HK-CEP Consultation Report 13/15

Toby Heale (expatriate Briton with extensive experience as an investor in Hong
Kong, now living in New Zealand. His submission was sought on the advice of the
Canterbury Development Council.)

Hong Kong's current account surplus, rapid economic growth and low
unemployment raise issues about why it wants to do a deal with New Zealand,
where the economic performance has been poor. Mr Heale says New Zealand could
stimulate the growth of its own capital base and reduce its level of foreign
currency debt through relatively minor changes to regulation and taxation. Mr
Heale recommends a Royal Commission into taxation.

In the meantime NZ must be clear on what Hong Kong hopes to gain from a CEP
and should proceed cautiously, as Hong Kong has shown great aptitude for coming
out on top in the face of major challenges.

Timothy Brears (a
New Zealand commercial lawyer with experience living and working in both Hong
Kong and New Zealand.)

Mr Brears believes there is every advantage in New Zealand having a special
trading and economic relationship with a city state which is still the gateway
to China and the second largest financial and securities market in Asia. Hong
Kong has few trade barriers, is an entre- pot and a free port. It has the best
legal and tax system in Asia. Its access to business and contacts in China is
unequalled.

Areas of Co-operation
Issues such as the rules of origin of
materials have already been discussed and I do not wish to comment further on
this except to repeat what I said at the meeting; Hong Kong has a vast
hinterland of factories which it owns and operates in Southern China, and the
coastal cities, and the Special Economic Zones in these parts of China supply
the labour and very often the materials for goods that are then finished in Hong
Kong and exported. Indeed, re- exports from the container port of Kwai Chung,
the largest in the world, mostly comprise re- exports.

In that I believe that no significant quantities of goods will come from Hong
Kong under a CEP agreement, the real benefits of a CEP will lie in other
sectors, and I wish to mention these and refer to the issues which I feel need
to be addressed before real benefits will flow to New Zealand or Hong Kong.

Investment and Immigration to New Zealand.
New Zealand is a small
country with little excess investment capital. It needs to tap into Hong Kong's
huge capital resources. That, and other types of investment, including
immigration, can be achieved if New Zealand not only adopts more enlightened tax
and investment policies but is seen to be welcoming Hong Kong people and
investment.

Tax:
While tax issues are not necessarily determinative of whether
the CEP should proceed or not, or whether it will be successful, if the aim is
to look for a long term relationship with Hong Kong and Asia generally, there
are pressing tax issues the resolution of which would ensure that the CEP would
have appeal for Hong Kong business generally and give much initial publicity to
a CEP.

The New Zealand End:
If Hong Kong investors and migrants are to be
attracted to New Zealand something must be done about New Zealand's appalling
international and domestic tax system.

The following matters need urgent attention.

• Non Resident Withholding tax on dividends on investments in a New Zealand
  Company, are as high as 30% because there is no double tax treaty between New
  Zealand and Hong Kong. The Hong Kong investor faces no tax on dividends in Hong
  Kong, so it is a deterrent to investment in New Zealand.
• New Zealand has some draconian thin capitalisation rules.
• New Zealand imposes a world wide tax system on individuals and New Zealand
  companies which are tax resident or incorporated in New Zealand.
• A Hong Kong company that proposed to establish a holding Company in New
  Zealand for its worldwide operations would be startled to find that the company
  and its subsidiaries outside New Zealand would suffer taxes on accrued income
  from operations outside its own borders.
• No "grey list" status for Hong Kong: An individual from Hong Kong who
  becomes a tax resident in New Zealand faces an accrual tax on investments in a
  Foreign Investment Fund ( FIF) based in Hong Kong, as opposed to being taxed on
  income already received. This is a brain dead policy. This treats all investors
  outside New Zealand as unusual, potential tax evaders, and up to no good.
• Similarly, for the Hong Kong migrant who has substantial interests in
  companies in Hong Kong, and who becomes a tax resident in New Zealand, must
  declare income under New Zealand tax rules and the income is then taxed as if it
  was in New Zealand. This system imposes very high compliance costs. New Zealand
  based operators are therefore at a substantial disadvantage to overseas
  companies.
• Migrants who hold tax residency status in New Zealand must pay interest tax
  imposed on bank deposits. Hong Kong has no interest tax. This tax means that
  hundreds of millions of dollars - probably billions- is kept outside New Zealand
  to avoid it. New Zealand banks and businesses lose out on the money.
• Further, there is a differentiation between a zero rated tax on interest
  lent by non residents, as opposed to high withholding taxes on pure investment
  funds invested into Zealand listed companies. Surely it is best to give the
  incentives for Hong Kong investors to invest in New Zealand companies rather
  than to seek interest bearing deposits. The two forms of investment should be on
  an equal footing.

By contrast, in Hong Kong:

• Taxes are low 15% on personal income and 16% on company profits.
• There are no taxes on dividends or interest.
• There is no tax on income earned from operations outside Hong Kong's
  borders.
• There are no thin capitalisation rules, no GST and no FBT as in New Zealand.
• There are substantial free allowances and non taxable perquisites.
• Hong Kong has a de facto type of double tax treaty with China so that income
  and profits arising in Hong Kong or China cannot be taxed twice.

In summary, for the New Zealand company or individual who wishes to invest in
Hong Kong, there are no tax disincentives at the Hong Kong end.

Mr Brears believes the following improvements could be made to attract
investment, trade and immigration between the two economies.

• Abolish dividend and interest taxes for non-resident Hong Kong companies and
  individuals investing in New Zealand from Hong Kong, or at least abolish the
  interest tax.
• Immediately classify Hong Kong as a " grey" list country.
• Give consideration to a double tax treaty with Hong Kong.
• Provide incentives for both New Zealand and Hong Kong business to set up in
  each other territory with some tax incentives.
• Provide incentives for a Hong Kong business to base itself in New Zealand so
  as to operate its worldwide business from a New Zealand base, for example by
  giving automatic work visa's or immigration status to the staff of such
  companies, together with an exemption from tax for say 5 years or perhaps tax at
  say 5% for a limited period.

Stock Exchange Co-operation:
There are some compelling reasons for
New Zealand seeking a closer association with the Stock Exchange of Hong Kong.

New Zealand could ask Hong Kong for:

• Confirmation that a New Zealand company would be accepted as a special
  category company for listing in Hong Kong. Bermuda has that qualification.
  However tax issues for a New Zealand company would arise and changes at the NZ
  end would be required. The effect would be that many international business
  companies would use New Zealand companies.
• The Hong Kong Stock Exchange could be asked to relax its listing criteria
  for New Zealand companies.
• For smaller companies, allow NZ companies to list on the GEM- a secondary
  market in Hong Kong for smaller Hong Kong companies.

Hong Kong might ask New Zealand for:

• A similar relaxation for New Zealand listed companies in which Hong Kong
  interests held over a 60% stake- there is interest in HK investors listing here
  as costs are much cheaper.
• Establish special categories allowing Joint Ventures between NZ and HK
  investors - for example in forestry or biotechnology - to list on the main board
  in NZ without large capital or past trading history.

Immigration.
The policies of the NZIS are seen as harsh, difficult
and arbitrary by some would-be Hong Kong migrants. There is an urgent need to
focus on attracting business migrants, particularly the very wealthy, who, if
they can be attracted to live here, will likely be more inclined to base their
businesses in New Zealand.

The New Zealand Stock
Exchange.

The NZSE supports New Zealand pursuing the CEP.

The key issue on which the NZSE seeks progress would be in mutual recognition
of professional qualifications, without the need for licensing, accreditation or
other acceptance, and then subsequent monitoring and supervision.

It would help substantially if brokers in New Zealand who are members of the
NZSE were able to offer services in Hong Kong and vice versa, without the need
for separate licensing and approval in the other jurisdiction.

Transend Worldwide
Limited.

Transend has its headquarters in Wellington, with subsidiaries in the United
Kingdom, branch offices in Spain and South Africa, and staff deployed in a range
of countries. As an exporter of services from New Zealand, Transend has been
active in more than forty countries.

In summary, Transend is supportive of trade liberalisation initiatives such
as this which have the potential to lead to new or improved opportunities for
either itself or its parent company, New Zealand Post Limited, to serve clients
in New Zealand or internationally.

Previous bilateral trade agreements, and multilateral services negotiations,
have not been able to impart impetus to postal reform and liberalisation,
focusing much more on financial services, insurance, professional services,
transport services, telecommunications and so on. We think that the upcoming
Hong Kong/New Zealand CEP negotiations provide a good opportunity to redress
this state of affairs.

Attitudes shown by some governments towards postal services and postal
services negotiations are far from competitive or commercial. They reflect a
strong public service mindset, and the ownership interest governments world-wide
have had in this sector.

New Zealand's postal market was completely deregulated on 1 April 1998. The
courier market has long been liberalised. Thus, a Hong Kong company, or any
other, could today register to offer postal services in our market.
Unfortunately however, New Zealand Post - and its international subsidiary
Transend - is prevented from offering a range of core mail services in almost
every external market, including Hong Kong.

Currently, Hongkong Post has the status of a trading fund. It is not yet
corporatised. Employees are public servants, and management is constrained in
several basic commercial respects, including setting prices and service
offerings. There is formal monopoly protection in the letters market, though
informal competition already exists. Transend and New Zealand Post would like to
be in a position where it could offer competing services in the Hong Kong market
for domestic and international postal services.

Accordingly, Transend seeks:

• the full and early liberalisation of all postal services in the proposed CEP
  agreement, as part of a wider and robust services accord. Hong Kong has not made
  commitments in the WTO on a number of services in which New Zealand has
  significant trade interests, including postal services. We hope that that
  situation can be rectified through this bilateral negotiation. Transend seeks,
  as a minimum, that postal services not remain outside services commitments
  negotiated with Hong Kong.

a defined timetable for the full and, hopefully, early liberalisation of
postal services. Certainly, we would not wish liberalisation of those services
to be deferred beyond the date set for other services sectors, or worse still,
not addressed specifically at all.