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Inland Revenue

Tax Policy

Chapter 1 – An overview

1.1 Introduction
1.2 Brief overview of this discussion document
1.3 Submissions

1.1 Introduction

The past ten years have been characterised by major reforms within the New Zealand economy. Those reforms have included very significant changes to the New Zealand taxation system. Major new taxes have been introduced; for example, GST. Part of this overall tax reform process has been fundamental reform of the taxation laws as they affect income flows across international borders.

A deregulated international capital environment requires robust international tax rules to protect the New Zealand tax base. While providing that essential protection to the New Zealand tax base, the reforms of the international taxation regime have also been designed to underpin the development of the dynamic, open, internationally competitive economy that has been a key component of New Zealand’s economic success in recent years.

Continued investment, necessary to support sustainable economic growth, demands that New Zealand businesses be able to satisfy their requirements for capital, either from New Zealand or overseas. Policies that give domestic producers access to capital at low cost will enhance the competitiveness of New Zealand business and are consistent with the Government’s policy of repaying public debt to remove the risk premium for New Zealand.

New Zealand’s recent economic performance

The average annual GDP growth over the past 20 years was 1.6%. In the year to June 1994, GDP growth was 6.3%.[1] New Zealand is now one of the fastest growing economies in the OECD. Forecast average GDP growth for 1994/95 is 5.8%.

Net public debt has fallen from 48% of GDP in 1992/93 to 43% in 1993/94. It is projected to fall to 26% by 1996/97 and 18% by 2003/04.

Underlying inflation has remained below 2% since 1991 and the fiscal balance moved into surplus in the 1993/94 year.

Exports of goods and services totalled 31 % of GDP in 1993. Manufactured non-food exports rose from 19% of export earnings in 1980 to 30% in 1993, growing at 11% per annum in the two years to June 1993 (15% per annum for non-commodity manufacturing exports—on present trends, exports of this sort will double between 1993 and 1997).

Foreign direct investment can bring with it the additional benefit of a transfer of technology and ideas to New Zealand. Openness to foreign capital, ideas and goods and services will aid the effort to build a dynamic, fast-growing enterprise economy that generates exports and jobs here in New Zealand.

At the same time, New Zealand businesses invest overseas to build infrastructures that support the sale of their New Zealand-made products and to pursue opportunities not available at home in the New Zealand economy.

A growing, dynamic economy that is raising the living standards of all New Zealanders will therefore see a combination of foreign investment in New Zealand and overseas investment by New Zealanders. The Government is committed to New Zealand’s continuing full participation in the international economy.

As much as possible, investment decisions should be driven by the intrinsic quality of the investment rather than by tax considerations. The tax system should not make offshore investment more or less attractive than domestic investment for New Zealand investors. Inevitably, however, tax policy plays a role in business decisions, including those decisions which affect international capital and income flows both into and from New Zealand.


Openness and growth are strongly connected. Recent World Bank work on East Asia has confirmed this.

Foreign direct investment into New Zealand in the year to March 1994 alone was $4.7 billion.

In legal terms, New Zealand is very open to foreign investment. Specific restrictions on foreign investment apply only to fishing quota and Air New Zealand. The Overseas Investment Commission oversees any proposal by non-residents to establish a business; acquire a 25% or greater share; increase an equity share; or acquire assets above $10 million. From 1988 to 1992, the Commission declined only three out of more than 4,000 applications. Authorisation is also necessary for a non-resident to purchase rural land or offshore islands.

Capital flows world-wide already dwarf trade flows and are growing faster. Total world trade volume in 1992 was US$10 billion per day, while foreign exchange turnover was US$880 billion per day.

In July 1994 non-resident investors held about NZ$4,671.5 million of New Zealand Government stock, 24.5% of the total and about NZ$3,342.7 million of Treasury Bills, 55.9% of the total. In addition, foreign currency Government debt at 30 June 1994 was NZ$16,864 million.

Foreign investors now hold substantial equity stakes in listed New Zealand companies, facilitated by dual listings on overseas markets.

Any tax policy development involves achieving a mix of objectives. Clearly, protecting the New Zealand tax base and low compliance costs must be key goals.

Prior to Christmas 1994, the Government issued a discussion document giving significant weight to minimising the compliance costs associated with the taxation system. Obviously, ensuring the maximum economic benefit to New Zealand must also be given full and thorough consideration in tax policy formation.

The policy objective of minimising compliance costs has already been given effect in the international tax regime by the introduction of such features as the “grey list”. Those investing in countries on the grey list are excused from complying with the rules of the international tax regime. The grey list countries have robust rules which are likely to ensure that any income-earning activity will be taxed at a similar rate to that which would apply under the New Zealand rules.

Over the last ten years, changes in international tax policy have led to the introduction of rules which allow the taxation of New Zealanders on their worldwide income, measured according to New Zealand tax rules. Both Controlled Foreign Companies (CFCs) and Foreign Investment Funds (FIFs) have been brought into and are now fully covered, by the international tax regime.

As part of the continuing reform process, in August 1993 the Government reformed the tax system as it affects non-resident portfolio investors by introducing a mechanism called the Foreign Investor Tax Credit (FITC).

The introduction of the FITC removed the double imposition of New Zealand taxes on dividends paid to foreign portfolio investors. Foreign portfolio investors are no longer required to pay full tax at the New Zealand company level as well as Non-Resident Withholding Tax. That puts a foreign investor in a similar position to a domestic investor as far as the maximum New Zealand tax payable is concerned. The change had an immediate positive effect on the New Zealand share market. (One large New Zealand business estimated that this one measure reduced its cost of capital by about 8%.)

At the time of those changes in August 1993, the Government announced that the next stage of the reform process would cover the areas of foreign direct investment, transfer-pricing and thin-capitalisation. These, together with existing rules, represent the remaining items in the current round of reforms of the international tax regime. The Government is of the view that, after the measures proposed in this package (foreign direct investment, transfer pricing and thin capitalisation) have been given effect to, New Zealand will have an effective and comprehensive international tax regime. Although Ministers are always willing to listen to concerns, and obviously any part of the tax law must be the subject of continual refinement to address issues that arise (for example, base maintenance and other concerns), in the fundamental sense, what has been achieved by way of major reform in the last ten years is in the view of the Government settled. After such a protracted period of intense legislative activity, it is appropriate that there be a period of consolidation.

This discussion document is produced as part of the generic tax policy development process recommended by the Review Committee chaired by the Rt Hon Sir Ivor Richardson of the Court of Appeal. It outlines the Government’s intentions for the next stage in the development of the international tax regime.

1.2 Brief overview of this discussion document

To assist understanding of the approach being taken to international tax policy, Part A of the document introduces a high-level discussion of the economic and tax policy considerations which the Government is working through to establish tax policy. This discussion is intended to indicate to interested parties the thinking on policy development in this area. It also offers an assessment, in the light of that discussion, of the current regime for taxing cross-border income. To assist the Government in its ongoing refinement of international tax rules, submissions are sought on the issues raised. The key issue here is the weighting to be placed on residence versus source tax bases.

Chapter 2 discusses the broad policy framework issues that underlie international tax policy.

Chapter 3 describes the current international tax regime and then assesses it in the light of the earlier discussion in Chapter 2 of the broad objectives of tax and economic policy.

Part B of the document then details the reform measures which the Government proposes to consider implementing this year. Submissions are sought from interested parties on these measures.

Chapter 4 discusses technical problems inherent in the existing rules for measuring cross-border income flows.

Chapter 5 covers the broad proposals for reform canvassed in this document, after which Chapters 6, 7 and 8 canvass in detail the options for reform. They introduce the Government’s proposals for the tax treatment of foreign direct investment and put forward the Government’s proposals to address the issues of transfer-pricing, source and thin-capitalisation rules.

1.3 Submissions

Submissions on Part A, the Policy Framework, should be sent to:

The Manager
International Tax
The Treasury
PO Box 3724

Interested parties can contact Treasury directly if they wish to discuss any issues raised in Part A.

Submissions on Part B, the Reform Proposals, should be sent to:

The Director
Legislative Affairs
Inland Revenue Department
PO Box 2198

Submissions on either Part should be made by 12 April 1995.


1 Source -Economic and Fiscal Update, 20 December 1994.