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Inland Revenue

Tax Policy

Chapter 1 - Introduction

1.1 Purpose of the Consultative Document
1.2 Reasons for the Measures
1.3 Consultative Committee
1.4 Terms of Reference
1.5 Submissions
1.6 Outline of the Document
1.7 Meaning of Terms Used

1.1 Purpose of the Consultative Document

The Minister of Finance, the Hon R O Douglas, announced in the Budget of 18 June 1987 that the Government would introduce measures to broaden the New Zealand tax base and to limit international tax avoidance.

The purpose of this consultative document is to set out the details of the structure and operation of the proposed new measures so that interested parties have an opportunity to consider them and to submit their views and suggestions before final decisions are made.

The document focuses on the taxation of income earned by New Zealand residents through offshore entities. The taxation of income earned in New Zealand by non-residents is not addressed.

1.2 Reasons for the Measures

The measures are part of a major upgrading of New Zealand's international tax regime. They reinforce the Government's drive to create a fairer and more efficient tax system. They seek to ensure that all residents of New Zealand pay their proper share of tax.

Moreover, the measures will make possible other desirable reforms. In particular, they will facilitate a reduction in income tax rates. They will also stimulate efficient investment in New Zealand. In this way, the measures will contribute to a better use of resources and have a positive influence on savings, investment and the creation of more productive and permanent jobs for New Zealanders.

In summary, the measures are designed to:

a protect the domestic tax base from arrangements which seek to avoid or defer New Zealand tax by the accumulation of income in offshore entities; and

b reduce the extent to which the tax system encourages offshore investment relative to investment in New Zealand and biases the form in which offshore investment is made.

1.3 Consultative Committee

The Government invites the public to make submissions on the matters set out in this document. A Consultative Committee has been appointed to receive and consider submissions and to advise the Government on implementation.

The Committee comprises:

Mr Arthur Valabh (Chairman), a tax partner and partner in charge of Deloitte, Haskins and Sells, Auckland;

Dr Robin Congreve, a tax consultant with Russell, McVeagh, McKenzie, Bartleet and Company, Auckland;

Mr Stuart Hutchinson, a tax partner with Simpson Grierson Butler White, Auckland;

Dr Susan Lojkine, a tax partner with McLeod Lojkine Associates, Auckland;

Professor John Prebble, a Wellington tax barrister and Dean of the Law Faculty at the Victoria University of Wellington; and

Mr Tim Robinson, an economist with Jarden and Company Limited, Wellington.

1.4 Terms of Reference

The Committee's terms of reference are:

a to receive and hear public submissions on matters concerning the implementation and operation of the measures proposed in this consultative document;

b to report to the Minister of Finance on:

i matters covered in this document, or raised in submissions, on the introduction of measures to protect the New Zealand tax base, and

ii such amendment to the detail of the proposed measures as the Committee may consider necessary for their effective implementation and operation

having regard to the Government's firm objective of eliminating the avoidance and deferral of New Zealand tax on foreign income as a means of broadening the tax base and facilitating a reduction in income tax rates;

c to prepare draft legislation to give effect to the proposed measures referred to in this document.

The Committee is to report to the Minister of Finance by 31 March 1988.

1.5 Submissions

Submissions should contain a brief summary of their main points and recommendations. They should be typed in double space and be lodged by 12 February 1988 with:

The Chairman
Consultative Committee on
Full Imputation and International Tax Reform
c/– The Treasury
PO Box 3724

Submissions received by the due date will be acknowledged.

1.6 Outline of the Document

This Consultative Document comprises eight chapters, as follows:

Chapter 1: This introductory chapter describes briefly the purpose of the document and the reasons for the proposed reforms. Members of the Consultative Committee, its terms of reference and submission procedures are detailed.

Chapter 2: This chapter summarises the main elements of the measures set out in this document for the reform of New Zealand's international tax provisions.

Chapter 3: This chapter discusses the importance of preventing international tax avoidance and strengthening international tax provisions. Existing problems and the consequences are highlighted. The objectives of tax reform, which have guided the measures proposed in this document, are presented.

Chapter 4: This chapter outlines the scope of the proposed measures. It indicates that taxpayers resident in New Zealand must include in their assessable income foreign income earned through non-resident companies or trusts on either a branch-equivalent or a comparative-value basis.

Chapter 5: This chapter discusses the branch-equivalent basis for the taxation of income subject to the measures. The determination of assessable income and how it will be attributed to resident taxpayers are described.

Chapter 6: This chapter discusses the comparative-value basis for the taxation of income subject to the measures. The annual change in value of a taxpayer's interest in a non-resident entity will be taxed as a proxy for tax on the underlying income.

Chapter 7: This chapter addresses the taxation of dividends from non-resident companies and distributions from non-resident trusts. Provisions for double-tax relief are described.

Chapter 8: This final chapter discusses disclosure and administrative issues.

1.7 Meaning of Terms Used

A /publications/1987/1987-dd-international-tax-reform/glossary of the technical terms used is provided at the end of this document.