New Zealand Will Cut Tax To Attract Foreign Investors

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

10 March 2003

New Zealand Finance Minister Michael Cullen has indicated that further steps are being taken on the road to reducing taxation for foreign investors in an attempt to attract overseas business to the country.

In a speech to the International Fiscal Association Conference Cullen said that he is giving serious consideration into implementing some of the changes that were recommended in the 2001 McLeod report. This signals somewhat of a U-turn from Cullen, who rejected almost all of the proposals contained in the $1m study in October of that year, preferring instead to wait for the outcome of the general election.

One of the central planks of the McLeod report was to implement a temporary exemption on taxation of foreign sourced income of new migrants. According to a report in the New Zealand Herald, Cullen told the conference that progress had been made on this and a regulatory framework was ready to be drawn up. The finance ministry is also due to report back on the possible implementation of an 18% tax rate for direct foreign investment. Cullen was less enthusiastic over the introduction of a risk free rate of return taxation method for New Zealanders' offshore investment. "One of the difficulties with this recommendation is that it can result in people being required to pay tax even when their foreign investment has reduced in value" the Finance Minister said.

Cullen is also considering other measures including reducing the savings tax on those earning under $38,000 per annum, and lowering tax on superannuation funds commonly used as savings for retirement. He said the government was also keeping a close eye on tax reforms in other industrialised economies such as the United States, Australia, the UK and the Euro zone in order to prevent New Zealand from lagging behind.

New Zealand is expected to run a budget surplus this year, and Cullen expects the original $2.5 billion estimate now to be exceeded by higher than expected tax revenue. However, the minister sounded a cautious note, and seems reluctant to dip into this surplus with uncertainties in the world economy still very much a concern. "I am cautious about this revenue growth" said Cullen, adding "The reason for the size of the increase in GST is not entirely clear. We have seen in the past that the company tax take can change rapidly if the economy deteriorates."

This surplus has grown despite a shrinkage in the insurance and financial services sector which has provided traditionally a large proportion of the country's tax take. This has shrunk from 29% in 2000 to 18%. Cullen was unsure what was behind this anomaly. "We are continuing to look at what is driving the changes in company tax revenue flows" he said.

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