The Government has considered recommendations outlined in a report by the International Funds Services Development Group (IFSDG) on how to enhance New Zealand as an international financial services centre.
The IFSDG (a taskforce established by Cabinet last year) believes that there is a major opportunity for New Zealand as a funds domicile and funds administration centre, where collective investment funds can be incorporated and serviced. Research conducted by financial consultancy firm Oliver Wyman indicates that the full realisation of this domicile opportunity (which would take until between 2020 and 2030) would generate revenue in New Zealand of approximately $0.5 to $1.3 billion per year, tax revenue of between $150 and $360 million per year, and 2,000 to 5,000 high-quality jobs.
If New Zealand is to take advantage of this opportunity, the IFSDG recommends that a two-staged approach would be the most appropriate strategy. This would allow the Government to first establish the tax and regulatory environment necessary for a funds domicile. Then, subject to market conditions, the Government could make a decision about what further additional government support is required to attract fund servicing companies that can perform the domicile functions.
The first stage would consist of:
- tax policy reform (establishing a zero percent tax rate on foreign-sourced income for non-residents);
- establishing the regulatory conditions necessary for a funds domicile (which includes ensuring non-resident investor protection replicates or improves upon existing global standards); and
- government support, specifically:
- jurisdiction relationship building;
- developing New Zealand's labour market capability; and
- obtaining broad support for the funds domicile initiative.
The changes to the tax and regulatory systems would be only a relatively small addition to the Government's existing work programmes. Changes to the PIE tax rules to allow foreign investors to pay a zero percent tax rate on their foreign-sourced PIE income are included in the Taxation (Tax Administration and Remedial Matters) Bill 2010 currently before Parliament, but further tax changes are required to ensure New Zealand is vehicle agnostic.
The current Securities Law reform review also provides an opportunity to make the necessary changes to existing securities law to meet the international regulatory standards required for the domicile opportunity. The IFSDG has indicated that the following changes would need to be included as part of this reform:
- restrictions on investments, such as the use of derivatives in defined funds;
- ensuring that the "fit and proper" tests meet the standards set by EU's UCITS regulatory regime;
- regulating all significant entities and individuals that work in senior positions in the funds industry, including the fund itself, fund managers and service providers;
- introducing capital adequacy provisions for custodians/depositories;
- enforcing anti-money laundering and "Know-Your-Customer" rules;
- amending the Companies Act 1993 to enable company structures to better support open-ended funds;
- regulating wholesale funds which are indirect recipients of retail funds; and
- requiring full independence between the manager and the assets where a Depository is appointed as the safe-keeper of the assets and to independently value the fund assets and calculate the unit prices.
The full report Exporting Financial Services can be viewed on the Ministry of Economic Development's website.