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Inland Revenue

Tax Policy

Statement by the Ministers of Finance and Revenue


Minister of Finance, Hon R O Douglas
Minister of Revenue, Hon T A de Cleene


This document is the final report of the Consultative Committee on Full Imputation and International Tax Reform. It contains the recommendations of the Committee on the further detailed measures required for the operation of the imputation and international tax regimes. The draft legislation for these regimes is set out in a separate annex to the Committee's report.

As noted by Mr Valabh in his covering letter, the report involves a number of changes to the regimes developed by the Committee and presented in its first reports but nothing which could be described as fundamental. These changes reflect the detail required to implement the regimes in accordance with the structure and principles already approved.

The Government supports the Committee's recommendations subject to some minor changes and reservations on definitional matters as highlighted further below. An enormous amount of detail has had to be developed in a relatively short space of time. We concur with the Committee that the overall regime is now at a sufficiently advanced stage for the legislation to be circulated. After being introduced to the House, the Bill will be referred to a Select Committee. There will then be a final opportunity for submissions.


The Government endorsed the Committee's recommendations on imputation set out in its earlier report. There were relatively few issues that required further work. The Committee now makes additional recommendations on the rules governing the allocation of imputation credits, the inclusion of co-operative companies and producer boards within the imputation regime, the treatment of returns of capital, the carry forward of unutilised imputation credits, the operation of the dividend withholding payment system, and on consequential changes to the definition of a dividend and to the excess retention tax and deemed dividend provisions. All these recommendations are supported subject to the following changes.

First, the Committee recommends that distributions subject to the winding up distribution tax of 10 percent should not also be subject to non-resident withholding tax. It had been envisaged that the winding up distribution tax would be enacted along with the imputation and international tax reforms later in the year. The Government considers that it would instead be preferable to enact this measure as soon as possible to facilitate the winding up process. Accordingly, the Government has decided that the measure will be enacted through the Taxation Reform (No.4) Bill.

Secondly, the Committee has recommended that fringe benefits received by a major shareholder/employee be subject to the FBT regime rather than the current deemed dividend provisions, in respect of fringe benefits other than loans with effect from 1 April 1988, and in respect of loans with effect from 1 October 1988. The Government agrees with the extension of the FBT regime but has decided that the change apply to fringe benefits including loans with effect from 1 April 1988. It will give further consideration to the details of the change to take account of anti-avoidance rules which are being developed to strengthen the provisional tax regime. Consideration also needs to be given to the implications for companies which wind up before the legislation extending the FBT is passed.

In its earlier report the Committee recommended that the date for the first withholding payment by companies, in respect of foreign-source dividends received after 1 April 1988, be the 20th of the month following the month in which the necessary legislation is passed. Given the scheduled enactment of the legislation later this year, the Government has decided that, in order to provide greater certainty for taxpayers, the date for the first withholding payment will be 20 January 1989.

International Tax

The international tax regime recommended by the Committee in its first report comprises a branch-equivalent (BE) regime, a foreign investment fund (FIF) regime, and a revised trust regime. The regimes are designed to reduce the myriad opportunities for residents to avoid or defer New Zealand tax where they interpose foreign entities between themselves and income-producing assets.

The legislation has been drafted to ensure that the three regimes support one another and other recent tax reform. The provisions are necessarily detailed and are supported by a number of anti-avoidance provisions. These should not be read down given the clear objective of the reforms. The purpose of the BE regime is to tax on a current basis New Zealand residents having economic or financial interests, including contingent interests, in the income of any foreign company where five or fewer residents in any manner whatsoever have a 50 percent or more interest in the company. The purpose of the FIF regime is also to tax residents on a current basis where they have interests in, but do not control, foreign entities in which they are able to accumulate income and obtain taxation advantages. Such interests include policies with foreign life offices and superannuation funds. The revised trust regime supports the BE and FIF regimes by generally taxing on a current basis the foreign-source trustee income of trusts having a New Zealand settlor, and taxing to New Zealand resident beneficiaries distributions from non-resident trustees.

We highlight the following features:

–    Aspects of BE Regime

Two important aspects here include the measurement of interests and an additional transitional measure. The Committee originally considered that a resident's control and income interests be measured on each day of the foreign company's accounting year. After further consideration, in light of the high compliance costs of daily measurement, the Committee now recommends that a resident's control and income interests be measured at the end of each quarter in a year and that anti-avoidance measures be adopted. In our view, this line strikes the right balance between minimising compliance costs and countering avoidance.

The Committee recommends that in respect of existing investments taxpayers should have the option of applying the BE regime before the end of the transitional period so that losses during that period may be accounted for in determining future BE income. In exercising this option, however, taxpayers cannot bring in losses and not profits. Accordingly, taxpayers will be entitled to elect, in respect of all of their income interests held on 17 December 1987 in all CFCs resident in countries not on the transitional list, to apply the BE regime for the accounting years of such CFCs falling in whole or in part during the period 1 April 1988 to 31 March 1990.

The Government has also decided the composition of, and the nature of the qualifications to, the permanent and transitional country lists as discussed below.

–    Grey List

The costs of complying with the BE regime should not exceed the revenue to be gained. For this reason, taxpayers with interests in CFCs resident in certain listed countries will not be subject to the regime. However, if stated preferences are utilised the BE regime will apply and income will be computed on a simplified basis. This list of countries is called a grey list.

Australia, Canada, France, Japan, the Federal Republic of Germany, the United Kingdom, and the United States of America will be on the grey list (see Attachment A). The relevant considerations in deciding the list included: the definition of taxable income, the extent of any tax preferences, the level of income tax rates, the efficiency of tax administration, and the extent of protection of the domestic tax base (including a comprehensive international tax regime) in each country.

It might be argued in certain circumstances that a taxpayer with an interest in a CFC in a grey-list country will be treated more favourably than a taxpayer with a similar interest in a non-listed country. However, favourable treatment in this context means only that some taxpayers are freed from additional income calculations; it does not necessarily mean that there is any anomaly in terms of tax liability. Rather than make all taxpayers calculate their BE income, it is preferable to relieve at least some from compliance costs where there is little risk to revenue.

–    Qualification of Grey List

The general qualification to the grey list relates to business income derived by a CFC from outside the listed country in which it is resident which is not subject to tax in that country. Other forms of income such as interest and dividends are also being considered for qualification. A general qualification rather than a qualification by country is favoured at this stage. Should it be necessary to introduce country qualifications they will have prospective effect.

–    Transitional List of Low Tax Countries

Under the transition recommended by the Committee, residents with interests acquired on or before 17 December 1987 in companies resident in countries other than low tax jurisdictions will be exempt from the BE regime until 31 March 1990. The list of low tax jurisdictions for this purpose is contained in Attachment B. The list is an updated and more detailed version of the illustrative list set out in the Committee's earlier report.

–    Trusts

The Committee has recommended changes to the trust regime set out in Part 1 of its report but these are of detail rather than of principle. The Committee continues to hold to the following principles:

  • the taxation of foreign-source trustee income (ie income which is not taxed as beneficiary income) should be determined by the residence of the settlor, rather than by the residence of a trustee as is currently the case;
  • where there is a resident settlor of a trust in the year in which the trustee of the trust derives foreign-source trustee income, the liability for New Zealand tax on that income should rest in the first instance with the trustee (whether that trustee is a resident or a non-resident) and if the trustee does not meet the liability and is not resident in New Zealand, the liability should fall to the resident settlor.

Transitional provisions apply where a resident settled a trust on or before 17 December 1987.

In addition, the Government has decided that testamentary or inter vivos trusts settled by a person who dies a resident of New Zealand, should also be subject to New Zealand tax on their foreign-source income where such trusts have a. resident trustee. Although in these cases there is no resident settlor in the year trustee income is derived, the resident trustee provides a sufficient basis for taxation.

With respect to the recommended taxation of distributions from trusts, effective from 1 April 1988, the Government has decided to modify the treatment recommended by the Committee for foreign trusts (trusts which at no time since 17 December 1987 have had a settlor who is a New Zealand resident). As recommended, distributions from the trustee income of such trusts derived in income years commencing after 1 April 1987, other than of corpus and capital profits, would be assessable to a beneficiary at his or her marginal tax rate but other distributions from such trusts would be non-assessable. The Government has decided that distributions of trustee income of such trusts derived in income years commencing on or before 1 April 1987 should also be assessable to a beneficiary but at a flat rate of 10 percent. This treatment is consistent with the transitional provisions recommended by the Committee in respect of trusts settled before 17 December 1987 which are either wound up by 31 March 1989 or brought within the new settlor regime for the 1989 income year.

Under the new trust regime recommended by the Committee, the existing distinction between specified and non-specified trusts will be removed with effect from the income year commencing 1 April 1988 (the distinction was originally made to limit the scope for income splitting). Along with this change, the Committee has recommended a widened definition of beneficiary income to include income of a trust which vests in a beneficiary, as well as income paid to or applied for the benefit of a beneficiary within six months of the end of a trustee's income year. The Government wishes to consider further the definition of beneficiary income.

–    Residence Rules

The definitions of residence under the Income Tax Act will be amended in order to reduce the scope for individuals and companies to manipulate their affairs to obtain taxation advantages. The new definitions, building on existing concepts, make it easier for a person to become a resident of New Zealand and harder to become a non-resident, and they more precisely define residence for companies.

In brief, if a person has a permanent place of abode in New Zealand or is present here for at least 183 days in any year he or she is resident, only ceasing to be so if absent for at least 325 days in any year having during that time no permanent place of abode here. A company will be resident in New Zealand if it is incorporated here or has its head office or its centre of director control or executive management here. There will be no special rule for banking companies.

–    Other Legislative Changes

To support the regime recommended by the Committee, two other legislative changes are required. These will be made through the Taxation Reform (No.4) Bill.

The first change is to the low income earner rebate. Despite the substantial reduction in the incentives for income splitting as a result of the flattening of the income tax scale, the Government is concerned to reduce them even further. Accordingly, it has decided to include beneficiary income in income which does not qualify for the low income earner rebate.

The second change relates to the rate of taxation of trustee income. The Committee has recommended a complete upgrading of the taxation of trusts including the removal of the distinction between specified and non-specified trusts from 1 April 1988. The uniform treatment of trustee income is an integral part of the trust regime and hence of the overall international regime since the BE, trust, and FIF regimes are mutually interlocking.

Accordingly, the trustee income of all trusts will be taxed at a rate of 35 percent or at the marginal composite rate scale for individuals (whichever is the higher) in the current year. From the 1989 income year, trustee income will be taxed at the top marginal rate for individuals (33 percent in that year).

This change will mean that some trustee income will be subject to a higher rate of tax than it would otherwise have been in the current year. This move towards a more uniform taxation of trustee income has been foreshadowed both in terms of the rates as originally set out in the No.4 Bill and the Government's acceptance of the Committee's earlier recommendations on the reform of the taxation of trusts.

–    Earlier Reservations

There were three issues on which Government expressed reservations in response to the Committee's first report on international tax reform:

a    the exclusion from the fund regime of the interests of residents in active businesses in low tax countries;

b    the treatment of capital profits from certain trusts; and

c    the transitional provisions in respect of trusts settled by residents before 17 December 1987.

The Government maintains its reservation in (a) and will be closely monitoring the FIF regime and strengthening it if necessary. As mentioned below, the reservations in (b) and (c) are removed in the light of changes to the Committee's recommendations on trusts.

The Committee recommends that where a trust settled on or before 17 December 1987 does not wind up before 1 April 1988 or the settlor, trustee or a beneficiary does not pay a tax of 10 percent on the net assets of the trust at 31 March 1988, distributions from the trust would be treated as non-qualifying distributions. This means that all such distributions (other than of corpus) would be taxable to beneficiaries at a tax rate of 45 percent. The Government considers that this measure provides a sufficient incentive for settlors in a position to do so to wind up such trusts or subject their foreign-source trustee income to tax in New Zealand.

Under the non-qualifying distribution provisions, distributions of capital profits would be taxed to a beneficiary. Distributions of capital profits which are not non-qualifying distributions would be non-assessable. Capital profits would of course, in some cases, continue to be taxable as trustee or beneficiary income. Capital profits of trusts that are foreign investment funds would also be taxable to residents. The recommended taxation of distributions of capital profits from trusts is broadly in line with existing treatment. However, it will need to be reviewed in considering the introduction of a capital gains tax.


The Government supports the recommendations of the Consultative Committee subject to some relatively minor changes and reservations. The changes, as discussed, relate to:

  • the timing of the implementation of the winding up tax on distributions;
  • the timing of the extension of the fringe benefit regime to major shareholders/employees for concessionary loans;
  • the taxation of the foreign-source trustee income of certain trusts which have a resident trustee but no resident settlor; and
  • the taxation of certain distributions from foreign trusts.

As discussed, the only points on which the Government reserves its position at this stage concern:

  • the definition of a foreign investment fund. The Government maintains its earlier reservation and will strengthen the fund regime if necessary;
  • the need for anti-avoidance rules to support the extension of the fringe benefit tax; and
  • the definition of beneficiary income under the new trust regime.

The Government has also decided that in order to provide greater certainty for taxpayers the date for the first withholding payment by companies, in respect of foreign-source dividends received after 1 April 1988, will be 20 January 1989.

In addition to the legislation to implement the measures recommended by the Committee, two other consequential legislative changes are required. One is the addition of beneficiary income to the list of income which does not qualify for the low income earner rebate. This is designed to counter income splitting. The other change required is the rationalisation of the rate of taxation of trustee income. This is necessary given the removal of the distinction between specified and non-specified trusts under the new trust regime. These changes together with the distribution winding up tax will be implemented through the Taxation Reform (No.4) Bill.

The Government has decided the composition of, and the nature of the qualifications to, the permanent and transitional country lists for the purposes of the BE regime. The lists are set out in Attachments A and B to this statement.

Once again we record our thanks to the Committee. It is to be commended for its report and for its professional commitment to seeing through an extremely difficult job. Chaired by Mr Arthur Valabh, the Committee comprises Dr Robin Congreve, Mr Stuart Hutchinson, Dr Susan Lojkine, Professor John Prebble and Mr Tim Robinson.

After being introduced to the House, the Bill giving effect to the imputation and international tax reforms will be referred to a Select Committee. There will then be a final opportunity for submissions. We commend a close examination of the Committee's report and the draft legislation to all interested parties.


Signature of Roger Douglas, Minister of Finance

Roger Douglas
Minister of Finance

Signature of Trevor de Cleene, Minister of Revenue

Trevor de Cleene
Minister of Revenue


Australia, excluding the Territory of Norfolk Island;


Federal Republic of Germany;

French Republic, including the European and Overseas Departments, but excluding the Overseas Territories;


United Kingdom of Great Britain and Northern Ireland;

United States of America, but excluding its possessions and territories.


  1. The Government has considered the Consultative Committee's recommendations concerning the listing of preferences and has decided that initially it would be more appropriate to list general features of tax systems which might be used to avoid the BE regime rather than listing specific preferences in relation to individual countries listed above. However, the Government intends to monitor developments in the seven listed countries. Once it is decided to list a particular preference or feature, or amend a listing, the change will apply prospectively.
  2. The legislation presented to Parliament will include one general qualification which will apply to all of the above listed countries. Interests in a CFC resident in a listed country will be subject to the BE regime where a CFC derives certain forms of foreign source income which are not subject to income tax in the listed country of residence. At this stage, it has been decided that the general qualification will apply to foreign source "business" income. Other forms of foreign source income, such as interest and dividends, are being considered for inclusion in this general qualification too.





Antigua and Barbuda





British Channel Islands

British Virgin Islands


Cayman Islands

Cook Islands

Costa Rica





French Polynesia





Hong Kong

Saint Kitts

Saint Lucia

Saint Vincent

San Marino


Solomon Islands

Sri Lanka

Isle of Man











Marshall Islands




Netherlands Antilles and/or Aruba


New Caledonia

Norfolk Island




Puerto Rico

Saint Helena


Turks and Caicos Islands

United Arab Emirates





  • companies which are regarded as Foreign Sales Corporations by the United States of America and which therefore qualify for reduced Belgian taxation
  • companies approved under Royal Decree No 187 of 30 December 1982 as Co-ordination Centres (as defined by the original Royal Decree or by subsequent amending laws)


  • companies deriving income from sources outside Brunei


  • companies obtaining relief or exemption from tax under Part V of the Corporation Tax Act 1976 or section 43 of the Finance Act 1980 (profits from trading within Shannon Airport)
  • companies obtaining relief or exemption from tax under Part IV of the Corporation Tax Act 1976 or section 42 of the Finance Act 1980 (profits from exporting certain goods)
  • companies certified by the Minister of Finance to provide international financial services or to carry on any other activities in the Customs Dock area


  • companies having income granted exemption from tax under paragraph 11 Schedule 1 of the Income Tax Act 1973


  • companies exempt from tax in relation to shipping
  • companies subject to tax at 5 percent in relation to inward reinsurance
  • companies deriving income from sources outside Malaysia


  • companies exempt from tax under the Decree for the Avoidance of Double Taxation 1985 for foreign source business profits
  • companies which have obtained a participation exemption under article 13 of the Corporate Income Tax Act 1969 or under article 18 of the Corporate Income Tax Act 1969
  • companies which are regarded as Foreign Sales Corporations by the United States of America and which therefore qualify for reduced Netherlands taxation
  • companies which have obtained an advance ruling from the Ministry of Finance in relation to income earned with respect to intercompany loans


  • companies which are regional headquarters companies
  • companies which operate as an Offshore Banking Unit or a Foreign Currency Deposit Unit
  • companies which receive interest on deposits with a Foreign Currency Deposit Unit, or other interest subject to reduced rates of tax under the National Internal Revenue Code


  • companies subject to the concessionary rate of tax for insurance and reinsurance of risks outside Singapore
  • companies which operate Asian Currency Units which have income -
    • taxed at a concessionary rate by virtue of section 43A of the Income Tax Act
    • exempted from tax under the Income Tax (Income Arising from Syndicated Offshore Loans) Regulations 1984
  • companies which are exempt from tax on the income of a shipping enterprise
  • companies which derive any income to which section 43E of the Income Tax Act applies (headquarters companies)
  • companies which are incorporated in Singapore but not managed and controlled from Singapore and which derive any income from sources outside Singapore