Skip to main content
Inland Revenue

Tax Policy

Preface by the Minister of Finance


In my Budget of 18 June 1987, I announced that the Government would be introducing anti-tax haven measures. This move is necessary to strengthen the tax system and facilitate further tax reform. The resulting measures are set out in this consultative document.

Reasons for the Measures

New Zealand residents are subject to tax on their worldwide income. However, some residents, notably larger companies and wealthy individuals, are avoiding tax on their foreign income, some of which is income that is diverted from New Zealand. This places an unfair tax burden on others and undermines the integrity of the tax system. The Government is determined to prevent the erosion of the income tax base by cross-border transactions which enable the deferral or complete avoidance of tax properly payable in New Zealand. The use of tax havens in particular has become widespread and has been a drain on government revenue. This concern to protect the tax base and to preserve the integrity of the tax system underpins the measures.

Another objective is to remove artificial incentives for taxpayers to invest offshore. Offshore investment is generally to be welcomed, but it should not be subsidised by ordinary taxpayers. Existing tax provisions are encouraging greater offshore investment than is economically and socially desirable. Hence, the measures attempt to ensure that investment and other decisions are based on commercial merit rather than tax avoidance.

Evolution of the Measures

An overview of the proposed reforms was sketched in Annex 4 of the 1987 Budget. It was stated then that the outline of the proposed regime was not definitive or complete. There were good reasons for this.

First, anti-tax haven provisions are among the most complex in international tax law and are typically subject to continual legislative and administrative refinement. The measures outlined in Annex 4 of the Budget have been modified to better meet the Government's reform objectives and to ensure that, as far as possible, the measures themselves will not be vulnerable to abuse.

Secondly, I indicated in the Budget that the anti-tax haven measures would be the first step towards a comprehensive tax regime designed to combat international tax avoidance. Given the progress which has been made in developing further aspects of that regime, this first step will now be larger than earlier envisaged. Thus, the complexion of the original proposals has been altered significantly.

Main Elements of the Regime

In brief, the measures will tax New Zealand residents on income derived from an interest in a non-resident company or trust. Residents have been able to divert income and accumulate it in such entities and thereby avoid or defer New Zealand tax. Income which is already taxed in New Zealand as it is derived will not be subject to these measures. The main elements of the proposed regime, including changes to the original proposals, are highlighted below.

Basis of Taxation

Under the original proposals, all taxpayers required to report income earned through a non-resident company or trust would have been subject to New Zealand tax on a 'branch-equivalent' basis. An alternative basis has now been introduced. Where residents are unable to obtain sufficient information to report on a branch-equivalent basis, tax will be levied on the annual change in value of their interests. This 'comparative-value' basis is a proxy for taxing the underlying income.


There are now no detailed rules relating to the control of a company. However, control can affect the amount of information a taxpayer can provide about the income of a company and may therefore affect whether a taxpayer will be able to report income on a branch-equivalent or a comparative-value basis.

Nature of Income

The distinction between tainted and non-tainted income has been eliminated. There are three related reasons for this: first, the Government has decided that it wishes to prevent as much tax avoidance and tax deferral as it reasonably can, not just the worst and most visible forms; secondly, the distinction would produce uncertainty, and possibly unintended consequences, as a result of inevitably arbitrary definitions; and thirdly, after further detailed consideration, the Government has decided that such a distinction, which has no economic basis, would be extremely difficult, if not impossible, to enforce adequately.

Sources of Income

The distinction between low-tax and high-tax countries has been eliminated. The new measures will apply to foreign income earned through any non-resident entity. Statutory rates of tax are an unreliable indicator of the real impact of taxes given the myriad of possible tax rules and the degree of enforcement in other countries. This new approach removes the need to make piecemeal and often inaccurate distinctions between high-tax and low-tax countries.

Exemption from Measures

A de minimis rule has been introduced. This rule will exempt from the measures natural persons with small shareholdings in non-resident companies. Such a rule balances the need for reducing the avoidance and deferral of tax against the need for effective compliance and administration.


The measures that apply to trusts are essentially of an anti-avoidance nature. As with companies, there will be no distinction between tainted and non-tainted income. The taxation of foreign income earned through non-resident trusts will be consistent with that of income earned through non-resident companies.

Foreign Portfolio Dividends

Resident companies will be subject to tax on foreign portfolio dividends (dividends from non-resident companies in which the resident has less than a 10 percent interest). This treatment is in line with international norms. Resident individuals will continue to be subject to tax on all foreign dividends received. Appropriate double-tax relief will be provided.

Effective Dates

The scope for tax avoidance during the period of public consultation, prior to the application of the new tax law, means that the effective implementation of the measures must necessarily entail an element of retrospectivity. I announced in the Budget that the measures to be enacted would apply from the accounting years of the entities concerned commencing after 18 June 1987. However, given the changes to the original proposals and the time required for consultation and to enact legislation, as well as the need for administrative preparation, the effective date will be altered. This decision is necessary in the circumstances. It should not be regarded as a precedent.

As described in chapter 2, the measures will take effect from 17 December 1987 in respect of distributed income and from 1 April 1988 in respect of undistributed income.

Role of the Measures in the Government's Tax Reform Programme

In proposing these measures, I would stress that the purpose is not to increase the total tax burden on the community. It is to spread the tax burden more evenly and more fairly. To the extent that the tax base is broadened and more people pay their fair share of tax, rates of taxation can be lowered.

The changes are an integral part of the Government's continuing programme to improve the efficiency and equity of the tax system. It is overwhelmingly clear that the New Zealand tax base must be protected from international tax avoidance; without a broader base, further tax reform will be prejudiced if not precluded. I am confident that the proposed changes to New Zealand's international tax regime will provide a solid platform for further tax reform. In particular, the expected gains from the new international tax regime have helped make possible the further major reform of the tax and benefit system which I have recently announced. Reductions in tax avoidance and lower rates of tax go hand in hand.

Consultative Process

This is the fourth time the Government has initiated a consultative process on a major taxation change. With the assistance of the business sector and members of the public, the previous consultations resulted in significant improvements to the reform proposals. The Government has appreciated this participation and hopes that it will again be forthcoming in the current consultative process. In particular, the Government is grateful to those who have agreed to serve on the Consultative Committee. It can be expected to complete its task in a thorough and professional manner.

The timetable for implementation is tight. The period allowed for consultation and review reflects the need to give adequate time for interested parties to make submissions and the need for timely decisions in order to reduce uncertainty. The Government invites public consideration of the proposals and welcomes comment on ways that may improve the implementation, operation and administration of the new measures.


The proposals outlined in this consultative document provide the basis for a substantial strengthening of New Zealand's international tax provisions. The need for such upgrading is overdue. The measures will reduce the problem of tax avoidance by residents diverting New Zealand income, and earning tax-favoured returns, through the use of offshore entities. Resources will flow to areas where they will generate the highest return for the nation as a whole. There will be a greater compatibility between private and national interests in investment decisions. Such reform will therefore contribute directly to creating a fairer and more prosperous society.

I believe that the development of a sound and secure domestic tax base is a prerequisite to further significant domestic tax reform. I commend a close scrutiny of this consultative document to those affected by the measures, as well as to those interested in the further reform of New Zealand's tax system.

Signature - Hon Roger Douglas, Minister of Finance

Roger Douglas
Minister of Finance