New Zealand Apprehensive On Australian/US Tax Treaty

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

09 October 2001

Tax experts in New Zealand are worrying about the effects on inward investment of the recently-announced Australian/US double tax treaty, which they fear will significantly tip the balance in favour of Australia for any inward investor trying to decide between the two countries as a base.

Under the deal Australian/US deal companies will be able to repatriate their dividends back from the US tax free - a concession that no other country, except the UK, has been able to extract from the world's most lucrative economy. Australian companies with substantial US interests lobbied fiercely for the deal, and in the the end won more than they had anticipated, with the US slashing its dividend withholding tax from 15% to zero. The rate for royalties was reduced to 5% and that for interest to 10%.

Analysts say that New Zealand firms investing in the United States will also be at a disadvantage there compared to Australian, British and Dutch companies, which have all negotiated lower withholding taxes. The New Zealand rate is 15% with both the US and Australia. KPMG tax partner Craig Elliffe says the reduction in the dividend withholding tax rate alone could increase after-tax returns to Australian corporate investors in the US by up to 17.6%. "Returns for US investors in Australia could also increase by the same amount," he said.

Mr Elliffe said the emerging trend in the tax treaties between the US and Britain, the Netherlands and now Australia to cut or eliminate withholding taxes reflected a preference within the OECD to move to a residence-based rather than source-based approach to international taxation.

Robin Oliver, general manager of the Inland Revenue's tax policy division, said they were looking at the implications for New Zealand. "We are not planning on negotiating with the US at the moment, mainly because it is not a priority for them. They have a big list of countries wanting to do double tax agreements with them." Mr Oliver said there was pressure throughout the world to reduce withholding tax rates. The move to residence-based taxation was to the advantage of capital-exporting countries, but to the disadvantage of countries like New Zealand, which imported capital. "We recognise that we can't extract much tax out of highly mobile capital without putting up the cost of capital."

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