Address to the New Zealand Papua New Guinea Business Council
The Northern Club, Auckland
Wednesday, 15 December 2010
Good afternoon and thank you for inviting me to be here with you today.
When your Chairman, Stephen Eagles invited me to speak today, he reminded me of our first meeting in Manchester back in 1994.
At the time Stephen was contemplating a move to New Zealand.
He tells me that I promoted New Zealand to him as a country with an economy with firm foundations based on long-sighted policies.
I am pleased to have been so influential.
Sixteen years ago, Stephen and I sat and discussed the economic prospects of New Zealand.
Today, here we are again, discussing the economic prospects of another country; Papua New Guinea.
When he asked me to speak today, Stephen was especially keen to hear my views on negotiating a tax treaty (otherwise known as a double tax agreement, or DTA) with Papua New Guinea.
International tax reform
Harking back to my conversation with Stephen in 1994, the truth is that New Zealand is a good place to do business and government policy seeks to continually improve on that by reducing the tax burden placed on businesses and investors where possible.
We have, I think, made great strides in Budget 2010, which sought to rebalance the economy with lower personal tax rates as well as a lower company tax rate, while raising GST to encourage savings and removing depreciation on most buildings to encourage more prudent investment decisions.
On the international front we need to continue our focus on ensuring that our tax rules are internationally competitive and, where it is sensible, that our rules on the taxation of offshore investment are in line with international norms.
Over the past three years, our international tax rules have been progressively reformed.
In 2007, new rules for the treatment of offshore portfolio investments were introduced.
This standardised the taxation of nearly all such investments, removing distinctions between income and capital gains and eliminating a significant bias towards investment in certain overseas equities.
Then in 2009 the tax treatment of controlling investments in foreign companies was overhauled.
This represented a major change because for almost two decades New Zealand had comprehensively all investment income, regardless of source.
Last year, we joined most of the result of the world and moved to a tax exemption for 'active' income such as income from manufacturing or distribution activities.
This brought New Zealand into line with other OECD countries and lowered barriers to the global expansion of New Zealand-based businesses.
Legislation is currently being considered which continues those reforms.
The Taxation (International Investment and Remedial Matters) Bill, introduced in October, proposes extending the active income exemption from controlling investments to non-controlling but significant investments, known as non-portfolio foreign investment funds.
More work is planned for 2011, beginning with a review of the taxation of offshore branches of New Zealand companies but the key planks of our new international tax framework are already in place, and helping New Zealand-based businesses to compete more effectively overseas.
At a governmental level, and of particular importance to you, New Zealand's tax system has two key tools for working with tax jurisdictions abroad - the tax information exchange agreement and the double tax agreement.
Tax information exchange agreements are bilateral international treaties that allow tax authorities in the participating countries to exchange information on civil and criminal matters and are an important benchmark for offshore financial centres in meeting OECD standards for transparency and the exchange of information.
Double tax agreements are quite a different proposition.
The negotiation of double tax agreements has been a significant part of New Zealand's tax policy work programme for some time.
Double tax agreements help New Zealand-based businesses compete abroad and help make New Zealand a more attractive place to invest in.
Because they operate by reducing tax impediments to cross-border income-earning activity, double tax agreements tend to be viewed favourably by New Zealand business and indeed by taxpayers at large.
I am therefore often asked by the New Zealand business community, not unreasonably, why New Zealand does not have a larger double tax agreement network.
In response to the question, I usually note that New Zealand's network of double tax agreements is respectable by world standards.
We currently have 35 double tax agreements in force, covering the majority of our major trading and investment partners.
Australia's network of double tax agreements, by comparison, stands at 46 agreements.
I also like to point out that entering into double tax agreements is not without cost.
They are complex technical agreements.
They are time consuming and costly to negotiate.
They give up revenue, lock in certain positions, and affect our ability to change tax policy.
They are also subject to the vagaries of interpretation and need to be maintained.
Accordingly, we do not enter into double tax agreements lightly.
Generally speaking, a double tax agreement should only be sought when there are clear indications that it is likely to be meaningful to New Zealand.
Unfortunately, no simple rules are possible when it comes to determining whether or not a double tax agreement with a particular country is in New Zealand's best interests.
A number of factors come into play.
Obvious considerations are the significance of the economic relationship, the likelihood of increased trade and investment and whether particular issues of double taxation are at stake.
We also look at broader strategic issues, and factors such as whether information exchange and other types of co-operation would be useful.
Of course, a key factor is also whether or not the other country actually wants a double tax agreement with New Zealand!
For the last two years, our main focus has been on securing lower withholding tax rates on dividends and royalties in our existing double tax agreements with key trading and investment partners.
Revised double tax agreements have now entered into force with Australia, Singapore and the United States.
Other renegotiations are in progress with Canada and the United Kingdom, with more in the pipeline.
At the same time, we are also looking to continue expanding our existing treaty network, as and when appropriate opportunities present themselves.
Earlier this month the Finance Minister Bill English signed a new agreement with Hong Kong, and negotiations with Vietnam have also now started.
As with renegotiations, a number of new double tax agreements negotiations are also in the pipeline.
I think it is fair to say that New Zealand's double tax agreement negotiating team has never been busier.
This brings us to the question of a double tax agreement with Papua New Guinea, which is where your interest lies.
Arguments have been presented to me that there is a good case for a double tax agreement with Papua New Guinea.
On the back of its long-term Liquefied Natural Gas projects, Papua New Guinea is a booming economy with almost every sector growing and providing new opportunities for New Zealand business.
For New Zealand exporters, Papua New Guinea's population of over six million and its economic potential makes the country very attractive and there are strong prospects to grow the market.
Currently, New Zealand's exports to Papua New Guinea account for only four percent of Papua New Guinea's total imports.
Clearly there are opportunities for growth, even when competing with countries such as Australia, China, and Japan, which all have a much greater share of the market.
With its significant natural resources, imports from Papua New Guinea are also attractive.
There are considerable opportunities for increased trade in service industries, for example, while telecommunications, education and tourism sectors are all potential growth areas as well.
However, New Zealand businesses face competition from overseas firms.
In the case of Australian companies, for example, the fact that Australia has a double tax agreement with Papua New Guinea means that our firms are competing at a disadvantage.
All of this is understood and appreciated by Government and I want to make it clear that the New Zealand government is sympathetic to your situation.
Having said that, I need to explain something of the process that is followed when embarking on a double taxation agreement.
I said before that we have other countries in the pipeline for double tax agreement consideration.
In fact we already have around 40 countries on our list for consideration, so the business of establishing priorities is a matter of careful judgement.
My personal expectation is that Papua New Guinea is a good candidate and should compare well against the other priorities.
As I have already mentioned, negotiation of a double tax agreement requires willingness on both sides to come to the table.
We would therefore first need to explore with Papua New Guinea whether they would be interested in a double tax agreement with New Zealand.
Papua New Guinea appears to have last entered into a tax treaty twelve years ago, in 1998, and currently only has a very small network of eight treaties.
Finally, there is the matter of timing.
Our current negotiating commitments with countries that have already progressed beyond this stage of the process will take up all of 2011, so realistically any new negotiations could not commence until 2012 at the earliest.
So, in summary, I think it is critical that the tax system does not stand in the way of businesses growing and thriving in New Zealand and beyond.
It is important that New Zealand continues to be a good place to invest in and a more attractive place to base multi-national enterprises.
The work we have already done with regard to international tax reform will play an important part in this regard and will help New Zealand businesses to be competitive.
The Government is mindful of trade opportunities between New Zealand and Papua New Guinea.
As promising as those are, we need to weigh those up against trade interests in other parts of the globe.
But as Papua New Guinea looks ahead to a promising future, I want to assure you that the New Zealand government wants to help New Zealand businesses be part of that future.