Key Issues in the Design of Capital Gains Tax Regimes: Taxing Non-Residents

Abstract

This article examines two broad areas of capital gains tax (CGT) design in respect of the taxation of non-residents. The first area relates to the domestic design of the tax and focuses on whether a CGT should apply to all assets held by non-residents or to some limited subset of those assets (including the possibility of it not applying at all). What reasons exist for the broader asset base and what is the justification for limiting the scope of CGT assets when dealing with non-residents? The second area is how New Zealand double tax agreements (DTAs) interact with or change domestic CGT taxing rights. This area is intricately connected with the first issue because that is the role of a DTA. DTAs limit the taxing rights of contracting States primarily to avoid or reduce double taxation. They therefore change or alter domestic taxing rights. This may involve an allocation of taxing rights from one jurisdiction to another by excluding the application of domestic tax law.

How then does our existing tax treaty network apply to a newly introduced CGT? Do DTAs entered into prior to the introduction of a CGT apply to determine and allocate taxing rights? What are the current settings for allocating taxing rights with our existing DTA partners? Finally, and this issue circles back to the first area, what should New Zealand’s policy be in respect of determining how we tax movable property where the gain is situated in New Zealand? Should we opt for the retention of source-based taxing rights in art 13(5) in respect of this New Zealand-situate movable property, or for adherence to the OECD Model Tax Convention on Income and on Capital which gives away these source-based taxing rights in return for enhanced residence taxing rights? The article concludes by examining some areas of concern that can arise where there are significant differences in taxation for residents of different countries because of the different allocation of taxing rights under DTAs. These areas include treaty shopping and the avoidance possibilities that will occur unless there is a consistent taxing policy applied in New Zealand’s DTA network.