Are we dropping the ball with Double Tax Agreement network?
New Zealand has a network of 37 enforced Double Tax Agreements, primarily with our main trading and investment partners.
DTAs are viewed as beneficial by most countries as they allow international business to be transacted with a degree of certainty, they clarify the taxing rights for each country, avoid double taxation and prevent fiscal evasion by allowing countries to obtain information in other jurisdictions on taxpayers’ affairs.
Our DTA network is arguably targeted to include countries where real benefits are likely to accrue (with our main trading partners, for example), as these are likely to be limited if there are low levels of investment and trade between New Zealand and the other nation.
Tax practitioners and businesses here continue to debate whether the IRD and the government are correctly focusing their efforts to ensure the DTA network is sufficiently wide-reaching and up to date.
It is in New Zealand’s best interest to enter into DTAs and to ensure existing ones are renegotiated on a structured and timely basis. Renegotiated DTAs generally have lower withholding tax rates on cross-border payments of dividends, interest and royalties.
Lower rates of withholding tax allow the repatriation of profits to New Zealand with less overseas tax being deducted, resulting in more funds being repatriated back to New Zealand investors/shareholders.
Given the IRD’s limited resources, most people would probably agree the IRD is doing a satisfactory job with them.
However, with more government funding the IRD could do significantly better.
The IRD has a programme to ensure New Zealand continues to enter into new DTAs with appropriate partners and the old ones are reviewed and renegotiated to ensure they provide appropriate benefits.
The IRD is in the process of negotiating or renegotiating six DTAs (for example, renegotiating DTAs with Japan and the Netherlands and entering into new DTAs with Luxemburg and Vietnam).
Based on the IRD’s resources they are at full capacity, thus the request for more resources being allocated to the IRD.
It has, however, become apparent there is no cohesive strategy from the government on entering into and renegotiating DTAs and tying this process into other agreements, such as free trade pacts, negotiated by other government departments.
One of the reasons for the disconnection between entering into FTAs and DTAs is that different government departments are in charge of negotiating the respective agreements.
Notwithstanding this, one would think it is not unreasonable to expect some degree of consistency and a coherent approach to be adopted by government with respect to entering into FTAs and DTAs and for the process, when possible, to be linked.
We outline examples below where this has not happened with respect to Asia, New Zealand’s current major trading focus.
Our DTA with China is becoming increasingly important due to the significant trade between the two countries and the number of New Zealand companies setting up operations there.
New Zealand entered into a FTA with China in 2008, being the first country to do so. Exports have grown from $2.3 billion to $5.8 billion – a figure which substantially exceeded expectations.
China is now New Zealand’s second largest trading partner after Australia, and now ranks ahead of the United States. It was surprising that while negotiating the FTA a process was not started to renegotiate the DTA.
We understand the two countries have only just started discussions on renegotiating a new DTA. Based on past history, it will take a number of years for it to become effective.
Under the current New Zealand/China DTA, compared to recent DTAs that China has entered into or renegotiated, very high rates of withholding tax are payable.
Under China’s more recent DTAs or renegotiated DTAs – such as with the United Kingdom, entered into last year – the withholding tax rate on dividends is 5%, and there are others that are similar.
With respect to New Zealand, the withholding tax rate on the payment of dividends is 10% under China domestic law – ie, there is no treaty reduction.
There also appears to be inconsistencies in strategy when New Zealand negotiated to become part of the Asean, Australia and New Zealand FTA.
It was clearly recognised at the time that entering into this pact would be beneficial to all parties involved.
New Zealand has a number of important trading partners in the Asean region and a number of the DTAs entered into with these countries are out of date. For example, we entered into one with the Philippines in 1980, Indonesia in 1988 and Thailand in 1998.
So where to from here?
Planning for entering into a DTA is essential as it can take a number of years to update or enter into new treaties.
Strangely, enough it is often a more difficult and time-consuming process to renegotiate existing DTAs than to enter into a new one, as arguably starting with a clean sheet is easier than renegotiating existing terms.
Also, a variety of political issues can come into play which are completely unrelated to the DTA process, and the DTA can be used as a pawn in a bigger political game.
If New Zealand is going to continue to grow internationally the government nededs a clear strategy to help businesses compete on a level playing field against our large international competitors.
This includes New Zealand’s DTA network.
The government should be applauded in being the first country to enter into a FTA with China. However, arguably the ball is being dropped with respect to a consistent approach in entering/renegotiating DTAs as part of New Zealand’s wider network of international agreements.
Greg James is principal, tax consulting, with WHK, and recently returned to New Zealand after spending five years based in Hong Hong.