The role of double tax agreements
Income derived across an international border can potentially be subject to double taxation as a result of two countries taxing the same income. New Zealand relieves double taxation by unilaterally granting its residents credits for foreign tax paid on income that is also subject to New Zealand tax up to the amount of New Zealand tax liability on that income.
In addition, New Zealand has a network of double tax agreements (DTAs) with its main trading and investment partners which refine and supplement the unilateral relief mechanism.
The focus of DTAs is wider than the elimination of double taxation. They reduce tax impediments to cross-border trade and investment and assist tax administration. This is achieved by:
- eliminating certain forms of double taxation;
- reducing withholding taxes on cross-border investments;
- prescribing how certain profits are to be calculated;
- exempting certain short-term activities in the host state from income tax;
- providing certainty of treatment;
- providing procedures that assist in resolving disputes; and
- enabling information to be exchanged between tax administrations.
New Zealand's DTA network is targeted to include countries where real benefits are likely to accrue. Benefits are likely to be limited if there are low levels of trade and investment between New Zealand and the other country or if the tax system in the other country does not produce tax problems that a DTA would be expected to remedy.
For example, if income is not taxed in the other country or withholding tax rates are at levels ordinarily set under DTAs, little benefit is likely to accrue. Therefore, the emphasis of a DTA is on resolving tax problems that are impediments to trade and investment between two countries.