Tax concessions for certain non-resident companies

(Clauses 38, 57 (13) (23) and 109)

Summary of proposed amendment

The bill repeals residual tax concessions for certain non-resident investment companies in the Income Tax Act 2007 as they are now outdated and could pose a risk to the tax base.

Application date

The amendment will apply from the 2013–14 income year.

Key features

The residual tax concessions for certain non-resident investment companies in the Income Tax Act 2007 are being repealed; related Orders in Council are also being revoked. The concessions have outlived their original purpose and are now inconsistent with a broad-base, low-rate tax framework. Moreover, retaining the tax concessions poses a revenue risk.

Background

The Income Tax Act 2007 provides residual tax concessions for certain non-resident companies investing in projects that are specified in four Orders in Council. The main concession relates to interest derived by these non-resident investment companies from specified projects.

The income tax on interest derived by a non-resident investment company from a specified project is limited to the lower of the New Zealand company tax rate and the tax rate imposed in the non-resident company’s home country. This is done by providing a tax credit for the amount (if any) by which the New Zealand company tax exceeds the amount of home tax. A similar concession applies for dividends derived by a non-resident investment company from specified projects. The interest paid to the non-resident investment company from these specified projects is also exempt from non-resident withholding tax.

The tax concessions for non-resident investment companies were generally repealed in 1995 as they were considered inconsistent with a broad-base, low-rate tax system, and were considered to be largely redundant in light of international tax reforms at that time. However, the concessionary rules were grandparented for the four Orders in Council then in force. The Orders in Council are:

• Income Tax (Non-resident Investment Companies) Order 1970;
• Income Tax (Non-resident Investment Companies) Order 1972;
• Income Tax (Non-resident Investment Companies) Order (No 2) 1972; and
• Income Tax (Non-resident Investment Companies) Order (No 3) 1974.