International tax rules full of ironies

International tax rules full of ironies

While the events associated with the Canterbury earthquake of 22 February have rightly dominated in recent times, some not insignificant tax policy changes have worked their way through the system says the New Zealand Institute of Chartered Accountants (NZICA).

One such change is to the way New Zealand taxes non-portfolio foreign investment, or more simply put, taxpayers that own 10% or more of a foreign company but don’t have a controlling stake in that company.

The key change is the removal of the grey-list (a list of eight countries in which such investments are not subject to tax) for all countries except Australia. Removing the grey list of exempt countries was strenuously opposed by NZICA because of the anticipated compliance costs this would impose on taxpayers in return for little, if any, revenue.

A further change is the introduction of an active income exemption that removes the income of the foreign entity from New Zealand tax if the passive income is below 5%; and even if exceeded only the passive income is taxable. Mr Macalister said that calculating the 5% passive income threshold was very much easier said than done.

“NZICA’s approach is to examine policy issues from the point of view of what is in the best interests of the public as a whole. While these rules will mean taxpayers with these sorts of assets will need more assistance to comply from their chartered accountant, we are not convinced that New Zealand will be better off,” says Mr Macalister.

The irony of these proposals is that the whole initiative is designed to make New Zealand owned businesses more competitive internationally, but the reality is that these changes will make business owners choke when they look at what they have to do to comply.

“For many, these changes are an additional cost of doing business abroad and it seems to contradict statements by the Government that is wishes to reduce compliance costs for business,” says Mr Macalister,

A further dark cloud hanging over this, in my view, is that we are going in a different direction to Australia at a time when the focus between our respective countries is on harmonisation.

“Australia, in its approach to make Australian businesses more competitive, has designed a set of rules that target arrangements to avoid or defer Australian tax and are likely to be less onerous on Australian businesses than New Zealand’s rules,” says Mr Macalister.
ENDS

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