Proposals to limit excessive non-resident tax deductions

Proposals in an Inland Revenue officials’ issues paper released today would bolster the taxation of highly leveraged investments made by foreigners, through changes to the thin capitalisation rules, Revenue Minister Peter Dunne said.

“I referred in December to upcoming proposals for strengthening New Zealand’s tax laws and I am pleased to see these now released,” he said.

The thin capitalisation rules are intended to prevent non-residents from using excessive interest costs to reduce their tax liabilities, but have not been effective in all cases.

The issues paper proposes a number of measures to beef up the rules.

The first of the two major proposals is to extend the rules to non-residents who act together to operate businesses in New Zealand; the rules currently apply only if a single non-resident controls the business.

The second proposal is to disregard some shareholder debt when calculating the global indebtedness of the foreign investor.  At the moment this debt can be included and used to justify a high level of indebtedness in New Zealand which can then be used to offset tax liability.

Mr Dunne said the two proposals would modernise the rules to reflect changes in global investment structures.

“In particular, they recognise the growing role of private equity investors, who often have high interest costs but are not subject to the thin capitalisation rules in their current form,” he said.

“New Zealand has overhauled its international tax system since 2007 by removing barriers to overseas investment by New Zealanders.

“The issues paper shifts the focus to investment in New Zealand by non-residents, and proposes changes to limit excessive tax deductions for interest costs. I think that would be a fairer outcome” he said.

The proposed changes are expected to leave most foreign investors unaffected as they are already subject to the thin capitalisation rules and have relatively low levels of debt.

They have also been designed to limit any effects on investors who use third-party debt, such as debt from an unrelated bank.

“The tax laws relating to foreign investment are a delicate balancing act. We want to ensure that a fair amount of tax is paid, but do not want to discourage investment,” Mr Dunne said.

“On the other hand, the proposals in this paper represent one step more towards ensuring that non-resident investors pay their fair share of tax,” he said.

Submissions on the issues paper, which can be found at www.taxpolicy.ird.govt.nz, close on 15 February, 2013.