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![handle is hein.taxfoundation/ffdhfxz0001 and id is 1 raw text is: t u0uOAT, O ]F scal ]Fact
June 20, 2013
No. 375
New Zealand's Experience with Territorial
Taxation
By
William McBride, PhD
Introduction
The U.S. is one of the few remaining developed countries that taxes the foreign profits of its multinational
corporations on a worldwide basis. As of 2012, 28 of 34 OECD countries have moved to a territorial tax
system, also known as participation exemption, which exempts to a large degree these foreign profits.1 About
half of these countries have transitioned to territorial taxation since 2000.
To understand the motivation behind this international trend, and the experience both before and after the
reforms in each country, the Tax Foundation has published a series of case studies.2 The following report on
New Zealand represents the sixth such case study.
New Zealand's Current System and History
In 2009, New Zealand implemented a territorial tax system much like that found in other developed
countries.3 This system first distinguishes between the active and passive income of controlled foreign
corporations (CFCs), where passive income is basically investment income such as dividends, interests,
royalties, and rents, and active income is everything else.4 Second, it exempts active foreign income entirely
from New Zealand tax while continuing to tax passive foreign income as it is earned.
To prevent corporate base erosion, New Zealand limits interest deductibility against domestic income.
These so-called thin-capitalization rules are common in countries with territorial tax systems. In New
Zealand, the limit applies if a New Zealand-based multinational corporation's debt percentage is more than
60 percent of its assets.
1 PWC, Evolution of Territorial Tax Systems in the OECD, prepared for the Technology CEO Council (Apr. 2, 2013),
2 Philip Dittmer, A Global Perspective on Territorial Taxation, TAX FOUNDATION SPECIAL REPORT NO. 202 (Aug. 10, 2012),
SThe new rules went into force July 1, 2009.
4 A Controlled Foreign Corporation is defined here as a foreign corporation with at least 10 percent of its shares owned by a New
Zealand investor. See New Zealand Inland Revenue Department, Taxation (International Investment and Remedial Matters) Act
2012: Overview, /2012-34-overview/.](ViewImageLocal?handle=hein.taxfoundation/ffdhfxz0001&div=1&collection=&method=preview&ext=.png&size=3)