Finance Minister Michael Cullen today released Taxation of non-controlled offshore investment in equity, a joint Treasury/Inland Revenue officials' paper
The long awaited paper gives the financial services industry only until mid-February to get its views together on the government's proposed tax changes.
The document sets out two possible changes to the way investments are taxed.
And, as expected, while the focus of the proposals is on investments overseas, the industry - and any other interested parties - are invited to discuss applying the same regime to investments within New Zealand.
As expected, the 'risk free rate of return' method, first proposed in the 2001 McLeod Tax Review, is one of the options. Dubbed the 'standard return rule' in the new paper, this taxes all investments at an imputed 4% standard return rate - with dividends and other distributions not taxed when derived.
That applies to non-business investments, unit trusts, foreign superannuation schemes and life insurance.
The other is a set of four possible offshore investment rules - a variation on the current FIF regime.
These apply to holdings of non-controlled offshore equity investments which cost more than $15,000.
Investors with non-controlling interests of 10% or more in foreign companies would be taxed:
· As if the company was a New Zealand branch; or
· On a share of the company's after-foreign tax income, based on that country's accounting rules; or
· On a revised comparative value basis - 70% of the annual changes in value of the interest, plus dividends; or
· On an imputed rate of return - this option only available for smaller taxpayers or those unable to use other methods.
Those holding less than 10% of the value of a foreign company are restricted to the last two options.
Both approaches cut through the issue of how to tax investment in "grey list" countries -Australia, the United Kingdom, Canada, Norway, the Untied States, Germany and Japan - and the rest.
Those countries are considered to have tax regimes similar to New Zealand, and about 80% of New Zealand's offshore investment goes in to those countries.
The overarching aim of the proposals is to minimise the role of tax in investment decisions, according to a chapter headed 'Economic Framework'.
"The international tax rules should create incentives to ensure that when investors make decisions that maximise their private returns, they simultaneously maximise the national return to New Zealand. Given that cross border flows of income are potentially subject to tax in two countries, it is important to keep the distinction between returns to the individual and returns to the economy as a whole in mind..."
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