International Tax

New Zealand companies with local shareholders only have to contend with one set of tax rules. However, for those companies that move outside the sheltered waters of the New Zealand tax regime, there are two new sorts of complication that need to be addressed. These are:

• Dealing with the tax laws of the country to which they are exporting; and
• Figuring out how the overseas country's tax rules interact with the New Zealand tax regime.

In a nutshell, the above points are what international tax is all about. In terms of the level of complication, the difference is probably like backyard cricket compared to facing Brett Lee. This article attempts to point out some of the protective equipment available. The idea being if you get hit, it won’t hurt so much.

Most countries around the world (at least the OECD ones) level tax based on concepts of source or residence- New Zealand is no exception. New Zealand taxes its own residents on their worldwide income. New Zealand only taxes the residents of other countries on income sourced from New Zealand. A New Zealand resident exporting to Australia is, at least on the face of it,subject to tax in two countries – New Zealand on the basis of residence and Australia on the basis of source. To reduce the effect of double taxation, developed countries enter into international treaties known as double taxation agreements. These agreements have twin objectives of setting a threshold for entry into the countries taxation regime and relieving double taxation.

How is all this relevant in practice? The impact of most double tax treaties is that a New Zealand company trading overseas will only be subject to tax in a foreign country where the company has a certain level of physical or legal presence in that country. Put simply, New Zealand companies can trade with Australian companies without being subject to Australia tax. New Zealand companies that trade in Australia will generally be subject to Australian tax.

Indirect taxes – GST and duties, are a different kettle of fish. Generally indirect taxes will apply right from the first export sale. GST type taxes aren’t meant to be a cost on businesses. Unless you have worked out how to comply with them in advance – they can become a cost. Duties on importation can be costly and come straight off the top line.

The first important point for exporters:

• Know where the threshold of taxability is; and
• Which side of it you are on.

This is all very well and good where the country in question has a tax treaty with New Zealand. Lots of countries don’t – New Zealand does not have tax treaties with Pacific Island nations except Fiji, nearly all of South America, all of Africa except South Africa and most of continental Asia. New Zealand companies exporting to countries with which we do not have a double tax agreement may have a problem from the day they step off the plane.

The second important point for exporters:

Find out if New Zealand has a double tax treaty with the country you are exporting to- if we don’t you may have a problem.

So having taken a few orders and built up an initial presence in another country, the question next arises as to what form of legal presence you should have in export markets. This question usually becomes a decision between a branch or a subsidiary. In deciding whether to opt for a branch or subsidiary, many factors need to be taken into account. Local factors relating to the country in which you are trading will usually be most influential. Don’t lose sight of the New Zealand implications of trading in a foreign jurisdiction either as a branch or subsidiary. Obtaining tax relief for start-up losses is a good example of how important this is. Whether a New Zealand business chooses to set up a branch or subsidiary overseas, may affect the extent to which tax deductions can be claimed for start-up losses. It may also be possible to obtain the best of both worlds through careful selection of an appropriate legal entity in New Zealand to undertake the exporting transactions.

The third important point for exporters:

You need to choose an operating entity. The decision of branch or subsidiary is a difficult one that needs to be made carefully.

So assuming you have left New Zealand set up a branch or subsidiary and are starting to make a dollar overseas. The next question is how do we get the money back to New Zealand. Because New Zealand operates an imputation system (tax paid by a company can be attached to dividends paid to shareholders), New Zealand businesses generally have a preference to pay tax in New Zealand and prefer to reduce tax paid overseas. This means New Zealand businesses trading overseas should generally prefer to repatriate income (bring it back to New Zealand) in a pre-tax rather than a post tax form. The tax authorities of the other country generally want to limit this sort of behaviour. Most developed countries have complicated rules to prevent people doing precisely this, in the form of transfer pricing rules (refer the separate article on structuring a transfer pricing policy for New Zealand corporates) and the quaintly named ‘thin capitalisation’ rules. Thin capitalisation is not a term that refers to an unfair distribution of the world food supplies but is a term that refers to the extent to which companies can fund their foreign operations with interest-bearing debt.

Withholding taxes will also apply to some payments made back to New Zealand. Withholding taxes water down – but don’t eliminate - the effectiveness of these strategies by forcing the payment of tax overseas. Because withholding taxes can generally be set off against the company’s New Zealand tax liability, the level of New Zealand tax paid is reduced.

Putting this all into some practical context, New Zealand companies should generally prefer to repatriate profits to New Zealand before they are subject to tax overseas. This is most commonly and effectively achieved through having a sensible transfer pricing policy. It can also be achieved through the careful location of intellectual property, structuring arrangements for the provision of management services and funding structures.

The fourth important point for exporters:

New Zealand businesses generally prefer to pay tax in New Zealand. The right funding and transfer pricing structure can help you achieve this.

So far we have covered off the corporate tax implications of exporting. The personal tax implications are also important. New Zealand residents spending large amounts of time in Australia may become subject to the Australian tax regime. Australia has a capital gains tax – New Zealand doesn’t. Building a thriving export business only to be subject to an Australian capital gains tax liability on an unrealised gain, defeats the purpose of exporting in the first place. Individuals should therefore be careful to consider their own personal tax status before spending significant periods of time (anything over three months) in another country. As with corporates, in establishing a taxable presence, most developed countries have rules that determine a threshold presence in the country and regulate your exposure to their tax laws. Knowing where this threshold is will prevent individuals inadvertently becoming subject to the tax laws of another country and not being aware of it. Finding this out while trying to leave the country could prevent an unpleasant and potentially uncomfortable introduction to the immigration and taxation authorities of the country to which you are exporting.

The fifth important point for exporters:

Find out if you are going to become liable to personal tax in a foreign country before you leave New Zealand.

What we have covered in this article are basic introductory points in a subject that is notoriously complex and where the devil definitely lies in the detail. Businesses beginning to export from New Zealand for this reason are faced with a choice: Either invest the money upfront in developing a robust and predictable tax structure for your company and yourself, or spend the money sometime down the track in any of a variety of other unproductive ways:

• defending a tax investigation in another country;
• wasting the money in foreign taxes paid;
• defending an investigation from the Inland Revenue Department.