Fight looming over tax proposals

The corpse of the much debated RFRM (risk free rate of return) method of taxing offshore investments is now barely twitching – but a fight may yet be looming over its alternative.

Thursday, May 5th 2005, 6:51AM

by Rob Hosking

Finance Minister Michael Cullen is expected to announce a move towards using the “comparative value” (CV) method for taxing offshore collective investment vehicles.

The CV method is currently used as part of the Foreign Investment Funds (FIF) regime. CV is basically a form of capital gains tax and the government’s interest appears to contradict Cullen’s repeated assertions over the years that he is not interested in anything that looks like a capital gains tax.

However that is probably not where the main scrap- will come;. The battle will probably be over the extent to which the CV method is applied. Very simply, CV compares the value of an investment at the start of a tax period and at the end and taxes the difference.

The battle is looming over whether the CV rate is set at 100% of the change or a lower level.

Officials have earlier suggested 70% of the value of the change, but even this may be too high, says Investment Savings and Insurance Association chief executive Vance Arkinstall (pictured).

“Setting it at 100% would definitely create the kind of distortions they are supposed to be trying to get rid of,” he says.

That would make offshore investments less attractive than onshore ones, and Arkinstall says that even at 70% it might make offshore investment vehicles less attractive than vehicles based in New Zealand.

“Some accountants say it would also discourage those high net worth individuals the government is trying to encourage to migrate here not to come.”

A level of about 50% could well be more neutral, he says.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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