The Impact of the Approved Issuer Levy on the New Zealand Dollar Domestic Interest Rates

New Zealand Journal of Taxation Law and Policy, Vol. 14, No. 4, December 2008

17 Pages Posted: 12 May 2010

See all articles by Craig Elliffe

Craig Elliffe

University of Auckland - Faculty of Law

Alastair Marsden

University of Auckland Business School

Russell Poskitt

Independent

Date Written: December 1, 2008

Abstract

This article examines the impact of the approved issuer levy (AIL) on the New Zealand dollar domestic interest rates. Under the AIL regime, New Zealand tax-resident borrowers can apply to Inland Revenue to be an approved issuer. Approved issuers are able to pay interest to lenders, who are not tax-resident in New Zealand, free of any non-resident withholding tax. Under the AIL regime, however, a two percent levy on interest income must still be paid to Inland Revenue. We provide empirical evidence which suggests that non-resident lenders require the New Zealand tax-resident borrower to gross up the pre-tax interest rate for the cost of the AIL payment. Our results support the wider proposition that reducing taxes on offshore portfolio investment will lower domestic interest rates and reduce the cost of capital for New Zealand entities.

Keywords: gross-up of tax, cost of borrowing, impact of tax on costs of borrowing

JEL Classification: K34, K00

Suggested Citation

Elliffe, Craig Macfarlane and Marsden, Alastair D.E. and Poskitt, Russell, The Impact of the Approved Issuer Levy on the New Zealand Dollar Domestic Interest Rates (December 1, 2008). New Zealand Journal of Taxation Law and Policy, Vol. 14, No. 4, December 2008, Available at SSRN: https://ssrn.com/abstract=1604837

Craig Macfarlane Elliffe (Contact Author)

University of Auckland - Faculty of Law ( email )

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Auckland Mail Centre
Auckland, 1142
New Zealand

Alastair D.E. Marsden

University of Auckland Business School ( email )

Private Bag 92019
Room: C208
Auckland
New Zealand
64 9 373 7999 (Phone)
64 9 373 7406 (Fax)

Russell Poskitt

Independent

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