New Zealand As Financial Hub 09 Dec 2011

New Zealand Exempt Collective Investment Vehicles - Submission on turning New Zealand into a Financial Hubinvestors and overseas sourced income.


Set out below is our joint submission with Christchurch law firm Helmores to the Inland Revenue Department on the officials' issues paper "Allowing a zero percent tax rate for investors investing in a PIE".

The submission is in favour of the underlying principles suggested by the discussion document. It suggests, however, that instead of designing complex rules for PIEs with resident and non-resident investors, a new PIE should be created with limited partnership tax treatment, and allowed to have only non-resident investors and overseas sourced income.


C/- Deputy Commissioner, Policy
Policy Advice Division
Inland Revenue Department
P O Box 2198
Wellington
6140
By Email To: Policy.webmaster@ird.govt.nz

Allowing a zero percent tax rate for non-residents investing in a PIE

1. Thank you for this opportunity to comment on your discussion document: “ Allowing a zero-percent tax rate for non-residents investing in a PIE”. We have kept our comments brief for the sake of your time and ours. We would appreciate the opportunity to discuss this with you in further detail in person.

Why we support the proposal

2. One may ask, “Why introduce tax rules that would benefit wealthy foreigners?” We think this is the wrong starting point, and the question should rather be: “Why not?”. As long as the rule changes result in benefits to New Zealand then they should in theory be made.

3. There is no loss to the IRD or the average New Zealander because the investment funds would never come to New Zealand otherwise. They would continue to be managed in places like Singapore, Ireland or Luxembourg, which are already set up for this type of business.

4. No New Zealanders would receive any tax breaks or special treatment. The benefits to New Zealanders would come in the form of increased business revenues and improved public services over the long term.

5. The exemptions from New Zealand tax would only benefit people who do not live here and do not earn income in New Zealand. Those people do not use New Zealand public services and so should have no moral obligation to pay tax in New Zealand.

6. In fact the current situation is palpably unfair. Of all OECD member countries New Zealand has the highest number of tertiary qualified citizens who work overseas. All of these people have had their educations subsidised by the New Zealand taxpayer and yet are now paying taxes in other countries.

7. New Zealand is effectively subsidising the education of taxpayers in Australia, the UK and other countries.

8. We consider that positive impacts would result from the changes at very little cost to New Zealand. This is so, because the changes are likely to make New Zealand more attractive to international funds and reduce costs for funds already here.

9. If a global funds management industry were to develop and grow then investment fund managers would pay tax in New Zealand on the income they earn. Fund administrators based in New Zealand would also pay tax at both a corporate and personal level on the fees charged and salaries earned.

10. However, the investment funds themselves would be exempt from tax in New Zealand.

11. A major benefit of this would be that New Zealand advisory firms would no longer be so dependant on the New Zealand domestic economy for revenue. They would further contribute to the economy by employing New Zealanders - from secretaries to office cleaners to senior executives – and purchasing business products and services such as: stationary, software, couriers, client hospitality, hotels, professional advice, book keepers etc.

12. Every employee and the funds management / administration firms that they work for would pay income tax and GST to the IRD in the usual way. However, because of the increased revenues to these firms and their respective employees the overall tax take by the IRD over time will increase and employment rates will fall.

13. There are numerous international examples where this has happened.

There are several other benefits:

  • The level of capital investment required by the New Zealand Government is not high.
  • The commercial infrastructure is more or less in place. There will need to be some modification and consolidation of systems currently run by law firms, accountancy firms, investment advisory firms, book keepers and the like. Firms will need to invest in marketing and travel. However, generally the capital outlay will be much less than is required to establish other industries where significant physical infrastructure is required.
  • The administration and advisory services will be delivered electronically. Therefore this would be an entirely eco-friendly and virtually carbon neutral industry concentrated in urban areas with no impact on conservation estates. It is entirely in keeping with New Zealand's clean green image and far more sensible than an economy reliant entirely on shipping commodities to the far corners of the earth at considerable financial and environmental expense.
  • Unemployment rates will fall for the reasons outlined above.
  • The trade deficit will be reduced for the reasons outlined above. For the first time in New Zealand's history it will not just be the farmers, manufacturers and tourism operators bringing foreign currency into the country. City dwelling professional advisers will also be exporters.
  • It will provide much needed career opportunities for all New Zealanders – especially those with professional qualifications. It will also provide a reason to return to New Zealand for those that have taken their government funded university degrees and are plying their trade (and paying foreign taxes) on high salaries in Sydney, London and elsewhere.

14. According to the CIA World Factbook New Zealand is currently in 51st position in the world in terms of GDP per capita. Of the top 20 countries nearly all of them have a thriving and well developed international financial services industry of the nature described above. The others seem to be well endowed with oil.

15. Many of the countries listed in the top 10 have far less going for them than New Zealand. None of Jersey, Guernsey, Liechtenstein or Luxembourg have the land, minerals, fresh water or population which we have - and yet they immeasurably better off than New Zealand.

16. Despite the fact that the Irish and Icelandic economies have suffered double digit contractions in recent years they are still ranked higher than New Zealand.

17. Australia, with all its commodities, does not even feature in the top 20 – well behind Ireland with a population comparable to New Zealand. That said Australia is still significantly higher than New Zealand in 22nd place.

18. However, a favourable tax and regulatory system will not be the definitive reason for an industry starting-up in New Zealand. This will happen if New Zealand can, over time, distinguish itself as a top class and well regulated financial service provider in the international scene.

High Level Submissions on Tax Rules

19. We do not make detailed submissions on the tax rules. However, we would like to express our preference for a third possible solution not canvassed in the discussion document. That is, we consider that a special regime should be designed for PIEs who have only non-resident investors, and only derive non-NZ sourced income. Investors in these PIEs should be taxed at 0%. The PIE would be afforded the same tax treatment as a limited partnership.

20. Investors can already access this treatment either through a foreign trust or a limited partnership. However, we consider affording this to PIEs would have the extra benefit of providing a unitised vehicle for tax neutral investment. This gives international fund managers a further option to choose when it comes to New Zealand, and it also opens the door for retail funds managed in New Zealand. We do not consider that PIEs in this category would or should get the benefit of New Zealand’s treaty network. If the changes are to succeed they should be made in such a way that they do not fall foul of New Zealand’s international commitments and tax policy. If limited partnership treatment is afforded to the PIEs, then this is likely to have the least impact on New Zealand’s international standing.

21. Furthermore it is entirely in keeping with the long-standing policy that the IRD will only tax New Zealand residents and/or New Zealand sourced income. This type of industry is not the sole domain of "offshore financial centres" or "tax havens". London, New York, Singapore, Dublin and numerous other international financial centres around the world offer similar regimes to attract international finance business.

22. Limited partnership treatment would afford the funds everything that is required, while at the same time not requiring any complex or detailed rules that would make compliance difficult for the fund managers. Any complexity in this area is likely to drive up costs, and to make New Zealand less competitive with the rest of the world.  Other jurisdictions, and certainly the ones New Zealand would be competing with, tailor their regulatory regimes specifically for these funds.

23. Another option is to simply establish an "exempt fund regime" where fund managers go through a rigourous and responsible licensing process with the result that they may eventually be issued with a special license by the newly established Financial Markets Regulatory Authority. This license will then allow them to establish funds in NZ, which can be offered to non-New Zealand residents using whatever type of legal vehicle they desire. Potentially the fund could be a legal structure established in another jurisdiction but the administration is carried out in New Zealand. Provided always that the fund holds the appropriate license then it will be exempted from paying tax in New Zealand.

Why would any fund manager choose New Zealand?

24. We consider that New Zealand’s time difference is a significant competitive advantage. At a high level this is so because it would allow New Zealand to price funds overnight, while the rest of the world, specifically the US and Europe, can only price this one day later. This advantage is one that is not easily matched by other jurisdictions.

25. There are opportunities to use New Zealand as a process centre for hedge fund administration (in particular) as our business day begins just as Wall Street closes which means that net asset values of individual fund holdings can be processed during the US evening and then sent to say Hong Kong for reporting to worldwide investors (Hong Kong is 4 hours behind New Zealand in time). This can speed up the administration process by a whole business day as compared to having an administrator is say Luxembourg (currently the world's most prevalent fund administration centre).

26. The costs of doing business in New Zealand are lower than Singapore, Ireland and Luxembourg – and certainly much lower than London, New York, Tokyo or even Sydney.

27. The level of commercial and professional expertise and quality of infrastructure is generally high.

28. Time zone issues and physical isolation can nowadays be managed through effective IT systems.

29. Regulations imposed by the European Union and other supra-national bodies are making life increasingly difficult for the traditional financial centres.

30. New Zealand is also strategically placed in the Asia-Pacific rim where it is projected that most of the world's wealth will be generated in the next few decades.

31. There are many other reasons why New Zealand would be a good choice. We do not exhaustively list these here, but consider the main ones to be: New Zealand’s reputation for ease of doing business, New Zealand’s standing in the OECD, high

standard of English, good infrastructure and stable political system.

Do we have any concerns regarding this initiative?

32. There is virtually no opportunity cost to New Zealand. There is a risk that unscrupulous financial service providers could exploit New Zealand for nefarious purposes such as money laundering and terrorist financing. There is a further risk that sub-prime financial service providers could offer sub-prime financial services from New Zealand and thereby tarnish our international reputation.

33. These risks can be managed by effective regulation from the Financial Markets Regulatory Authority, which will need to:

a. enforce New Zealand's existing OECD grade anti-money laundering and counter-terrorist financing laws; and

b. licence, monitor and supervise the registered financial service providers (and their directors and employees) providing these services from New Zealand.

34. Before any institution can obtain a license there will need to be a stringent due diligence process to ensure that the directors are fit and proper persons. Systems, processes and best practice will be supervised and audited. Such regulatory regimes are well established in other jurisdictions and could be replicated in New Zealand.

Logically a competent and qualified person should be headhunted from the regulatory authority of somewhere such as Singapore or Ireland to oversee the initial start up phase.

35. This will not be a silver bullet to everlasting economic prosperity and will not supersede the traditional planks in New Zealand's economy such as farming. However, it would provide a much-needed stimulus and greater opportunities for New Zealanders by keeping them here and attracting them back to New Zealand from other countries where career opportunities are currently more alluring.

36. We look forward to hearing from you regarding a possible meeting to discuss this further. Please contact either of the authors if you wish to liaise regarding a meeting.

Kind regards

Sybrand van Schalkwyk Henry Brandts-Giesen
BCom, LLB(hons) (Canterbury), BA, LLB (Canterbury), DIP ITM
LLM (hons) (Wellington), CA, ADIT (Distinction), TEP
Associate
Helmores

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any New Zealand tax questions that you might have.  Please contact Kris Morrison at Parry Field's Christchurch office (348 8480) for help with tax matters.  Please note that this is only a high level overview of the case, and there may be specific situations where a different outcome is reached.  Therefore, please don’t rely on this as legal advice.