deal only with the worst forms of tax avoidance. They do not deal with the fundamental problem of the deferral of domestic tax on foreign income earned through non-resident companies and trusts. The Government has decided a broadening of the tax base with respect to foreign income is required to permit cuts in the rates of income tax applicable to both individuals and companies. Accordingly, the task is to eliminate the avoidance and deferral of New Zealand tax on foreign income earned by residents of New Zealand through non-resident companies or trusts. Where a New Zealand resident has an interest in a non-resident company and can provide sufficient information about the company, the resident's share of the foreign income will be taxed as if it were derived from a foreign branch. Where the resident is unable to provide sufficient information, New Zealand tax will be levied annually on the change in value of the interest. A similar approach will be adopted with respect to non-resident trusts to which New Zealand residents contribute property. Further, there will be several consequential changes to the tax treatment of dividends received by New Zealand residents from non-resident companies and distributions received by New Zealand beneficiaries from non-resident trusts. This approach has several advantages over the more limited anti-avoidance approach adopted by some countries. For example, under the measures proposed in this document it will be unnecessary to determine when a non-resident company is controlled by New Zealand residents; to distinguish between tainted and other income; or to determine whether a non-resident company is resident in a tax haven. The new approach will significantly limit opportunities for international tax avoidance and protect the domestic tax base. Since the foreign income of non-resident companies will be subject to New Zealand tax currently, there will be little reason for New Zealand residents to divert income (whether in the form of transfer pricing, fees for services, royalties or interest) from New Zealand to a non-resident company. Under the reform proposals, if a New Zealand resident has an interest in a non-resident company or trust, in many cases that interest will be treated, in effect, as if it were a foreign branch. Since the tax treatment of foreign branches is relatively straightforward, the reform proposals are simple in concept and should not involve undue legislative complexity. The alternative basis for taxing foreign income, the comparative-value basis, will require such interests to be valued each year.
deal only with the worst forms of tax avoidance. They do not deal with the fundamental problem of the deferral of domestic tax on foreign income earned through non-resident companies and trusts. The Government has decided a broadening of the tax base with respect to foreign income is required to permit cuts in the rates of income tax applicable to both individuals and companies. Accordingly, the task is to eliminate the avoidance and deferral of New Zealand tax on foreign income earned by residents of New Zealand through non-resident companies or trusts. Where a New Zealand resident has an interest in a non-resident company and can provide sufficient information about the company, the resident's share of the foreign income will be taxed as if it were derived from a foreign branch. Where the resident is unable to provide sufficient information, New Zealand tax will be levied annually on the change in value of the interest. A similar approach will be adopted with respect to non-resident trusts to which New Zealand residents contribute property. Further, there will be several consequential changes to the tax treatment of dividends received by New Zealand residents from non-resident companies and distributions received by New Zealand beneficiaries from non-resident trusts. This approach has several advantages over the more limited anti-avoidance approach adopted by some countries. For example, under the measures proposed in this document it will be unnecessary to determine when a non-resident company is controlled by New Zealand residents; to distinguish between tainted and other income; or to determine whether a non-resident company is resident in a tax haven. The new approach will significantly limit opportunities for international tax avoidance and protect the domestic tax base. Since the foreign income of non-resident companies will be subject to New Zealand tax currently, there will be little reason for New Zealand residents to divert income (whether in the form of transfer pricing, fees for services, royalties or interest) from New Zealand to a non-resident company. Under the reform proposals, if a New Zealand resident has an interest in a non-resident company or trust, in many cases that interest will be treated, in effect, as if it were a foreign branch. Since the tax treatment of foreign branches is relatively straightforward, the reform proposals are simple in concept and should not involve undue legislative complexity. The alternative basis for taxing foreign income, the comparative-value basis, will require such interests to be valued each year.
1987-dd-international-tax-reform.docx