The New Zealand Inland Revenue Department has launched a new crackdown on foreign companies operating in the country in an attempt to curtail what it considers to be a growing wave of abusive tax planning schemes.
The Inland Revenue Department's deputy commissioner Robin Oliver told the New Zealand Herald in a report published on Monday that the department has already held discussions with certain foreign firms, particularly those based in Australia, to remind them of their obligations to the New Zealand tax system.
"Our message to the corporate sector is that we will fight back to maintain our source-based taxation," stated Mr Oliver.
"We are prepared to put resources into it because to raise $4 billion or half the corporate tax base if we went down to the level of US tax collections we would have to get it [the $4 billion] off individuals. That would be a significant increase in the tax burden," he added.
Mr Oliver went on to comment that the IRD is becoming increasingly concerned at the way foreign companies can "suddenly turn" income generated in New Zealand into foreign-related income through the use of intangible assets and foreign subsidiaries.
The IRD's campaign is likely to involve the use of targeted tax audits, but it could also help bring about changes in legislation. Indeed, the issue is high on the New Zealand government's legislative agenda, and Revenue Minister Michael Cullen has already announced proposals closing a loophole to prevent Australasian groups of companies abusing the country's domestic tax rules on dividends and imputation credits.
“Some companies appear to be taking advantage of an unforeseen loophole in the rules," Dr Cullen observed whilst announcing the new legislation in the summer.
"They are setting up schemes whereby imputation credits are directed away from foreign shareholders, who generally cannot use the imputation credits, and streamed towards a special group of New Zealand investors, who can. At the same time, the payment is deductible as interest in Australia," he added.
The new rules will apply to dividends paid after 1 April 2006 from shares already issued within the same group of companies.
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