New Zealand Offshore Taxation Review

Michael Cullen and Peter Dunne, the New Zealand Finance and Revenue Ministers are working together in a bid to review and reform the nation’s taxation treatment relating to offshore passive and active income in a bid to maintain and even improve New Zealand’s standing as a competitive environment in which to do business, and to make New Zealand based companies operating in international export markets especially competitive.

One of the main considerations under review is the abolition of income tax payable in New Zealand on active income derived from the offshore business operations of New Zealand based companies to enable them to compete more on an international footing.  This consideration, along with a series of others is under review at the current time.

Currently the New Zealand Inland Revenue tax active income which has been earned offshore at 33%.  Active income in this case is that which is described as that derived from manufacturing or industrial activity for example, it is distinguished from passive income which is that earned from interest or royalties for example.  Under the new guidelines such active income would be exempt from local New Zealand income taxation. 

It is hoped that by removing the requirement to pay tax locally in New Zealand more companies with offshore interests will be encouraged to maintain their headquarters locally rather than relocating to a lower tax jurisdiction to avoid excessive taxation.  This would boost business activity in New Zealand and it would help to keep New Zealand companies competitive.

At the moment it is often the case that once New Zealand companies have gone through their tax returns and proved to the revenue services in New Zealand that they have already been taxed on active income overseas and that no tax is owed locally on top as a result of double taxation treaty policies in place, countless hours have been wasted in the preparation of accounts that fail to derive any tax revenue anyway and actually cost both the company and revenue services man-hours in wasted time.  The thinking behind the Finance and Revenue Ministers changes therefore makes even more sense, and if the changes to the rules are passed through government then it will mean that New Zealand applies the same rules as Australia currently does.

As part of the changes under review there is an additional amendment of particular interest relating to the proposed reduction of withholding taxation on income derived in New Zealand from interest, royalties or dividends by non-residents.  This could seriously encourage foreign direct investment and if such an agreement were reached and added to existing double taxation agreements in place internationally, a reciprocation agreement could be reached to benefit New Zealand companies and investors investing overseas as well.

The proposed changes included in the New Zealand Offshore Taxation Review are available for consideration until the middle of February 2007 at which time they will be passed to the government for contemplation with decisions relating to the passing of amendments due sometime in the summer of 2007.

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