DOUBLE TAXATION AGREEMENT BETWEEN HONG KONG AND NEW ZEALAND
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A final advantage of the Hong Kong DTA is that New Zealand and Hong Kong share
many treaty policy positions. As a result, New Zealand was able to secure virtually all of its
key negotiating positions, and the DTA represents a good precedent for New Zealand in
future negotiations with other countries. As such, the Hong Kong DTA will strengthen
New Zealand’s position on its key negotiating positions.
Disadvantages of the treaty entering into force
As noted above, DTAs offer bilateral solutions to problems that are difficult to solve
unilaterally. However, a potential downside to DTAs is that those solutions are then
locked in place by treaty and are difficult and costly to change. This can create difficulties
if treaty provisions need to be changed urgently. Practical experience indicates that in
genuine cases treaty partners are usually amenable to making necessary changes. However,
in extreme cases, if the treaty partner was to refuse to co-operate, termination of the treaty
could be required.
A second general disadvantage of DTAs is that they give rise to an up-front revenue cost.
This is because DTAs lower withholding tax rates on investment income and allocate
taxing rights between the two jurisdictions. The allocating of taxing rights means that New
Zealand will lose the ability to tax some income streams that it previously could tax (this
applies on a reciprocal basis). This means that New Zealand prima facie loses some tax
revenue when it enters into a DTA. The revenue cost to New Zealand arising from the
reduction in withholding taxes is estimated to be $0.5 million per year.
A third general disadvantage of entering into DTAs is that costs will then need to be
incurred in administering the exchange of information provisions of the DTA. That is, to
the extent that the treaty partner makes requests for information under a New Zealand
DTA, New Zealand will incur costs in complying with those requests. However, New
Zealand already has exchange of information arrangements in force with 39 other
jurisdictions (including 35 DTAs and four Tax Information Exchange Agreements) and has
systems in place for administering those arrangements. The costs of providing information
to Hong Kong under the Hong Kong DTA will therefore be marginal.
As noted above, Hong Kong is a significant international finance centre, and Hong Kong
also has a territorial-based tax system. These features tend to make Hong Kong a favoured
location for non-residents to establish companies. This, in turn, potentially raises “treaty
shopping” concerns. Treaty shopping occurs when a resident of a third jurisdiction obtains
the benefits of a DTA, such as lower withholding rates, by interposing a shell company in
one of the two jurisdictions party to the DTA. Accordingly, it could be argued that a
disadvantage of concluding a DTA with Hong Kong is that New Zealand opens itself up
to treaty shopping opportunities. However, treaty shopping is an issue for all DTAs. It is
generally addressed by applying general anti-avoidance law. In the Hong Kong DTA, this
protection is supplemented by the inclusion of specific anti-abuse rules in the key articles.
In a typical DTA, both sides would make reciprocal withholding tax rate reductions.
However, Hong Kong generally does not levy withholding taxes. (It does impose a low rate
of withholding tax on royalties, but at the same rate specified in the Hong Kong DTA.)
Therefore, Hong Kong will not actually forego any withholding tax. While this may be
thought of as a disadvantage, officials consider that a better analysis is that it is not a
disadvantage. Hong Kong has already effectively reduced its withholding tax rates below