KEY POINTS:
Leading tax accountants hope the departure of former Treasurer Peter Costello from office will clear the way for a deal on the most vexed issue in transtasman tax relations - mutual recognition of imputation credits - when the tax treaty is renegotiated this year.
"Mr Costello had made it plain he was firmly opposed. Maybe the new administration gives an opportunity of fresh eyes,' said PricewaterhouseCoopers chairman John Shewan.
Deloittes tax partner Thomas Pippos said the renegotiation of the double tax agreement, scheduled to begin at the end of March, was at least an opportunity to see if the Rudd Government had a different view to its predecessor on the issue.
Both Australia and New Zealand allow shareholders to claim imputation or franking credits for their share of the corporate tax their companies have paid, in order to avoid the double taxation of dividends.
But the relief does not apply to tax paid on the other side of the Tasman.
The main provisions of a double tax agreement, however, relate to non-resident withholding tax (NRWT) rates on interest payments, dividends and royalties.
New Zealand's tax treaties impose NRWT rates of 10 per cent on interest and royalty payments. On dividends the nominal rate is 15 per cent, though under the complex foreign investor tax credit regime it is effectively zero so long as the dividends are fully imputed.
Australia has cut its rates in treaties with several countries, including the United States and Britain.
It has a 5 per cent NRWT rate on royalties and either zero or 10 per cent on interest, depending on whether the lender is a financial institution or not.
Dividends attract a 5 per cent NRWT if the stake is between 10 and 80 per cent, 15 per cent if it is less than 10 and zero if more than 80.
The present treaty has been substantially unchanged since 1995.
Pippos said business would be disappointed if there was no material change in the treaty.
"When judging whether countries are high tax or low tax the next thing people look at after the company tax rate is withholding taxes," Pippos said.
"If you are dealing with an overseas party and you don't have to pay any taxes it makes for a freer flow of funds and transactions."
But Shewan expects the Government to be cautious about which withholding taxes are reduced and to what extent. "At first blush you would say they should be reduced," he said.
"But on the other hand New Zealand as a significant importer of capital relies more heavily on withholding taxes than other countries. You don't want to give away revenue needlessly."
On royalties in particular, Inland Revenue's view was that if reduced significantly it could open up significant opportunities for erosion of the tax base, Shewan said.
And because of most favoured nation clauses in other tax treaties any cuts negotiated with Australia would act as a precedent for those as well.
Pippos said that while in principle a foreign company to which royalties had to be paid could claim tax credits in its home jurisdiction for withholding taxes paid here, in practice it was not that simple.
"So in a lot of cases when a New Zealand company wants to use intellectual property from a foreign company the contract requires it to gross up its payment to offset the non-resident withholding tax paid. In other words the contract requires the payments to be free of all New Zealand taxes. So the withholding tax becomes a tax on the New Zealand business."
Similarly with interest, the foreign lender was only concerned about its after-tax return and would require compensation for New Zealand tax paid, so the economic burden of the tax fell on the borrower.
The Government has invited comment by March 22.
BIG ISSUES
* The tax treaty with Australia is to be renegotiated.
* Canberra has cut withholding tax rates with other countries.
* And there might finally be a deal on imputation credits.
