Press Statement by the Ministers of Finance and Revenue

25 March 1988

PRESS STATEMENT BY

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

This document is the first part of the report on the introduction of international tax measures by the Consultative Committee on Full Imputation and International Tax Reform. The report sets out the major building blocks of the regime recommended by the Committee following its review of the regime contained in the Consultative Document and the many public submissions received. So as to provide taxpayers with as much information as possible as soon as possible, this first part of the report is being released now.

The Committee broadly endorses the Government's objective of reducing the opportunities for the avoidance and deferral of New Zealand tax by residents through the use of offshore entities. It also recommends the introduction of a domestic capital gains tax as a matter of priority. It is partly in light of such future action on capital gains that the Committee has recommended a number of important changes to the international tax regime set out in the Consultative Document.

In brief, the major recommendation is that the branch-equivalent method of taxation should apply only where there is control and, where there is not control, the comparative-value method of taxation should apply but only to a limited range of investments (foreign investment funds). To streamline the operation of the branch-equivalent method and reduce compliance costs, an exemption is recommended for taxpayers having interests in entities which are in designated countries and which do not benefit from significant tax preferences. Transitional arrangements are also recommended by the Committee together with more comprehensive disclosure provisions.

The regime recommended by the Committee, although less comprehensive than that in the Consultative Document, is one which substantially meets the objectives of reform which were set by the Government. The Committee has developed the regime in accordance with clear principles and at the same time has given due recognition to the real practical constraints. It has also had regard to the Government's broader programme of taxation reform.

Accordingly, we agree with the recommendations in the Committee's report which constitute the basic framework of the regime. At this stage there are only three main areas in which the Government reserves its position. The first concerns the foreign investment fund provisions (recommendation (g), page 63). Their effect is to exclude from the regime all residents with non-controlling interests in 'active' tax haven entities. The Committee has suggested that coverage of this area should await the introduction of a domestic capital gains tax, or evidence that the regime is not catching the majority of opportunities for avoidance and deferral, or evidence that taxpayers are abusing the exemption. This is an area the Government intends to monitor closely in the initial stages of the operation of the regime. If necessary, such provisions will be reviewed and strengthened prior to the introduction of a capital gains tax.

The second area in which the Government reserves its position is the treatment of capital profits earned by trusts subject to the settlor regime, and by testamentary trusts, after 31 March 1989, that is after the end of the transitional period. The Committee has recommended that, on distribution, capital profits be allowed to pass through to beneficiaries tax free (recommendation (o), page 65 and recommendation (t)(i), page 66). The Government wishes to consider these recommendations further in the context of the imputation and superannuation reforms.

The third area concerns the taxation of resident trusts as defined under the new regime, settled on or before 17 December 1987, in the period from 1 April 1989. The Committee recommends that the settlor regime apply to any such trusts which are newly settled or which have new settlements made to them after 17 December 1987, or which have elected with the settlor's agreement to come under that regime; other trusts could remain outside the settlor regime, but distributions of income (including accumulated income) and capital profits to New Zealand resident beneficiaries would be taxed to the beneficiary with an interest charge calculated from 1 April 1988 to recoup deferred tax (recommendations (r), page 65 and (s), pages 65-66). At this stage, the Government considers that from 1 April 1989 resident trusts should be taxed according to the settlor regime, except where the settlor can demonstrate that there is manifest good reason for such an exception and it can be shown that either the trust is subject to tax in a high tax jurisdiction or the imposition of the settlor regime would cause undue hardship to the settlor. For these excepted trusts, as for testamentary trusts, the beneficiary regime recommended by the Committee would apply (recommendation (s), pages 65-66 and recommendation (t) (ii), page 66).

Subject to these reservations it is agreed that work on the further detailed measures and the draft legislation, to be developed for the Government's final approval, proceed on the basis of the Committee's report.

A summary of the changes and the key elements of the new regime are to be set out in a separate press release. Further information on the detailed technical issues relating to the operation of the regime will follow in the second part of the Committee's report.

The Committee is chaired by Mr Arthur Valabh and its members comprise Dr Robin Congreve, Mr Stuart Hutchinson, Dr Susan Lojkine, Professor John Prebble and Mr Tim Robinson. The Committee has faced a formidable task. Its professionalism is reflected in the excellence of the report.

We thank Mr Valabh and his Committee for their significant contribution to the reform of taxation in this area. Our appreciation extends also to those who took the time to make submissions and provide constructive comment. This has facilitated the Committee's work and will result in improvements to the policies finally enacted.

We look forward to the second part of the Committee's report on the international tax measures and its report on full imputation; both will be accompanied by draft legislation. After the subsequent introduction of the Bill to Parliament, it will be referred to a Select Committee. Interested parties will therefore have a further opportunity to make submissions.

Roger Douglas
Minister of Finance

Trevor de Cleene
Minister of Revenue