1 Sep 2023

Labour says National's foreign buyers tax faces legal snags

7:19 pm on 1 September 2023
Auckland houses

National's plans to allow foreign buyers to purchase New Zealand property with more than $2m if they pay an extra tax, could break foreign trade agreements, Labour claims. Photo: RNZ / Diego Opatowski

The National Party says it received legal advice that its proposed tax on foreign buyers could be criticised by New Zealand's trading partners, but that such arguments would not have legal merit.

However, Labour says National has got the wrong advice by focusing solely on Free Trade Agreements (FTAs), rather than tax treaties.

One of the four new 'targeted revenue measures' set out to fund National's Back Pocket Boost tax cuts plan, launched this week, was a partial reversal of the foreign buyers ban, which had been in place since 2018.

It would impose a 15 percent tax on houses worth more than $2m sold to overseas buyers (although Singapore and Australia would be exempt, due to prohibitions within the FTAs). National said the move would raise $740m a year, on average.

However Labour's overseas investment spokesperson David Parker said New Zealand's international tax treaties could exempt many other markets from National's proposed tax.

"It could put us in breach of both our trade agreements, and our agreements in respect of double tax agreements," he said.

Parker specifically singled out China, saying a non-discrimination article in the double tax agreement between New Zealand and China would exclude China from taxes of every kind and description, making National's income projections meaningless.

"Chinese buyers were 36.7 percent of non-New Zealand house transfers in the year before overseas speculators were banned. When you add Australia (19 percent) and Singapore (3.5 percent), this means at least 60 percent of non-New Zealand house transfers would be excluded from National's tax," Parker said.

Before announcing the tax, National trade spokesperson Todd McClay sought advice from Tracey Epps Consulting. Epps looked at the AANZFTA, RCEP, CPTPP, EU, China, Korea, and UK Free Trade Agreements to see whether there was justification for charging the tax.

The advice, released to RNZ, said the proposed tax (which could also be labelled a 'fee') would be discriminatory, but New Zealand had policy space within many of the Free Trade Agreements to justify charging it.

"New Zealand should not be criticised by its trading partners for imposing the fee, although the prospect cannot be ruled out completely," Epps said.

She argued the move would actually be liberalising by allowing the investment, albeit with the tax, due to partially removing the ban.

McClay told RNZ there was space in the trade agreements for New Zealand to make its own decisions.

"New Zealand has the ability to protect certain things under the Overseas Investment Act. You cannot create new classes to protect, but within a class you can alter the criteria."

"New Zealand has the right to discriminate on this ground, should we choose to do so," McClay said.

Epps' advice acknowledged China could apply the most-favoured-nation clause in the FTA to argue it was entitled to better treatment New Zealand provides to investors from other countries in FTAs signed after the entry into force of the China FTA.

"However... New Zealand will not be obliged to exempt any investors from payment of the proposed fee, other than Singaporeans and Australians. More favourable treatment for Singaporeans and Australians pre-dates the China FTA, which means that there is no qualifying [better] treatment to accord to Chinese investors."

McClay was also confident the tax could be applied without jeopardising any double tax agreements, pointing to the government's recent introduction of the Digital Services Bill, which would tax foreign companies' profits in New Zealand.

"They're using the argument that they're able to do that because it's not an income tax, and therefore it doesn't violate any of our double tax agreements around the world.

"Double tax agreements specifically focus on income tax, so that you are not taxed on your income in two places. Other taxes are able to be moderated, and that's what we're doing here," he said.

Parker told RNZ it did not matter whether National called it a tax or a fee, it would still be unable to implement it.

"It is a tax, whether it's a stamp duty or some other fee, it is a tax that would be applied to foreign investors and not to locals."

He said National was grasping at straws.

"They're wrong. And the papers make it absolutely clear they're wrong.

"It's interesting that the only information they released as to analysis on this was in relation to trade agreements, as opposed to double taxation agreements. I think it's going to become very clear in the coming days that they've got this plain wrong."

Nevertheless, National's finance spokesperson Nicola Willis said she was confident the policy could be implemented in a way that captured Chinese buyers and was consistent with New Zealand's tax treaties.

"This is because our policy does not take any existing entitlements away from potential Chinese buyers. Instead, it provides them a new option for purchasing certain high value residential properties, but only if they pay a large charge for the privilege," she said.

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