Tax change to encourage talent to NZ
Foreigners and returning New Zealanders who have been away at least ten years may be given a tax holiday on their overseas income in a measure to assist businesses to attract talented people to work in New Zealand.
The provision would apply only to people who came here to work as employees and only to income earned offshore. Income earned in New Zealand would still be subject to tax.
Revenue Minister Michael Cullen signalled the move today in an address to the Institute of Chartered Accountants National Tax Conference, saying details would be announced within the next few weeks with the release of a discussion document on reducing the tax barriers to international recruitment.
"I tested the proposal with members of the Institute's London branch on my recent overseas trip and got a very warm reception," he said.
The proposal expands upon an idea in the Tax Review 2001. The Review recommended exempting for seven years the overseas income of foreign nationals who become residents in New Zealand for tax purposes.
The government has yet to make a decision on how long the exemption should apply for but is considering expanding it to include expatriate New Zealanders returning to take up jobs here.
"It can be difficult for New Zealand to compete on wages with much larger economies to attract the highly skilled to work here. And to the extent that New Zealand businesses have to pay higher salaries to compensate for the New Zealand tax liability of an individual's offshore investment, the business rather than the individual will be the ultimate beneficiary of the change."
Other measures canvassed in the speech to reduce the obstacles to international investment included whether the profits from the sale of certain shares should be exempted from New Zealand tax when the investors were exempt from tax in their own jurisdiction.
Dr Cullen said this should assist the flow of venture capital to New Zealand by removing a disincentive for investors who were tax exempt in their own country but became subject to our tax when they sold their New Zealand shares.
"The government is also considering recommendations from the private sector liaison group on research and development to change the depreciation rules to deal with "black hole" R&D expenditure.
"I hope to include in the next taxation bill a provision that will make the cost of failed patent applications and failed resource management consent applications immediately deductible."
Dr Cullen said that after much thought and consultation, the government had decided not to proceed with the Tax Review's recommendation of a discounted tax rate for new foreign direct investment.
"Introducing a tax differential on FDI subject to the date of the investment would not be sustainable because it would be too difficult to police the boundaries and the costs of implementation would likely outweigh any benefits.
"But the government remains determined to increase the flow of FDI to New Zealand and will explore options to achieve this through the interdepartmental steering group on promoting New Zealand's international links and inter-connectedness.
"Given the high level of interest in this particular recommendation, I am making public the officials' report on which the government's decision is based," Dr Cullen said.
The report — "Taxing Inbound Investment" — is available at www.taxpolicy.ird.govt.nz
Contact: Patricia Herbert [press secretary] 04-471-9412 or 021-270-9013. E-mail [email protected]
Technical inquiries to Helen Mackenzie [tax advisor, Dr Cullen's office] 04-471-9728 or 021-270-9052
Speech to the 2003 Tax Conference of the Institute of Chartered Accountants of New Zealand
Thank you once again for the opportunity to speak to your annual conference.
As always, the government's tax policy work programme is very full in the year ahead. It deals with issues ranging from tax simplification, through to matters such as taxation of retirement savings, to the review of fringe benefit tax. One of the key features of New Zealand's tax policy-making process is that reforms are signalled in advance and are well known before they become law. This means that, unlike many of my predecessors as Revenue Minister, I do not generally have the opportunity to make surprise announcements about them. This I think is a good thing.
Another key feature of the process is that the priorities within the tax policy agenda should be and are heavily influenced by the wider economic context. As much as a tax system can be a thing of beauty in itself, it is there at the end of the day to gather revenue in the most effective way - to fund the wider government work programme - and to ensure the minimum of distortion to decisions regarding business, investment and employment.
The government has constructed a framework within which we can pursue higher sustainable growth through an emphasis on innovation. This growth and innovation framework has three core elements.
Firstly, we want to strengthen the foundations that are the necessary conditions for successful economic performance in an uncertain and ever-changing world. This means we need sound government finances, a competitive economy, a cohesive society, a healthy and skilled population, sound environmental management, a strong research base and a globally connected economy.
The second element of the framework is that we will build more effective innovation, through a mix of attracting and developing talent, creating new venture investment funds, making better linkages between tertiary institutions, industry and communities and by increasing global connectedness.
Finally, we are developing areas where our natural advantages and aptitudes give us scope to boost growth and innovation. These are biotechnology, information and communications technology and the creative industries. These sector level competencies have applications across a range of industries.
My remarks today need to be considered in the context of these economic policy priorities.
I would like to concentrate on policy developments in relation to New Zealand's international tax rules, which will be very much in the spotlight over the next few weeks.
Much of the government's focus in the international tax area is on strengthening our global connectedness by reducing the extent to which tax is a barrier to New Zealand doing business with the rest of the world.
This may be a matter of strengthening the Closer Economic Relations agreement with Australia and working towards bilateral reforms; extending our network of double tax agreements with trading partners; making sure that our tax laws are in line with those of other countries; or removing obstacles to the inflow of capital into New Zealand, whether venture or human capital.
Legislation which is scheduled to be enacted before Christmas brings into effect New Zealand's part in a landmark agreement between Australia and New Zealand to remove a tax impediment to trans-Tasman investment. The problem is a long-standing one, often known as "triangular taxation", which can result in the double taxation of investments in companies that operate in both countries.
Successive New Zealand governments have attempted to resolve the problem, which, by its very nature, requires a bilateral solution. I am therefore very pleased that we have progressed to the point of legislating in both countries to remove an obstacle to doing business together. It is particularly fitting that it has happened in the year of the twentieth anniversary of our signing of the Closer Economic Agreement.
Peter Costello and I have agreed to meet annually, recognising the importance that issues within our respective portfolios have for both economies and for the trans-Tasman relationship. The main focus of the meetings is to encourage trans-Tasman business through the co-ordination of business, regulatory and tax law. Our second meeting in this series comes up in February. Although the agenda has not been set, we will doubtless be looking at a wide range of issues that affect both countries.
Double tax agreements have an important role to play in reducing the extent to which tax is an obstacle to cross-border trade and investment. We are making progress on several fronts.
Last month, in Dubai, I signed a double tax agreement with the United Arab Emirates, New Zealand's first with a Middle Eastern country. It will provide opportunities for investment into New Zealand by the United Arab Emirates, and vice versa, and covers the operation here of the Emirates Airlines. The agreement is expected to come into force once both countries have legislated for it.
The Russia-New Zealand double tax agreement came into effect on 4 July of this year, with the completion of domestic ratification procedures in Moscow. It has become our twenty-seventh double tax agreement.
A double tax agreement between South Africa and New Zealand is expected to come into force later this year once New Zealand has given effect to it by Order in Council.
The first steps in negotiating a double tax agreement with Chile have been completed, and the agreement is expected to be signed by both governments before the end of the year.
The Tax Review 2001 suggested that New Zealand should introduce a lower tax rate for foreign direct investment to encourage economic growth. Specifically, it recommended that the company rate be reduced from 33 per cent to 18 per cent, and that non-resident withholding tax on dividends be reduced from 15 per cent to 2 per cent. It favoured an approach whereby the reductions would apply only to new foreign direct investment, so as to reduce the fiscal costs of the proposal.
After much consideration and consultation, the government has decided not to implement that particular recommendation. Applying different tax rates to foreign direct investment that depend upon the date of the investment is not sustainable as a permanent feature of the tax system. Moreover, the costs of implementing such a measure, even on a temporary basis, are likely to outweigh the benefits - especially in view of the mobile nature of the investment that it would likely attract.
This decision should not be interpreted as a lack of government interest in encouraging foreign investment. That is certainly not the case. But before any further work can be done on the issue of tax incentives for foreign investment, we need to deal first with the fundamental question of whether it is necessary to subsidise that investment, either directly or through the tax system, as a means of increasing the flow of capital to New Zealand.
This is part of a much broader issue of economic development that will be examined by an interdepartmental steering group as part of a range of work to promote New Zealand's international links.
The Tax Review also recommended that individuals with no previous connection to New Zealand who become residents for tax purposes should be taxed only on their New Zealand-sourced income for the first seven years - in other words, tax on their overseas income should be exempted for that period.
There is no doubt that New Zealand's tax system is more comprehensive than that of other countries in relation to offshore investment. In some ways, this fact reflects the efficient design of New Zealand's tax system. However, some people who come here to work may find themselves facing tax on offshore income that they might not have faced had they made a different choice of residence. These extra tax costs faced by highly skilled overseas recruits may in many instances already be passed on to New Zealand businesses in the form of higher remuneration.
The skills needed for a flourishing, knowledge-based economy are in demand throughout the world. The people who have these skills are increasingly mobile, and New Zealand businesses have to be able to compete with businesses in other countries to attract them to work here.
In recent months the government has been developing the idea of a temporary exemption from tax on overseas income for these people, with the focus on reducing costs for New Zealand businesses. We are also considering widening it to include returning New Zealanders who have been out of the country for at least ten years and are coming back to work here.
Details will be announced within the next few weeks, when we release a discussion document setting out proposals for reducing the tax barriers to international recruitment.
A similar problem exists in the area of international venture capital - overseas investment in small, unlisted companies in New Zealand. We want to facilitate the flow of venture capital into New Zealand, but tax can be a barrier. The problem is that investors who may be exempt from tax in their own jurisdictions may find themselves subject to New Zealand tax when they sell their shares. This may create a problem for them because they have no access to tax credits owing to their tax-exempt status in their country of residence.
Over the next few weeks, tax policy officials will be consulting with key players, including your Institute, on a broad proposal to exempt profits from sales of certain shares from New Zealand tax when the investor is exempt from tax in its own jurisdiction.
The government is also considering recommendations to make certain changes to the depreciation rules to address "black hole" research and development expenditure. These are recommendations of the private sector liaison group that was set up to help monitor the effectiveness of the new research and development tax rules and identify areas that can be improved. The particular "black hole" expenditure concerns expenditure on failed patent applications and r & d expenditure that is capitalised but is not depreciable because either the resultant asset is not depreciable or the project is abandoned.
The government will soon be releasing an issues paper that presents options to reform the taxation of New Zealanders' investments in offshore equity. One of these options will be a version of the risk-free return method suggested by the Tax Review in 2001.
As you will all be aware, the problems with this area of our tax law have been highlighted recently by the wide media coverage of the Australian unit trust issue. This issue, while important, is only one amongst a number of problems with the tax rules applying to portfolio investment in offshore equities. The options that will be presented in the issues paper are an attempt to address all the main problems identified in this complex area.
In relation to the Australian unit trust issue, in August I announced in a media statement that the government would move to prevent New Zealand investors using certain overseas funds to escape tax.
Another occasion on which I have announced that the tax law will change is in relation to the "masthead" issue - which apparently involved sale and leaseback transactions meant to allow tax deductions for what are effectively repayments of principal. No government could accept such a result, so I announced that we would change the law so that this could not happen. Consultation on this change will also take place shortly.
I mention these examples because they appear to have raised some concerns about the government's commitment to the generic tax policy process - that we were moving towards legislating by means of press statement. I can understand the reasons for the concern. But both announcements involved revenue protection measures requiring a rapid response. Faced with revenue risks from widely publicised transactions that were clearly contrary to policy intent, the government chose to announce the law changes, and then to proceed to consultation before introducing legislation. In the circumstances, would the critics have preferred early legislation with no consultation? I think our approach in these two instances serves to protect the policy making process, rather than undermine it.
You can rest assured that the government remains committed to the generic tax policy process. And, as is normal under the process, the forthcoming issues papers and consultative documents will ask for submissions on the options presented. I would urge all those with an interest in these areas to consider the options and give us your views.
I would like to turn briefly to the Lawyers and Conveyancers Bill, aspects of which have been of concern to your Institute. The government's intention, when introducing the bill, was to clarify current law and open up conveyancing to more competition - it was not intended to shut accountants out of the legal services market. My colleague the Minister of Justice has recently written to you to confirm that the bill is not intended to deny accountants the opportunity to undertake - for example - tax work, and changes to reflect this intention are expected to made by the select committee following consideration of submissions on this issue.
As I said at the outset, the tax policy work I have described today is not being done in isolation, but as part of the government's wider economic framework.
I might also add that I think all of us could do a better job of selling the advantages of our tax system overseas. It is stable and robust. It is also open, honest, transparent and not anywhere near as complex as tax systems in many other countries. We do not have high compliance costs compared with those of other developed countries. Our business taxation rates compare well with those of other countries, in light of the fact that we do not have a separate payroll tax, as some other countries have. Nor do we have a general capital gains tax, death duties or stamp duty. And our generic tax policy process, in the words of the Tax Review, "has allowed tax policy in New Zealand to develop more rationally and smoothly than in many other countries."
So perhaps next time you find yourself "selling" New Zealand to international colleagues or clients, you may want to mention some of the advantages of our tax system, which can so easily be taken for granted.
The government's goal - which I am sure that the Institute of Chartered Accountants wholeheartedly supports - is to ensure that New Zealand offers sound and attractive investment opportunities for international investors. Consultation with tax practitioners and the free and frank exchange of ideas has played an important role in the progress we have made to date, and I am sure that the tax policy issues I have outlined today will be advanced in that same spirit.