The impact of the approved issuer levy on the New Zealand dollar domestic interest rates

Abstract

This article examines the impact of the approved issuer levy (AIL) on the New Zealand dollar domestic interest rates. Under the AIL regime, New Zealand tax-resident borrowers can apply to Inland Revenue to be an approved issuer. Approved issuers are able to pay interest to lenders, who are not tax-resident in New Zealand, free of any non-resident withholding tax. Under the AIL regime, however, a two percent levy on interest income must still be paid to Inland Revenue. We provide empirical evidence which suggests that non-resident lenders require the New Zealand tax-resident borrower to gross up the pre-tax interest rate for the cost of the AIL payment. Our results support the wider proposition that reducing taxes on offshore portfolio investment will lower domestic interest rates and reduce the cost of capital for New Zealand entities.