13 December, 2006
Deloitte welcomes changes to foreign company rules
The Government’s commitment to the introduction of an active/passive regime has now come one step closer with the release of a discussion document in relation to International tax rules. An active/passive regime has different tax treatments for overseas investments which are considered active (such as manufacturing or industrial activity) and those that are passive (such as dividends, interest, royalties and rents).
“This is a welcomed policy initiative” Deloitte’s managing tax partner Thomas Pippos said.
“Since the introduction of New Zealand’s International tax rules (referred to as the Controlled Foreign Company (CFC) regime) in 1988 there has been a noticeable absence of an active/passive exemption regime. This feature of New Zealand’s rules has lead to widespread criticism and has had the effect of curtailing the ability of New Zealand companies to compete on the global stage. It is not a feature that is replicated in the tax legislation of our major trading partners. Without such a regime, foreign countries, such as Australia, have a distinct competitive advantage in attracting and retaining large corporate taxpayers; this announcement will assist in making New Zealand attractive from a tax perspective” Mr Pippos said.
Currently investments into CFCs are taxed depending on whether the investment is into a grey list (Australia, Canada, Germany, Japan, Norway, Spain, United Kingdom, and United States) or a non-grey list country. If the CFC is in a grey list country then there is effectively no tax on any undistributed income from that CFC or on any dividends received from that CFC. However, for investments into CFCs resident in non-grey list countries, all income, whether distributed or not, is attributed to the New Zealand shareholder even if the company is in an active business.
Under the new active/passive distinction offshore active income would be exempt from accrual taxation.
“While the general theme is positive, there is some devil in this detail, there are some parts which taxpayers will not like and these issues will need to be fully consulted on through the Generic Tax Policy Process. This includes the possible removal of the grey list exemption for CFCs and the introduction of interest allocation rules. For compliance cost purposes we would like to see the retention and expansion of the grey list. If these issues cannot be satisfactory resolved then there are strong arguments that the current regime should remain, this will be extremely disappointing as New Zealand will to struggle to retain internationally focussed corporates.” Mr Pippos said.
“The discussion document now places the ball into the taxpayer’s court to help determine boundary issues and the trade offs of such a regime, ensuring that the final outcome produced is the right one and that New Zealand has a competitive international tax regime”. Mr Pippos said.
“One point not adequately discussed is the proposed application date. Given the complexity of these proposals, it will take time for them to be fully consulted on and implemented. It is disappointing that the Government did not set an expected application date, even if this is 2 or 3 years down the track, as this will provide more certainty to taxpayers.”
Clearly for many taxpayers, including large corporates in the midst of expanding overseas, these developments cannot come soon enough. The certainty that at least some form of active income exemption will be introduced in the near future will in itself provide some comfort to companies that they will be able to efficiently use New Zealand as their global base.
The discussion document also raises the possibility of changes to the non-resident withholding tax rules as part of on going bilateral treaty negotiations, along the lines of those found in the Australia/United States double tax agreement.
Submissions on the discussion document close on 16 February 2007 giving taxpayers some additional reading over the Christmas period. The Government expects to be in a position to make decisions regarding the discussion document by mid 2007.