A critical ingredient of New Zealand's mysteriously exciting 'financial hub' project is being secretly prepared by the IRD this month.

The hub hit the headlines last year as part of the government's grand plan for the nation and was given a hurry-up by John Key in December.

But for the hub to become at least technically viable the government needs to amend the tax rules for managed funds, specifically those structured as Portfolio Investment Entities (PIEs), to attract international investors.

While Australia is working on similar tax reform to boost its own hub hopes, the IRD might get in first with PIE tax changes due before this year's election.

Essentially, the IRD has made two proposals to allow: zero-rated PIEs open only to non-residents that don't invest into NZ assets, and; variable-rate PIEs open to anyone and able to invest in just about anything, anywhere but which must apply different tax treatments to investors based on residency status and asset class.

The first proposal, which Australia already operates a version of, offers the beauty of simplicity but may have limited use - according to one industry source, this approach would only work smoothly for funds that invest in global equities. The variable-rate PIE concept has the ugliness of complexity, presenting administrative difficulties for fund managers, but might have more broadscale appeal to foreign investors.

David Carrigan, the IRD manager in charge of the project, said the second option, for instance, would gain more relevance for KiwiSaver members who move overseas.

Under current arrangements, and this was news to me, if you shift offshore your KiwiSaver scheme is obliged to deduct tax at the highest rate, 28 per cent, while your correct rate, if you lived here, might be as low as 12.5 per cent.

Carrigan said fund managers would be able to elect into either of the zero-rate or variable-rate PIE rules - or not bother with either.

By themselves the new PIE tax rules are no guarantee a financial hub will flourish in New Zealand but they are a necessary pre-condition.

Carrigan told me that even prior to the financial hub declaration the tax department had intended to fix the foreign tax treatment in PIEs.

He said the underlying principle is that all investors in PIEs should get tax at the same rate as if they had invested into the assets directly.

What a very nice principle.