NZ Reviews Taxation Of Foreign Funds

by Mary Swire, Tax-News.com, Hong Kong

15 April 2010

New Zealand’s Revenue Minister, Peter Dunne, has announced the release of a tax policy issues paper from the Inland Revenue (IR) seeking feedback on suggested changes to remove an anomaly that results in overseas investors being over-taxed when investing in New Zealand portfolio investment entities (PIEs).

"Under New Zealand tax law, residents are taxed on both their domestic and foreign-sourced income, while non-residents are taxed only on their New Zealand-sourced income,” Dunne said. "However, non-residents investing in foreign assets through a PIE are currently taxed as if they were New Zealand residents and are taxed both on their New Zealand-sourced income and income from their offshore activities. This creates a potential disincentive for foreign investment in New Zealand's financial services industry.”

In its final report to the government at the end of last year, the Capital Market Development Taskforce recommended pursuing opportunities to develop New Zealand as a provider of high-value middle and back-office services for fund management companies. New Zealand’s location in the Asia-Pacific region, it was said, gave it the opportunity to develop a regulatory and tax regime that will support such functions.

While the government has therefore established a private sector advisory body, the International Fund Services Development Group, to report back on how New Zealand can successfully position and market itself as an international funds domicile, it is also interested in how this positioning might create opportunities for strengthening New Zealand’s funds management industry and capital markets as a whole.

The IR issues paper says that the present taxation of non-residents investing in foreign assets through a PIE as if they were residents “is inconsistent with how those investors would be taxed if they invested directly in those foreign assets and so is conceptually inconsistent with New Zealand’s source-based taxation system.”

However, the IR is concerned that any decision to proceed with a proposal to allow a zero tax rate for non-residents investing in a PIE will need to weigh up potential benefits, costs and risks. Industry views are therefore being sought on two possible options for arranging for the proposed tax exemption.

The first of the two options is in respect of a PIE with resident and non-resident investors and only foreign-sourced income, in which the non-resident investors would have a zero portfolio investor rate (PIR) for all income (resident investors would have standard PIRs). There would, perhaps, be some allowance for a minimum threshold of (non-property) investment in New Zealand equity and debt.

The second option involves a look-through global investment option that would allow a PIE to have both resident and non-resident investors and New Zealand and foreign-sourced income. The PIE would apply a different tax rate to different types of income derived by non-resident investors, and it would therefore be necessary to track income from different sources, apportion expenditure to that income and allocate it to investors as if each stream were the only income derived by the PIE.

Aside from whether the fund management industry has a preferred option, the IR is also interested in feedback on whether a minimum level of New Zealand-sourced income would be useful under the first option; the appropriate level for that minimum threshold exemption; and whether the minimum threshold level should be an income or asset test.

Feedback would also be welcome from the industry on whether the tax exemption (in combination with some other regulatory measures) could lead to a percentage of global market back-room and administrative services being migrated to New Zealand.

It has been estimated that, after ten years, New Zealand could gain a market share in these activities to create approximately NZD1bn (USD710m) of profits and approximately NZD300m in taxes. In contrast, the estimated fiscal cost of providing the particular exemption under investigation has been put at less than NZD10m per year (using end-2008 statistics).

Submissions are scheduled to close on June 4, 2010.

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