Australia-US tax deal blow for NZ

By BRIAN FALLOW

Australia and the United States have negotiated a tax agreement which will make New Zealand less attractive to investors.

Tax experts believe the agreement will also place New Zealand firms investing in the United States at a disadvantage compared to Australian, British and Dutch companies, which have negotiated lower withholding taxes.

The deal, yet to be ratified, lowers the dividend withholding tax rates for corporate investors owning more than 10 per cent of a company in the other country, from 15 per cent to nil if the stake is more than 80 per cent, and from 15 per cent to 5 per cent if it is between 10 and 80 per cent.

The New Zealand rate is 15 per cent with both the US and Australia.

The interest withholding rate has been cut from 10 per cent to nil where the lender is a bank. Under New Zealand's approved issuer levy, the rate is 2 per cent.

The withholding tax on royalties has also been cut from 10 to 5 per cent.

KPMG tax partner Craig Elliffe said the reduction in the dividend withholding tax rate alone could increase after-tax returns to Australian corporate investors in the US by up to 17.6 per cent. "Returns for US investors in Australia could also increase by the same amount," Mr Elliffe said.

From the standpoint of a US multinational, it would be a clear reason for preferring Australia to New Zealand, he said.

Robin Oliver, general manager of the Inland Revenue's tax policy division, said they were looking at the implications for New Zealand.

"We are not planning on negotiating with the US at the moment, mainly because it is not a priority for them. They have a big list of countries wanting to do double tax agreements with them."

Business New Zealand chief executive Simon Carlaw said the message to the Government was, "We have no difficulty understanding the length of the line to the door of the US tax authorities, but please let's see what we can do to get up the queue."

Mr Elliffe said the emerging trend in the tax treaties between the US and Britain, the Netherlands and now Australia to cut or eliminate withholding taxes reflected a preference within the OECD to move to a residence-based rather than source-based approach to international taxation.

Mr Oliver said there was pressure throughout the world to reduce withholding tax rates. The move to residence-based taxation was to the advantage of capital-exporting countries, but to the disadvantage of countries like New Zealand, which imported capital.

"We recognise that we can't extract much tax out of highly mobile capital without putting up the cost of capital."