The terms of reference are expected to be quite narrow but they will include taxation of local as well as international investments, Finance Minister Michael Cullen’s office has indicated.
The coordinator of the review will have to report back with options for reform by October.
This latest move comes out of the tax issues paper released by the government just before Christmas. Back then the focus was on the International tax regime, but that discussion paper included the invitation for comment on whether the two regimes should be aligned.
The financial services industry has pushed hard for a similar regime for both onshore and offshore investments, and also for a general simplification of the tax regime as it applies to investment.
The present tax regime has been the focus of considerable criticism for more than 10 years and there have been several bids, in both the early 1990s and the late 1990s, to come up with a long term “fix”.
The paper though is likely to become a discussion on whether or not to adopt some form of the “risk free rate of return” method (RFRM) first put up in the 2001 Tax Review and then subsequently modified in the December discussion document, or other options.
RFRM is favoured by the Inland Revenue Department and has the attraction of certainty and simplicity – investors will know how much tax they will have to pay, regardless of how well or how poorly their investments do.
That last part is also the downside: investors have to pay the same rate of tax even if their investment makes a loss.
Whether or not Cullen goes with that option will probably boil down to a political judgement on how saleable he thinks it is.
The government still talking about 1 April 2006 as a possible date for implementation of a new regime – hence the selection of only one coordinator, rather than yet another panel. However that date is seen as a desirable possibility, rather than a firm target.
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