Just over two years ago, John Key announced his desire to set up New Zealand as a financial services hub. The Ministry of Economic Development (MED) was quick to pour cold water over the idea, saying the Magna Carta of documents would need to be delivered first. Since then, a Government working group was set up, the International Funds Services Development Group (IFSDG), to assess the export opportunities and hurdles of this initiative.
Last year, the IFSDG released a report outlining their findings. The main opportunity identified was the creation of a New Zealand funds domicile. This would essentially see a funds industry, based in New Zealand, taking care of functions such as account administration, transfer and registration of shareholders, performance of caretaking roles with respect to investments, calculation of daily pricing and other related accounting and legal matters. In other words New Zealand would become an exporter of financial services for the Asia Pacific region.
The external research commissioned by the IFSDG concluded that by 2030 a New Zealand based funds industry could potentially generate up to 5,000 high quality jobs, annual New Zealand revenues of up to $1.3 billion and tax revenues of up to $360 million.
In response to the report, a range of regulatory impact issues have been highlighted by officials. The MED have said that while a financial services hub is a good idea, there are a range of barriers such as regulation, priority and conflict with other programmes. The main barrier is the $700,000 cost required to determine if this initiative could take off. However, by not investing in this analysis, it’s impossible to know if the $1.3 billion revenue is there for the taking. One has to wonder why our bureaucrats are being so conservative at a time when we need them to be ambitious. The Government will need to keep the pressure on this initiative to avoid it falling by the wayside.
The IFSGD set out their recommendations via a two stage process. Stage one includes the introduction of a zero per cent tax rate on foreign sourced income for non-residents as a necessity. It is positive that tax changes, for example the zero rate PIE changes, have already come to fruition. However, wider and bolder tax changes will be needed as New Zealand centric PIE rules are unlikely to grab the attention of offshore investors who are more used to dealing with other investment vehicles.
Stage two is focused on attracting domicile activities to New Zealand by establishing a funds servicing agency, gaining mutual recognition from major Asia Pacific regulators, undertaking and implementing various regulatory initiatives, marketing the New Zealand brand and attracting business to New Zealand.
Another necessary component is regulation to ensure non-resident investor protections are in place which either meet or exceed existing global standards. Success is also contingent on relationship building throughout the Asia Pacific region, the development of New Zealand’s market capability and obtaining community and political support. Government support needs to be consistent and a commitment to the required tax changes, public sector prioritisation of work programmes and engagement of the private sector is needed to ensure international advisor and regulator interests are met.
The benefits of this initiative are clear. The tide is coming in on this issue but the Government needs to help the flow by taking an active role in pushing the public sector’s commitment to change and to fund and prioritise the work required to make this happen. This month’s Budget is the perfect opportunity for the Government to signal its desire for investment in and commitment to this initiative.
Murray Brewer
Partner, Tax
T +64 (0)9 308 2570
E Murray.Brewer@nz.gt.com