The worldwide income of the Fund is subject to tax in New Zealand.
Foreign-sourced income of the Fund may also be taxed overseas. The tax rules of the applicable jurisdiction will determine the tax treatment of each investment subject to any modifying effect provided for in a double tax agreement between New Zealand and the foreign country.
As a general rule, earnings derived from Fund investments in foreign countries will then be taxed in New Zealand in accordance with the relevant domestic tax rules. When the Fund brings these foreign earnings back to New Zealand, they may be subject to foreign withholding taxes in the country of source for which a foreign tax credit may be available in New Zealand.
The Fund is measured on a post-foreign tax, pre-New Zealand tax basis. For the Crown, as owner of the Fund, any foreign tax paid represents leakage from the Crown’s fiscal perspective. However, as a sovereign entity, the Fund is generally entitled to various exemptions from offshore withholding taxes and, in limited circumstances, may also qualify for an offshore tax exemption. The availability of the “sovereign immunity” exemption is a relevant factor when evaluating various offshore investments as it impacts the rate of return on the investment.
To implement its investment strategies, the Fund needs the flexibility to access a range of investment vehicles, including collective investment funds (CIVs), some of which may be located in tax neutral jurisdictions such as Bermuda or the Cayman Islands. These jurisdictions have low or nil tax rates but are transparent and allow for the exchange of information between international revenue authorities.
Using a CIV based in a tax-neutral jurisdiction ensures the CIV is not exposed to a second layer of foreign tax on its collective income where applicable foreign taxes have already been paid at source. The Fund then pays New Zealand income tax on income from the CIV. The Guardians requires CIVs in which the Fund invests to provide tax transparency, to co-operate with tax information exchange programmes and to comply with all relevant laws.
As at 30 June 2018, 5.7% of the Fund was invested via tax neutral jurisdictions.