NEW ZEALAND TAX CHANGES WOULD END PREFERENCE FOR INVESTMENT

UNCLAS SECTION 01 OF 02 WELLINGTON 000465

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/ANP-DRICCI AND EB
STATE PASS TO USTR FOR BWEISEL
COMMERCE FOR 4530/ITA/MAC/AP/OSAO/ABENAISSA
TREASURY FOR OASIA
SYDNEY FOR CS

E.O. 12958: N/A
TAGS: EINV ECON EFIN NZ
SUBJECT: NEW ZEALAND TAX CHANGES WOULD END PREFERENCE FOR INVESTMENT
IN U.S., AMONG OTHERS

REF: WELLINGTON 396


1. (U) This is an action request; please see Paragraph 9.


2. (SBU) Summary: The New Zealand government has proposed changing
the tax treatment of overseas stock-market investments in an effort
to protect small investors. The proposal effectively would maintain
a tax preference for portfolio investments in Australia, while
removing tax benefits currently accorded portfolio investments in
the United States and several other countries. End summary.


3. (U) New Zealanders' investments in any of eight countries on the
"gray list" -- including the United States -- currently incur taxes
only on dividends. Under legislation introduced May 17 in
Parliament, the gray list would be abolished. Individuals who
invest directly in share portfolios outside New Zealand and
Australia would pay not only a tax on their dividends, but also a
tax based on the change in value of their investments over the
course of each financial year. It would be a partial tax on capital
gains, even if the gains were unrealized. The tax would be applied
on 85 percent of the paper gain in value, with the tax capped at 5
percent of the investment's value in any given year. (The
carried-over tax would have to be paid if the shares were sold and
the proceeds remitted back to New Zealand.) The rules would apply
to all such overseas investments worth more than NZ $50,000 (US
$31,200). Thus, most small investors would escape the partial
capital-gains tax, but wealthy investors would not. Officials
estimate that between 10,000 to 20,000 New Zealanders would pay the
tax. (ABN AMRO Craigs contends that number is as many as 100,000
people.) Meanwhile, in general, individuals and companies that own
10 percent or more of a foreign company would continue to pay taxes
only on dividends.


4. (U) Abolishing the gray list would mean that all offshore
investments would be taxed the same, except for those in Australia.
Holdings in Australia would be exempt from the partial capital-gains
tax but still subject to a tax on dividends. Finance Minister
Cullen and Revenue Minister Dunne gave several reasons for
Australia's special treatment, including an eventual goal of
establishing a single investment market of Australia and New Zealand
and the fact that Australian companies -- like New Zealand companies
-- tend to pay out a high proportion of their profits as dividends.
Besides Australia, the seven other countries on the gray list are:
Canada, Germany, Japan, Norway, Spain, the United States and the
United Kingdom.


5. (U) The legislation also would make it more attractive to invest
in managed funds that trade in New Zealand and Australian shares and
that meet certain criteria as vehicles for savings and investment.
Managed funds no longer would be taxed on capital gains from
investing in Australian and New Zealand shares. Instead, only the
funds' earnings would be taxed, no longer at a flat 33 percent as
they are now, but rather at the investor's marginal tax rate.
Investors currently in the top income-tax bracket of 39 percent,
however, still would have their earnings from managed funds taxed at
33 percent.


6. (U) The proposal is touted by its backers as a "fairer"
investment tax regime. According to a statement issued April 11 by
Ministers Cullen and Dunne: "As always there will be winners and
losers. The losers in this case will tend to be sophisticated
direct investors who have enjoyed considerable tax advantages under
the old regime. ... The winners will be thousands of ordinary, hard
working New Zealanders." The ministers estimated the reform would
cost the government NZ $110 million a year in forgone tax revenue.
The bill has been referred to the Finance and Expenditure Committee,
which will receive public comments until July 7. If approved by
Parliament, the changes would take effect in April 2007.


7. (U) Meanwhile, the government immediately introduced an amendment
May 17 that would exclude overseas investments in certain types of
companies from the new tax rules for five years, which would give
the companies time to consider shifting their headquarters to New
Zealand. The amendment was aimed primarily at benefiting Guinness
Peat Group, a London-based investment company that has 28,000 New
Zealand shareholders.


8. (U) The proposals on managed funds should encourage investment in
the New Zealand stock market, while the changes for individual
investors should encourage those looking for overseas investments to
focus on Australia. The National Party condemned the tax proposal

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as unfairly targeting New Zealanders who invest offshore. Business
New Zealand, which represents business and employers' interests,
criticized the changes for making it difficult for New Zealanders to
diversify their portfolios.


9. (SBU) Action requested: New Zealand companies and individuals
held NZ $15.7 billion (US $9.8 billion) in U.S. portfolio
investments as of March 2005, or 44.7 percent of the stock of New
Zealand's portfolio investment overseas. (Portfolio investment in
Australia was only NZ $5.8 billion, or 16.5 percent of the total.)
The Canadian consul in Auckland has asked post whether the U.S.
government would take action on the tax proposal, noting the
preference that it gives to investment domestically and in
Australia. Post seeks Department guidance as to how to answer this
inquiry. Post also recommends that, if U.S. agencies have questions
or concerns about this proposed policy, it be added to the agenda
for the U.S.-New Zealand Trade and Investment Framework Agreement
discussions later this month.

MCCORMICK