Tax Law Update – New Zealand releases overview of tax policy settings for inbound investment

Home Insights Tax Law Update – New Zealand releases overview of tax policy settings for inbound investment

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Contributed by: James Lester

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Published on: August 23, 2016



The New Zealand Inland Revenue and Treasury have released a draft report outlining the current policy framework for taxing income earned on inbound investment into New Zealand (New Zealand’s taxation framework for inbound investment, June 2016).

New Zealand relies heavily on inbound investment to fund its capital stock, and the report provides a timely reminder of the government’s approach in this area. This is particularly the case in relation to reforms that have been recommended by the OECD in its BEPS action plan.

Two possible areas of reform currently on the New Zealand government’s tax policy work programme are rules to address hybrid mismatches (BEPS Action 2) and the possibility of tighter interest limitation provisions to prevent profit stripping through deductible interest payments (BEPS Action 4). Officials plan to invite public consultation on both issues in late August 2016.

In addition, draft legislation limiting exemptions from non-resident withholding tax (NRWT) on interest is being debated in parliament and is expected to be enacted later this year or early in 2017.

Policy conclusions

The principal policy conclusions of the June report are summarised as follows:

  • The levying of income tax on companies and NRWT on income from certain activities carried on in New Zealand remains an appropriate way in which to tax income earned on inbound investment. Moreover, the report concludes that New Zealand’s current tax settings in this regard are broadly consistent with international norms;
  • NRWT on interest from related-party debt is said to play an important role in ensuring income from money lent in New Zealand is brought to tax in New Zealand; and
  • Base-protection measures (including transfer pricing and thin capitalisation rules) are necessary to strengthen the taxation measures applicable to inbound investment. More generally, base-protection measures should target the exploitation of deviations from “normal” tax outcomes by non-resident investors. The report observes that such deviations can result in low-tax investors being substituted for tax-paying investors in respect of a given investment, which would reduce national income without necessarily increasing investment in New Zealand (or without reducing the pre-tax cost of capital to New Zealand).


As noted above, officials will be consulting on further base-protection measures (targeting hybrid mismatches and interest limitation provisions) arising from the OECD’s work on BEPS.

While the June report provides a useful overview of the key policy considerations relevant to taxing inbound investment, the formulation of tax rules in the area of international investment will always call for difficult decisions and judgement calls.

It will be interesting to see how the New Zealand government applies the policy considerations outlined in the report as it weighs up the options for reform. This is especially so in the case of measures such as withholding tax reforms, anti-hybrid measures and any tightening of interest deductibility settings, all of which could drive up the cost of capital at a time when New Zealand requires significant levels of foreign capital to improve its infrastructure and meet the government's business growth agenda.

This article was first published in the International Tax Review.

This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

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