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Foreign account information-sharing agreements

Opposed to the changes

Issue: Should the proposed legislation for foreign account information-sharing agreements be advanced?

Clauses 2(23), 5, 6, 37, 128(1), (2), (5), 123(15), 129, 150, 151, 152 and 158

Submissions

(Andrew Broadwell, Anne Cargill, Arielle Hiscox, Benjamin Popovich, C Tobias, Carol Tapanila, Caroline Hooper, Carrie Fisher, Centre for Freedom and Prosperity, Dan Sullivan, Darlene Hall, Darryl Betham, Dean Tatro, Dr Nathaniel Janke-Gilman, Dr Stuart Jeanne Bramhall, Elliot Sawyer, Grant Kuppernick, Gwen D, Harold David Bonnett, Henry Velthuizen, Ian Fish, James George Jatras, James H Woods, Jason Spears, John Phillips, John Richardson, John Smith, Jonathan Baker, Jonathan Evans, Julian Woodhouse, Kent W Deitemeyer, Kirsten Woods, Lea Turkington, Lindsay Forbes, Lynne Swanson, Marvin Van Horn, Matt Joynes, Matthew Agnew, Matthew Provost, Mr A, Paul Andrew Ross, Rachael Fone, Rebecca Woodhouse, Richard Borain, Robert Fraser, Simon Titheridge, Stephen John Schoenberg, Stephen Rowe, Stephen Tamatoa Cairns, Tiffany Love, Timothy Smyth, Victor Paul)

The aspect of the proposed legislation creating a framework for foreign account information sharing agreements should be withdrawn from the bill.

Comment

Officials are conscious of the fact that, although the submission summarised above does accurately portray the views of the relevant submitters, the primary concern appears to be with New Zealand’s proposed entry into an intergovernmental agreement (IGA) with the United States in respect of its Foreign Account Tax Compliance Act (FATCA).[1]

In this regard, there are some key areas of concern that have been consistently raised during the submission process. It is therefore considered appropriate to address each of these key areas in turn. To the extent that submitters have raised concerns that extend beyond these key areas (but are nevertheless opposing the proposed legislation) officials have attempted to respond to those comments too.

First, however, it is important to restate why officials consider that entering into an IGA with the United States is in the best interests of New Zealand. This explanation expands on that provided in the Inland Revenue Regulatory Impact Statement that accompanied the introduction of this bill.[2]

Entering into an IGA

Without an IGA, in order to avoid FATCA penalties, New Zealand financial institutions would need to enter into separate agreements with the United States’ Internal Revenue Service (IRS). Under these agreements, the financial institutions would need to:

  • identify US accounts and report certain information about these accounts to the IRS on an annual basis;
  • withhold 30% on payments from the US to a non-participating foreign financial institutions or to a recalcitrant account holder (account holders who have not provided the required information); and
  • close the accounts of these recalcitrant account holders.

Officials consider that New Zealand financial institutions would not be able to comply with these agreements under our existing legislative framework. Private details of individuals may be able to be collected and shared if appropriate amendments were made to customers’ terms and conditions. Terms and conditions may also be able to be used to close accounts in appropriate instances. However, it is not clear that a financial institution could ever legally act as a withholding agent for a foreign government. Entering into separate agreements would also impose significant compliance costs on all New Zealand financial institutions.

The only way such agreements could be effected would therefore be for New Zealand to enact specific legislation that allowed financial institutions to comply with their terms. This would solve the issue at one level but would still impose significant compliance costs on New Zealand institutions and would effectively result in those institutions being subject to US regulation.

Entering into an IGA will significantly lower compliance costs on New Zealand financial institutions by providing some clear exemptions from reporting and relieving institutions of having to withhold on payments made to customers. It will also significantly reduce the likelihood that New Zealand financial institutions will have FATCA penalties imposed on them.

In essence, not entering into an IGA and not enacting enabling legislation of some sort would leave New Zealand financial institutions with a choice of:

  • not investing either directly or indirectly into the US (to avoid withholding); or
  •   nvesting in the US and suffering the withholding penalty.

Officials do not consider either of these options is desirable for the health of the New Zealand financial services sector.

Cost/benefit for New Zealand

Officials do not consider it is possible to accurately predict the cost of Government inaction. This is largely because:

  • It is not known what the exact size of investments that the financial services sector, both directly and indirectly, has into the United States.
  • It is not possible to accurately estimate the likely returns that financial institutions would receive from the counterfactual of not investing in the United States.

However, in saying this, it is our view that effectively denying New Zealand financial institutions access to the world’s largest capital market, or reducing the return from such investments by the 30% penalty, would be likely to have a severe impact on investment returns. Lower investment returns by New Zealand financial institutions has the potential to raise the cost of financial transactions for all New Zealanders, not just those “US persons” that would be the subject of IGA reporting.
Officials also take the opportunity to reiterate that nothing in the IGA alters any substantive United States taxing rights – meaning that, if a New Zealand resident also has US tax obligations, those obligations already exist as a matter of law and nothing in the IGA or the proposed legislation will raise or lower the amount of US tax owing.

International trends/reputational issues

From a Government perspective, officials also note that FATCA is now part of a major global initiative to combat international tax evasion. FATCA is based on the idea of global automatic exchange of certain information by financial institutions. Previously these information exchanges have occurred either on an ad hoc or “on request” basis, or annually by way of agreement between tax authorities under various double tax treaties.

Automatic exchange of information between multiple jurisdictions is now the new international standard for automatic exchange endorsed by the G20 and the Organisation for Economic Cooperation and Development (OECD).

Officials consider there would be a severe reputational risk for New Zealand if it were not to be involved in this international movement. All OECD countries have either signed, or are negotiating, IGAs with the United States in respect of FATCA. The OECD itself has dedicated resources to devising a common reporting model for financial accounts, based on the FATCA model. This tax transparency is seen as complementing its base erosion and profit shifting (BEPS) work. The BEPS initiative is aimed at ensuring that entities and individuals that operate in numerous jurisdictions pay an appropriate amount of tax. Automatic information exchange and transparency in tax affairs is seen as an important compliance tool for this programme.

It is also important to note that, under the IGA and any OECD/G20 model that may be devised in the future, New Zealand will also be the recipient of information in respect of New Zealand tax residents that have undeclared offshore bank accounts. This information will assist in ensuring that all New Zealanders also pay the correct amount of tax on their worldwide income.

Officials consider that the aims of FATCA (which are, ultimately, reduced tax evasion) are being caught up in the wider issue of the United States “citizenship” basis of taxation, which is relatively unusual by international standards. However, officials consider that entering into information exchange agreements that allow countries to levy tax according to its laws is becoming an important part of being a “good international citizen” and will ultimately benefit New Zealand both in a fiscal and reputational sense.

In saying this, officials acknowledge the genuine concern of submitters who consider that New Zealand entering into an IGA and enacting the proposed legislation will have a detrimental impact on their lives.

Key concerns

The key areas of concern raised in submissions are:

  • Allowing a financial institution the ability to send IGA-relevant information to Inland Revenue, which in turn will pass it to the Internal Revenue Service (IRS) in the United States, is a breach of the privacy rights of the individuals concerned.
  • Allowing this information-sharing is a form of discrimination against a group of people based on their nationality, arguably contrary to New Zealand’s Human Rights Act and Bill of Rights Act.
  • The United States’ system of citizenship-based taxation is fundamentally unjust.
  • Reporting will result in “overreach”, with particular concerns being expressed that the information of spouses that are not “US persons” will be provided.
  • New Zealand is being “bullied” into accepting FATCA and the IGA, which are an impingement on New Zealand’s sovereignty.

Officials will address each of these areas in turn.

Issue: Privacy concerns

(Anne Cargill, C Tobias, Caroline Hooper, Carrie Fisher, Centre for Freedom and Prosperity, Darlene Hall, Darryl Betham, Dr Nathaniel Janke-Gilman, Dr Stuart Jeanne Bramhall, Elliot Sawyer, Grant Kuppernick, Gwen D, Harold David Bonnett, Ian Fish, James George Jatras, James H Woods, Jason Spears, John Phillips, John Richardson, John Smith (key recommendation 3 and recommendation 9), Jonathan Baker, Kirsten Woods, Lea Turkington, Marvin Van Horn, Matthew Agnew, Rachael Fone, Rebecca Woodhouse, Richard Borain, Stephen John Schoenberg, Stephen Rowe – and implicit in other submissions)

New Zealand’s Privacy Act is written in a way that contemplates it being over-ridden by express statutory authority. Officials consider that the scheme of this Act therefore anticipates that there may be over-riding public policy arguments for setting limits on privacy principles in carefully defined circumstances.

Officials accept that, under the IGA, information will be collected and shared which is not currently being collected or shared. In these cases, there is always a judgement about whether collecting that information is “appropriate” in a public policy sense, taking all circumstances into account. This is as true of information-sharing between New Zealand government departments as it is to sharing between governments.

The question therefore becomes: what is “appropriate”?

It seems obvious from submissions that many of the individuals concerned do not consider information-sharing in this case to be appropriate. However, government is in the position of having to make such judgements on a national, rather than individual, level. As set out in “Entering into an IGA” section of this report, officials consider that a sound public policy argument exists in this case that justifies New Zealand entering into an IGA – a necessary part of such an action being that the information collection and transmission contemplated in the IGA will occur. The privacy of the individuals concerned was a factor that officials examined in reaching this view, but it was, on balance, deemed to be outweighed by other public-interest considerations.

Issue: Discrimination

(Andrew Broadwell, Anne Cargill, C Tobias, Caroline Hooper, Carrie Fisher, Darryl Betham, Dr Nathaniel Janke-Gilman, Dr Stuart Jeanne Bramhall, Grant Kuppernick, Gwen D, Harold David Bonnett, Henry Velthuizen, Ian Fish, James George Jatras, John Richardson, John Smith (recommendation 1), Kent W Deitemeyer, Kirsten Woods, Lea Turkington, Marvin Van Horn, Matt Joynes, Matthew Provost, Richard Borain, Simon Titheridge – and implicit in other submissions)

Officials accept that, as a result of IGA information gathering and collecting, information on people that are “US persons” will be transmitted to the IRS, while the information of those that are not “US Persons” (or exhibit no “US indicia”) will not. Officials also accept that there is an argument that this different treatment will take place because of the nationality of the person concerned, while noting that a “US person” for IGA purposes is not synonymous with “US Citizen”.

Contrary to what is asserted in some submissions, officials wish to reassure the Committee that this bill was vetted for consistency with the New Zealand Bill of Rights Act by the Ministry of Justice, which was informed of the context of the changes.[3]

Issue: The US basis of taxation

(Anne Cargill, C Tobias, Carol Tapanila, Caroline Hooper, Carrie Fisher, Darlene Hall, Darryl Betham, Dean Tatro, Dr Nathaniel Janke-Gilman, Grant Kuppernick, Gwen D, Harold David Bonnett, John Richarsdon, John Smith, Kent W Deitemeyer, Kirsten Woods, Lea Turkington, Marvin Van Horn, Matt Joynes, Mr A, Rachael Fone, Richard Borain, Robert Fraser, Simon Titheridge, Stephen John Schoenberg, Stephen Rowe, Tiffany Love – and implicit in other submissions)

Officials acknowledge that the citizenship taxation model adopted by the United States is relatively unusual by international standards. However, it is not appropriate for Inland Revenue officials to comment on the merits or otherwise of tax policy decisions made by foreign governments.

As officials have noted in the “entering into an IGA section of this report, nothing in the IGA alters any substantive United States taxing rights.

It is generally recognised that, with the benefits of citizenship of any country comes an obligation to abide by the laws of that country. Officials would also add that:

  • The United States does provide a mechanism whereby citizenship can be renounced. It is expected that a person that has renounced their US citizenship will be in a position to provide New Zealand financial institutions with sufficient evidence to prove that they are not a “US person” and so should not be the subject of reporting.
  • The United States model of taxation is not new, so it appears reasonable to assume that citizens of the United States are aware both of their citizenship rights and obligations.

Issue: Reporting “overreach”

(Anne Cargill, Carrie Fisher, Dean Tatro, Elliot Sawyer, Grant Kuppernick, Gwen D, John Richardson, Marvin Van Horn, Rebecca Woodhouse, Richard Borain, Simon Titheridge, Stephen Rowe – and implicit in other submissions)

It is important to note that the model IGA provides a set of “due diligence” requirements that a financial institution is required to carry out in order to determine whether or not an account holder is a “US person”. Simply put, under these due diligence requirements, the institution is to collect or review existing data for what are known as “US indicia”. Where no US indicia is found, the institution is not required to report on the account holder. Where US indicia is found, there is a working presumption that the account will be held by a US person. However, even when US indicia is found, the presumption that the person is a US person is rebuttable. There are mechanisms within the IGA that allow the person to provide evidence that they are not a “US person”.

Submitters appear particularly concerned that information on the spouses of “US persons” (where those spouses are not “US persons”) will be reported. Officials note that oral submissions from representatives of the financial services industry confirm that New Zealand financial institutions are intending to, and their systems are designed to accommodate, separating joint account holders where necessary and only reporting the personal details of the relevant “US person”.

In addition, officials make the following observations:

  • The United States has provided a “schema” setting out the information that it expects to receive as part of the IGA reporting. That schema provides for the name of the US person and the account number, but it does not contain a field for the account name. Given our understanding that each customer with a bank has a unique customer number, this significantly reduces the risk of the details of a non-US taxpayer being transmitted in error.
  • Inland Revenue has established an IT working group with the financial services sector to ensure that only the necessary and correct information is transferred (noting that the first transfer of data to Inland Revenue is not due until about mid 2015).
  • Inland Revenue’s proposed technology solution for IGA information will result in data transferred from financial institutions being electronically screened to ensure it complies with minimum requirements. From the 2017 reporting period, one of the required data fields will be the US social security number (called a TIN for tax purposes and essentially an IRD number equivalent) of the relevant person. A person that is not a US taxpayer will not have a social security number. So, even if a financial institution did try to report on a non-US person, the data would be rejected by Inland Revenue systems as being incomplete.

The legislation before the Committee (clause 158, proposed section 185I) is also designed to reduce certain cases of “over-reporting”. For example, the wording on “excluded choices” in clause 185 (proposed sections 185F(6) and (7)) is intended to prevent a financial institution from reporting on a US person if an account they have an interest in has a balance below the US$50,000 threshold set out in the model IGA. This is intended to ensure that financial institutions will not report on an account with a balance below that threshold even if they are held by a US person.

In addition, the draft legislation only authorises financial institutions to transmit data to Inland Revenue “…if that information and its providing and obtaining is described or contemplated in the agreement…”. The model IGA does not contemplate the passing of information of anyone that is not a US person. Therefore, if a financial institution transmits data on any other person it will not be able to rely on the protections offered by the legislation if the relevant person made a complaint to the Privacy Commissioner under the Privacy Act.

Issue: Sovereignty issues

(Arielle Hiscox, Benjamin Popovich, C Tobias, Carrie Fisher, Centre for Freedom and Prosperity, Darlene Hall, Dr Nathaniel Janke-Gilman, Grant Kuppernick, Ian Fish, James George Jatras, James H Woods, Jason Spears, John Phillips, Stephen John Schoenberg, John Richardson, John Smith (recommendation 2) Stephen Rowe, Stephen Tamatoa Cairns, Kent W Deitemeyer, Kirsten Woods, Lynne Swanson, Marvin Van Horn, Matt Joynes, Matthew Agnew, Matthew Provost, Mr A, Paul Andrew Ross, Rachael Fone, Richard Borain, Robert Fraser, Julian Woodhouse – and implicit in other submissions)

From a tax policy perspective, the model IGA does not limit New Zealand’s taxing rights in the same way as, for example, a double tax treaty might. Nor does it dilute the New Zealand Government’s other regulatory capacity over financial institutions or individuals.

Officials consider there is scope to raise sovereignty issues in respect of any international agreement or convention. However, there is an underlying assumption that the government of the day will only enter into agreements that it considers to be in the best interests of New Zealand.

As set out in the “Entering into an IGA” section of this report, officials consider that entering into the IGA and enacting legislation that enables financial institutions to comply with its terms is in the best interests of New Zealand in this case. In saying this though, officials are aware that this is ultimately a decision for Ministers and Parliament.

The aim of the enabling legislation in this bill is simply to provide a legislative framework in which the proposed IGA, and any other similar agreements that may be entered into in the future, can operate. It is inherently limited in its scope to automatic exchange of information agreements, but is drafted in broadest way possible to accommodate these agreements, whatever form they may take.

Issue: Other matters raised

Submissions also raise the following points:

The IGA and enabling legislation will be detrimental to the New Zealand economy. (Elliot Sawyer, Kirsten Woods)

It is recognised that IGA information may result in previously unpaid US tax liabilities being discovered. However, as officials have noted in the “Entering into an IGA” section of this report, we consider that, from a New Zealand economy perspective, the most detrimental course of action would be not to negotiate and implement an IGA.

The changes are being introduced by “stealth” through an omnibus tax bill. (Marvin Van Horn, Grant Kuppernick, John Smith (recommendation 20)

Officials note that almost all amendments to the core tax legislation (particularly the Income Tax Act, the Tax Administration Act and the Goods and Services Tax Act) that take place outside the budget process are contained in omnibus tax bills. The complex nature of tax legislation makes this process of regular omnibus bills the most efficient way of progressing policy and remedial changes. This includes substantial changes and redrafting of entire parts of tax legislation.

The content of all tax bills is publicly available as soon as the bill is tabled in Parliament, as is the Commentary to the bill and any regulatory impact statements prepared for bill items. This bill has followed all of these standard processes.

No adequate cost/benefit analysis has been undertaken/the interests of US persons in New Zealand have not been properly canvassed. (Grant Kuppernick, C Tobias, Caroline Hooper, John Smith, (recommendations 3, 4, 5, 10, 16 and 19), Henry Velthuizen, Marvin Van Horn)

Officials note that it is not possible to accurately determine exactly how many “US persons” are likely to be reported on under the IGA. However, officials note that 2013 Census information records 21,462 people that are “usually resident” in New Zealand were born in the United States.

Despite these figures, the “Entering into an IGA” section of this report sets out why officials consider the IGA to be in the best interests of New Zealand. Officials also acknowledge the difficulty in putting a dollar value on either entering into an IGA or declining to do so. However, even in dollar terms it is expected that negotiating an IGA would be the preferable course of action – the non-monetary factors, such as reputational risk, are seen as adding weight to this conclusion.

Officials consider that public submissions on this bill, and the scrutiny that entails, is a good way of gauging public opinion. As noted above, this bill has followed all the usual procedures regarding publicity and dissemination of its content. The number of submissions received indicates to officials that this process is robust and Committee members have a fair view of how the changes are perceived.

The IGA will not in fact be reciprocal/the IGA will not be a “treaty” under US law. (James George Janras, John Smith (recommendations 12 and 14), Lea Turkington)

These issues appear to be predicated on an assumption that the United States will not have the legislative or regulatory framework in place that will cater for reciprocity – or that the United States may cancel the IGA. Again, this is not an issue that officials are able to comment on. International agreements are negotiated on a good faith understanding that each party will give effect to its terms and only break those terms, or cancel the agreement, when there are genuine reasons for doing so. The IGA is no different in this regard.

New Zealand should negotiate an amnesty under which US citizens in New Zealand would have a fast-track to renouncing that citizenship or negotiate other New Zealand-specific IGA concessions. (John Smith (recommendation 6))

Officials have addressed this point in the “Matters raised by the committee” section of this report.

New Zealand should insist on full reciprocity, being that New Zealand should only report on US “residents”, not US citizens. (John Smith (key recommendations 2 and 13))

Officials consider this to be a sub-set of submissions opposed to the United States’ method of taxation. As set out above, it is not considered appropriate for Inland Revenue officials to comment on these matters.

Experience in the UK suggests that the IGA will result in discrimination. (Jonathan Evans)

Officials consider that any choices taken by financial institutions in regard to their relationships with “US person” customers will be less likely to result in discrimination than would have been the case without an IGA.

The IGA should not be classified as a double tax agreement (DTA) simply to over-ride privacy concerns. (John Smith (recommendation 17)).

Officials consider that the classification of the IGA as a DTA does not itself over-ride the Privacy Act. The relevant privacy principles in the Privacy Act are capable of being over-ridden by any legislation that expressly contradicts them (section 7 of the Privacy Act 1993).

The legislation should be delayed until after the IGA is signed. (Caroline Hooper, John Smith) The committee should assume that New Zealand will sign on terms identical to the Model 1A IGA. (John Smith (recommendation 11))

Officials accept that it would be preferable to have an IGA agreed in order to inform the debate. However, New Zealand financial institutions will have to deal with the effects of FATCA from 1 July 2014 irrespective of any action taken by the New Zealand Government. In this context, given this bill is the last legislative vehicle that will allow for a 1 July 2014 application date, officials consider that advancing this legislation in the current bill is the only viable option. In providing its guidance notes (referred to in greater detail later in this report), Inland Revenue is assuming that a Model 1A IGA will be agreed and this report is also drafted on that basis.

The IGA will only affect the law abiding. (Dan Sullivan, James H Woods)

The aim of FATCA and the IGA is to reduce tax evasion. Officials are not in a position to speculate as to the potential volumes of “dishonest Americans” (as one submitter puts it) that will be reported on.

The IGA itself should be subject to public scrutiny, as should any future amendments to that agreement. (Lea Turkington, John Smith (key recommendation 1 and recommendations 21 and 23)

Inland Revenue officials note that the decision as to whether or not the IGA is subject to Parliamentary Treaty Examination is made by the Minister of Foreign Affairs. This decision will be taken prior to any treaty action being taken by the Government.

FATCA will be repealed in any event/reciprocity is being challenged in US courts. (Centre for Freedom and Prosperity, John Smith, James George Jatras)

Officials acknowledge that, as with all countries, the United States has the right to amend its own laws. It is therefore possible that the FATCA rules may be repealed at some stage in the future. However, officials consider that ignoring current US law and instead relying on the current or a future United States government taking such a course of action would be irresponsible and would provide no benefit for New Zealand institutions and individuals who are, in the meantime, left to comply with the existing 1 July 2104 deadline.

Officials are aware that court proceedings in the United States are ongoing. However, a Federal Court has recently upheld the legal status of reciprocal reporting under IGAs.[4]

The Government must inform affected persons what the IGA means for them. (John Smith (recommendation 8)

As mentioned later in this report, Inland Revenue is providing extensive guidelines on how the IGA will operate in practice. This guidance is expected to be finalised after an IGA is agreed.

The New Zealand Government should not be funding FATCA.

As set out in the “Entering into an IGA” section of this report, the decision to enter into an IGA is at least in part an attempt to lower compliance costs that would be imposed on financial institutions in any event. It is anticipated that, by centralising some of these costs, the compliance costs on New Zealand as a whole will be reduced.

The legislation does not govern what information is exchanged (Paul Andrew Ross), is generally too broad (Victor Paul), is too open given the IGA has not yet been signed (John Philips)

Officials note that the actual information to be exchanged would be contained in the IGA. Given this legislation is designed to accommodate future similar agreements, officials consider the lack of specificity is appropriate.

Officials reiterate that the proposed legislation is only the framework in which any IGA will operate – the two processes are separate. If an IGA is not signed for any reason, this legislation will exist without any operative effect.

Tax relief provided by the double tax agreement is inadequate (John Richardson), and this DTA should be reviewed. (John Smith (recommendation 7))

Officials acknowledge that the double tax agreement (DTA) with the United States does not apply to all forms of taxation. This is not unusual in such agreements. However, submitters appear to accept that it does apply to employment and investment income. Officials consider that, for the vast majority of people, this will cover the major forms of their income.

Information will be shared with other US government agencies. (Marvin Van Horn, Dr Stuart Jeanne Bramhall)

The actual information exchange in accordance with any IGA will take place under the existing DTA between the countries. Article 25 of the DTA sets out the terms under which information exchange will occur. This article will apply to IGA information. Article 25(2) provides:

Any information received under this Article by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes referred to above, or the oversight of such functions. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

The enabling provisions and the IGA need to be read and considered together. (John Smith (recommendations 24 and 25))

Officials consider that the submission process to this bill has ensured that the Committee is aware of the potential impact of the IGA.

The practical implications of the IGA for family trusts have not been evaluated. (John Smith)

Officials reiterate (as set out in the response to a New Zealand Bankers’ Association submission on “reasonableness” below) that Inland Revenue is currently undertaking a process whereby it is producing guidance notes for public consultation. Part of those guidance notes covers the IGA implications for trusts, including family trusts. Inland Revenue is happy to receive submissions on those draft guidance notes as part of its ongoing public consultation process.

A summary of submissions should be provided to Cabinet. (John Smith (recommendation 22))

Officials see no reason why the usual process by which the Committee reports to Parliament should be deviated from in this instance.

The OECD and FATCA models are different. (John Smith (recommendation 18))

Officials acknowledge that there are differences, but note that, in some respects, more reporting may take place under the draft OECD model because that model does not appear to have any low-value thresholds. Again, the real issue appears to be the citizenship basis of taxation adopted by the United States.

The due diligence requirements on New Zealand financial institutions need to be clarified. (John Smith)

Officials consider that preventing financial institutions reporting on low-value accounts (as set out in the bill) will address many of the privacy concerns expressed by individuals.

The effect of US tax policies on KiwiSaver funds needs to be clearly understood. (John Smith)

The submitter notes that the model IGA would treat KiwiSaver funds as “non-reporting”. In saying this, officials accept that this may not remove any underlying tax obligation a US taxpayer may have in respect of such funds. However, as the Committee will recall from recent changes to New Zealand’s foreign superannuation rules, a country exercising taxing rights over savings held in another country is not necessarily unusual.

The legislation constitutes an override of the DTA. (John Smith (recommendation 15))

Officials do not consider this legislation will override the existing DTA. As set out above, the information exchange will take place under the DTA but will not have an overriding effect.

Suggested alternatives

Many submissions also suggest alternative courses of action that the Government should consider in preference to entering into an IGA and enacting the legislation proposed. These include the Government taking no action and letting the financial institutions deal with FATCA within the existing legal framework.

Officials have addressed why Government inaction is not considered appropriate in the “Entering into an IGA” section of this report. Officials do not propose to comment on the various alternative courses of action suggested by submitters. The decision, at its simplest level, is to enter into an IGA or not. All alternative courses suggested by submitters are effectively a subset of the second option.

Recommendation

That the submissions be declined.
 

 

 

[1] For the purposes of this report, it is assumed that New Zealand will enter into an IGA on the terms of the “Model 1A IGA” (with corresponding Annex I and Annex II), as published in the US Treasury website: http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx.
[2] http://taxpolicy.ird.govt.nz/sites/default/files/2013-ris-arearm-bill-04.pdf.
[3] http://www.justice.govt.nz/policy/constitutional-law-and-human-rights/human-rights/bill-of-rights/taxation-annual-rates-employee-allowances-and-remedial-matters-bill
[4] http://www.justice.gov/tax/2014/flabankersassoc.pdf