formula is then applied to find the amount of New Zealand tax payable for each segment of foreign-sourced income. Any expenditure incurred must be attributed to each segment, and some adjustments may be required.  
  • the person is then entitled to a foreign tax credit for the foreign tax paid on the segment, up to a maximum of the amount of New Zealand tax payable on that segment.  

PUB00370 is broken into three parts – part 1 explaining how to calculate a foreign tax credit and relevant compliance obligations, part 2 explains in greater detail how to segment foreign-sourced income, and finally, part 3 illustrates how the foreign tax credit calculation applies in some specific scenarios. I would suggest that the flow chart on page 3 is very useful as a first glance determination of whether you may or may not have an entitlement to claim a credit for foreign taxes paid. 

The document is 54 pages long, and can be found here