Dunne: Further consultation on international tax rules
Revenue Minister Peter Dunne today announced a new round of consultation on the reform of New Zealand's international tax rules.
Addressing the International Fiscal Association conference in Christchurch this morning, he released an issues paper seeking feedback on suggested changes to the treatment of non-portfolio foreign investment funds.
"This consultation paper builds on the comprehensive reforms made last year to the taxation of New Zealand companies that have offshore subsidiaries so they can compete in world markets on the same basis as foreign competitors," Mr Dunne said.
"The main feature of those reforms was the introduction of an exemption from New Zealand tax on income earned through controlled foreign companies undertaking "active" business activities such as manufacturing, distribution or sales functions.
"This issues paper continues the reform process by looking at ways to remove further taxation obstacles to New Zealand companies' international competitiveness.
"In particular, it looks at how the tax exemption might be extended to some investment interests made by New Zealand companies in foreign companies - known as foreign investment funds or FIFs - in which they are not the controlling partner.
"New Zealand firms will often choose to enter new markets by establishing links with a partner in the host country by setting up a jointly owned entity. New Zealand firms considering expanding overseas may also use subsidiaries, joint ventures and other substantial investment in foreign markets in which they are not the controlling partner.
"While the New Zealand firm may not own the entity it usually makes a substantial contribution in areas such as management, or by providing technical or marketing expertise.
"These types of arrangement can bring considerable economic benefits to New Zealand businesses by allowing firms to improve their market knowledge or access to customers and suppliers in a way that facilitates export growth or an increase in high-value research, design and management activities in New Zealand.
"It is important that the tax system does not act as a barrier to New Zealand companies looking for opportunities to expand into new and emerging markets. The changes suggested in this issues paper focus on making the FIF rules easier and more coherent for taxpayers and advisors to understand and operate so that New Zealand firms can reap the commercial advantages of global investment more easily," Mr Dunne said.
The issues paper, New Zealand's International Tax Review: extending the active income exemption to non-portfolio FIFs, is available at www.taxpolicy.ird.govt.nz.
The closing date for submissions is 30 April 2010.
Mark Stewart - Press Secretary, Office of Hon Peter Dunne
Cell +64 21 243 6985
Address to 33rd International Fiscal Association (IFA) Conference
Holiday Inn City Centre, Christchurch
9am, Friday 19 March 2010
Last year when I was invited to address your annual conference, New Zealand was facing one of its greatest economic challenges since the great depression of the 1930s.
Most of our trading partners were in recession and taking urgent steps to prevent economic collapse.
In New Zealand, our own economy was shrinking, our government deficit had ballooned, businesses were closing and unemployment levels were beginning to rise to levels not seen since the early 1990s.
In this context of global economic crisis, governments around the world were faced with many challenges.
Among them was the immediate problem of preserving their revenue base while balancing the needs and expectations of households and businesses facing economic hardship.
As part of the Government's immediate response, a $450 million package of tax assistance measures was introduced to help the smaller enterprises that make up over 95 percent of New Zealand businesses to weather the downturn.
The personal tax cuts introduced from 1 April 2009 also gave New Zealanders more money in their pockets.
Just 12 months later we appear to have come through the worst of the crisis in reasonable health.
The economy is again beginning to grow, employer confidence is lifting, and recent Crown accounts show core Crown revenue was $102 million higher than forecast at $32.4 billion in the seven months to 31 January while core crown expenses were $678 million below forecast at $36.2 billion.
While I think it is safe to say we have weathered the worst of the economic downturn somewhat better than some of our trading partners, our distance from the epicentre of the global economic collapse means we still have no cause for complacency.
Indeed, the recession reinforced the need for several of the most intensive reviews of New Zealand’s wider economic environment in a decade, opening for scrutiny and debate the foundations of our capital markets, our regulatory environment and, of course, our tax system.
The release in mid-December of the Capital Markets Development Taskforce's recommendations to improve the functioning of New Zealand's capital markets gave us the opportunity to review the overall health and efficiency of our capital markets.
As Minister of Revenue, I was particularly pleased that a significant number of those recommendations showed a high level of support for the Government's current tax policy work, and its programme towards building a world-class tax system.
It confirmed my personal view that while there are some areas that need attention, the New Zealand tax system has many solid features.
For example, we consistently rate highly in OECD rankings of transparency and ease in paying taxes.
Our GST system is perceived internationally as a model of simplicity and clarity, and the administrative costs of raising revenue are modest by international standards.
That message came through very clearly in the area of company taxation, for example, where four of the Taskforce's recommendations endorsed much of the Government's current work relating to the future shape and direction for our imputation system.
With the Henry Review in Australia now unlikely to be released until later this year, the Taskforce's endorsement confirms we are on the right track.
The formation of the Victoria University Tax Working Group in May last year and its work in placing the tax system under the microscope has helped to catapult the subject of tax into the mainstream of public debate, and done much to advance the Government's longer term vision of a tax system that will help to promote economic growth.
That is a credit to the scope and depth of the Group's work.
The Tax Working Group was a new approach to the development of policy thinking.
The Group was formed and operated independent of government, but with significant government input from officials.
The process was very open, with papers and discussions posted on the Group's website.
It was not a foregone conclusion that this novel approach would work; but I think there is a general consensus that it did.
The process allowed issues to be highlighted, and provided a framework for future tax reform to emerge.
As is clear from the Prime Minister's Statement to Parliament earlier this year, the Government has accepted the need to address the issues the Group highlighted and the reform framework the Group set out in its final report.
All things considered, it has been a very successful process.
As you know, the Group's recommendations are still being reviewed by the Government in detail and final decisions on the overall shape of any tax reforms will be announced in the Budget on May 20.
However it is pretty clear that there are certain areas of the tax system that should be addressed.
Accordingly, we are likely to see changes to the tax treatment of property to make the rules fairer and more equitable for all taxpayers.
This is not an attack on landlords, as some have protested, but a rebalancing act designed to address the concerns highlighted by both the Tax Working Group and the Governor of the Reserve Bank over the years about distortions favouring property investment over other forms of investment.
In short, we want investment decisions to be driven by the quality of the particular investments, not just the tax advantages that may derive from them.
There are also likely to be lower personal taxes across the board – not just for the top end of the income scale as some allege - to encourage productivity, investment and saving.
And much debate has ranged over the proposal to lift the GST rate to 15 percent, with appropriate compensation for those who need it.
I can make two points about that: there will be no increase in the rate of GST unless there is appropriate compensation, and there certainly will be no exemptions of specific items introduced into the GST system.
We are still considering the company tax rate and its relationship to the top personal tax rate and that of trusts.
As you know, I have long advocated a 30/30/30 alignment of tax rates as a simple solution to deal with problems that arise as a result of the differences in tax rates that allow companies and trusts to be used to shelter income.
The problem remains however, that in spite of the relatively recent reduction in the company tax rate from 33 percent to 30 percent, our rate remains higher than many OECD countries.
This does not necessarily mean that we need to drop the rate to match or outpace other countries.
There are trade-offs between:
- a tax system that is as simple and coherent as possible;
- the need for New Zealand to have a company rate that is attractive to investment compared with other countries; and
- the fiscal constraints that the Government must operate under.
These are issues that Ministers are still weighing up, but the bottom line is, in line with the Working Group's conclusions, we want a tax system that is basically fair, competitive, and coherent.
As a partner in the world economy, our responses to tax policy development must be approached in the context of what is happening elsewhere in the world, yet tempered by our own unique set of social and economic circumstances as a small, geographically isolated economy.
We have made considerable advances over the past year in our international tax reforms and international tax negotiations with other countries.
Legislation enacted in December last year introduced a tax exemption for interests in controlled foreign companies that earn active income, a move aimed at making New Zealand a more competitive base for internationalised firms and enabling New Zealand-based businesses to compete more effectively in foreign markets.
A consultation paper was also released late last year which looks at whether AIL – the approved issuer levy – should apply at a zero rate, rather than the usual 2% on interest paid on corporate bonds that meet certain criteria.
AIL, which in some circumstances is an alternative to paying non-resident withholding tax on interest paid to non-residents, has sometimes been identified as a possible impediment to further growth of our bond market.
A new round of consultation is also about to begin with the release today of an issues paper on the tax treatment of non-portfolio foreign investment funds.
The main proposal in the issues paper is to extend the tax exemption that is already provided for controlling interests in foreign companies, to significant but non-controlling interests.
That will further reduce the obstacles to New Zealand companies' international competitiveness.
The proposal reflects the importance of joint ventures and other partnering arrangements in the expansion plans of New Zealand-headquartered enterprises.
These types of arrangements can bring considerable economic benefits to New Zealand businesses by allowing firms to improve their market knowledge or access to customers in a way that facilitates export growth or contributes towards research, design and management activities in New Zealand.
The paper will be available on Inland Revenue's Tax Policy website from today, with a closing date for submissions of 30 April.
Work has also been steadily progressed on our programme of tax treaty negotiations over the past year.
Most recently, two new tax Information Exchange agreements were signed this week with Dominica, and St Vincent and the Grenadines.
These bilateral treaties provide for full exchange of information on civil and criminal matters between two countries and are an important benchmark for offshore financial centres in meeting OECD standards for transparency and the exchange of information.
The growing number of these treaties is part of a new international emphasis on tax co-operation that is enabling Inland Revenue to get more and better information from its treaty partners concerning overseas transactions and investments made by New Zealand tax residents.
In the past year we also have advanced a number of other significant tax treaty negotiations, including a new double tax agreement signed with Australia.
Once in force, the Australia DTA will mean lower withholding taxes on dividend and royalty payments between the two countries and make pensions that are tax-free in one country also exempt in the other when recipients move across the Tasman.
2010 is also shaping up to be a busy year, with the first round of negotiations with the UK underway, a second round with Canada later in the year, and other negotiations in the pipeline.
We are also in the final stages of bringing the new Australian and United States treaties into force.
Once in force, these international agreements play an important role in facilitating trade and investment between New Zealand and our partner jurisdictions by reducing tax impediments to the course of business.
For our businesses to be successful in the international marketplace New Zealand must be seen to be part of a global tax system that is transparent, coherent and robust.
Strengthening our international tax relationships however is only part of the tax reform story.
Over the past couple of years I have gone on record as saying we cannot have a world-class, internationally competitive tax system that delivers fairness, equity and efficiency by policy measures alone.
We also need a first-class tax administration that collects revenue and delivers services with speed, certainty and in a way that allows taxpayers to self-manage their tax affairs with confidence in the technology, systems and people they are dealing with.
To turn this vision into reality, Inland Revenue has begun a major exercise that will see its administrative functions move away from the largely paper-based systems it has operated for the past two decades to the use of technologies that better reflect the needs of businesses using e-business tools and the internet.
Over time, much of the way Inland Revenue goes about its business will be transformed – from improving processes, re-engineering systems and renewing IT infrastructures towards a fundamental change in the way the department and taxpayers interact.
Legislation will be introduced in the next few months that will begin this process by simplifying the administration of student loan repayments by replacing the previous paper-based management of loan repayments to electronic management and communications.
The next step will be to look at ways to improve the functioning of the PAYE and personal tax summary systems.
One of the best ways that Inland Revenue can help support the efforts of business to be productive, competitive players in our economy is to minimise the amount of paper, telephone contacts and manual interventions that it currently takes for businesses to complete their tax obligations.
There are two strategies that can be employed in parallel to achieve this.
The first is to reduce the number of interactions which need to take place.
The second is to move as many as possible of those contacts which do need to take place into the electronic channel, where they can take place more quickly and more efficiently.
Implementing these proposals will dramatically change, for the better, the way in which employers, businesses and individuals interact with Inland Revenue.
I see this as a real opportunity for government to support the efforts of business, and I hope that we will be able to start consulting on these proposals in the second half of this year.
I would now like to bring you up to date with some of the other recent developments on the tax policy agenda.
In December last year I announced the release of an issues paper seeking submissions on how a system of income splitting for parents of dependent children might work.
This was pursuant to the provisions of the National/UnitedFuture confidence and supply agreement.
Submissions closed in February and officials are now working on the detail of proposals, based on the 54 submissions received with a view to developing legislation which I will introduce later this year.
I am also pleased to announce that I have agreed to a proposal to expand the Rewrite Advisory Panel’s current role of the panel to include the consideration of tax remedial matters not arising from the Rewrite Project.
As you are probably aware, the Rewrite Advisory Panel was established to review submissions on any unintended changes in the law in the rewritten tax legislation and, where necessary, to recommend appropriate legislative action.
It has also maintained a watching brief to ensure our tax legislation remains consistent with the objectives of the rewrite project in drafting tax law that is clear and in plain English style so taxpayers can easily understand and comply with the rules.
I have now agreed to a proposal to expand the role of the Panel to include remedial matters that do not arise from the rewrite project.
These may be matters that are raised by tax practitioners or Inland Revenue with a view to remedial amendments to any of the Inland Revenue Acts.
However, my expectation is that these remedial amendments would normally not relate to matters accepted for the tax policy work programme where relevant remedial matters would generally be included in existing projects.
Because the scope of the proposal is potentially quite large, only issues on particular topics will be called for – at least initially.
There are also a number of practical issues that will need to be resolved concerning how the new process will operate.
These include how Inland Revenue should receive and, if necessary, clarify potential remedial issues with tax practitioners, how issues that have been accepted for consideration are allocated to a relevant tax policy team to consider and research options, and how the Panel will ultimately deal with the submissions.
This new initiative recognises the success of the Rewrite Advisory Panel under the chairmanship of Colin Blair, Sir Ivor Richardson, and now David McLay, in providing a vehicle for effectively dealing with technical issues.
It also recognises the importance of ensuring that remedial work is progressed and that necessary running repairs and maintenance are handled efficiently.
We are investing considerable resources in reforms to build a world-class tax system, but we also need to be conscious that quick responses to remedial questions form an important part of this.
However, when priorities are set for the tax policy work programme, remedial work tends to be crowded out by other urgent matters.
Using the Rewrite Advisory Panel is a way of ensuring there is a mechanism for retaining a focus on remedial work that is quick and efficient.
Other tax policy projects in the pipeline for 2010 include consultation on the changes relating to the transforming of Inland Revenue's administrative functions that I mentioned earlier, an issues paper which examines concerns with the dispute resolution and challenge procedures and a paper which will look at clarifying the tax rules in relation to International Financial Reporting Standards.
All in all, 2010 is set to be another busy year for tax as we build upon the achievements of last year.
Among those was the successful resolution of Inland Revenue's long-standing court dispute relating to cross-border structured finance transactions that were widely used by foreign-owned New Zealand banks in the late 1990s and early 2000s to reduce their local tax liability.
It is good that this long standing issue has been resolved and that all parties can now move forward as we continue our work towards making the New Zealand tax system as efficient, fair and equitable as it can be.
While the likely tax content of Budget 2010 looks set to remain the primary focus of public attention in the coming weeks, I believe we can be confident that the changes we make will help to ensure that the tax system remains robust, and that it fulfils its function of supporting an economy that delivers quality services for the people of New Zealand.
Our work towards this goal will also be reflected in the new tax policy work programme for the next 18 months.
The current tax policy work programme was released in March last year and work involved in the Budget and any follow-up to that will inevitably require a review of the work programme.
This will be undertaken as soon as possible after the Budget.
It will require some hard choices to be made on what measures we can and should proceed with given our priorities as outlined in the Budget, and current resource and fiscal restraints.
As always, I appreciate any input you may have on where our ongoing priorities should be.
That brings my comments on the tax system today to a close.
I wish you well for the rest of the conference and look forward to your contribution to the debate as we work together to build a world-class tax system.