Dunne Peter: Taxation (Tax Administration and Remedial Matters) Bill — In Committee Third Reading 
Dunne Peter: Taxation (Tax Administration and Remedial Matters) Bill — In Committee Third Reading 
[Volume:675;Page:20755] 
Hon PETER DUNNE (Minister of Revenue) 
: 
 I am happy to respond to the points the member Lianne Dalziel has raised. I must say it is very rare in a debate of this type to get a detailed cross-examination on the application of the portfolio investment entity (PIE) rules but as the member has bravely walked down that path I am happy to respond in kind. I should go through just a few points here and then talk about the state of the Taxation (Tax Administration and Remedial Matters) Bill as it has emerged from the Finance and Expenditure Committee. 
The amendments the member referred to introduce two new categories within the PIE regime: the foreign investment zero-rate PIE and the foreign investment variable-rate PIE. These aim to align the tax treatment of non-resident investors in a PIE with the tax treatment of direct investors. Resident investors in a foreign investment PIE will continue to be taxed as if they were in an ordinary PIE. These new rules will be optional. PIEs can continue to apply to existing rules where non-residents are taxed at a flat 28 percent on their income. Foreign investment zero-rate PIEs will generally be able to invest only offshore. De minimis levels of New Zealand - sourced income will be allowed—for example so such a PIE can finance its day-to-day operations with a New Zealand bank account. Non-resident investors in a foreign investment zero-rate PIE will be taxed at zero percent on all their PIE income. 
Foreign investment variable-rate PIEs can invest in both New Zealand and offshore assets. Non-resident investors in a foreign investment variable-rate PIE will face a variety of different tax rates depending on the type and the source of the income. Foreign investment variable-rate PIEs will have an option to withhold non-resident withholding tax from distributions made to investors out of unimputed dividends. This will be instead of the PIE paying PIE tax in the normal manner and by withholding the non-resident withholding tax non-resident investors should be able to claim a credit for the tax paid in their jurisdiction. 
The key changes the committee has made include that for foreign investment variable-rate PIEs non-resident investors should be taxed only on interest income from financial arrangements and that matches the treatment of direct investors. Foreign investment zero-rate PIEs should be able to purchase New Zealand - sourced derivatives such as foreign exchange hedges. This is justified as these arrangements could be seen as part and parcel of the PIE’s offshore investments. In addition a non-resident would normally not be taxed on any income earned under New Zealand - sourced derivatives because derivatives do not pay interest. An investment in land investment companies should be allowed. The modifications to the exemptions in the foreign investment fund rules that were to apply if a foreign investment fund invested in a foreign investment PIE will be removed. 
A provision has been inserted to allow a retail PIE to treat income from a wholesale PIE if the retail PIE earned the income directly. This will prevent income earned from foreign investments made by a wholesale PIE in New Zealand being reclassified as New Zealand - sourced income when it was allocated to the retail PIE for example. The modifications to the source rules will be extended so that income from a foreign investment PIE would not have a New Zealand source merely because a contract was made or performed in New Zealand provided that the contract related to the PIE’s overseas investments. 
I am very pleased the member raised those questions. I hope that the very clear and simple explanation I have given in response has clarified a number of her concerns.