National's foreign buyers tax has international law risks

National's proposal for a tax on foreign buyers of residential property raises significant risks under international tax treaties, writes Professor Craig Elliffe.

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Analysis: Are there any problems in imposing a foreign buyer taxation obligation on non-New Zealand citizens?

This is a brief note to explain some of the issues relating to the imposition of a transaction tax on the purchase of New Zealand real property by foreign buyers when those foreign buyers are nationals of a double tax treaty with New Zealand that contains a non-discrimination clause.

Article 24 of the OECD Model Treaty

New Zealand has double taxation treaties with 40 countries. These treaties are primarily designed to prevent double taxation, which is seen as a barrier to international trade.

The double taxation treaties mainly operate to eliminate or reduce source taxation (the taxation that takes place on inbound investment) when the investor comes from a country that has signed the tax treaty with New Zealand. It is no longer New Zealand’s tax treaty policy to include non-discrimination clauses, and we have a reservation making it clear that we don’t necessarily conclude treaties with a version of Article 24.

That said, approximately half of New Zealand’s tax treaties contain a non-discrimination clause in (usually) Article 24. The countries with this agreement with a version of Article 24 include Australia, Canada, China, Hong Kong, India, Japan, Mexico, the United Kingdom and the United States, amongst many others.

What does a non-discrimination article do?

The prevention of discrimination in carrying on business in another jurisdiction is older than income tax. Contracting states entered into arrangements to extend and strengthen the diplomatic protection of their nationals. These arrangements historically were contained in consular or establishment conventions and treaties of friendship or commerce.

Later, the provisions preventing tax discrimination came into modern tax treaties, and the provisions have remained essentially unchanged since 1963. There are five non-discrimination rules in Article 24.

The first is the relevant one as far as foreign buyer taxation is concerned. Article 24 (1) bans taxation discrimination on the grounds of nationality. A national is defined in Article 3 to be any individual possessing the nationality or citizenship of that contracting foreign state.

Taxation imposed based on tax residence (a common distinction found in tax law) is unlikely to be problematic under Article 24. A New Zealand Court of Appeal decision in the early 1970s (United Dominions Trust Ltd) held that discrimination based on residence was not in breach of the New Zealand/United Kingdom double tax agreement of 1966.

It appears that residence is not the basis for determining this taxation. Instead, it is based purely on nationality and would be more burdensome as a tax obligation than that imposed on New Zealand nationals. It applies to people who do not hold a resident class visa in New Zealand (something New Zealanders, nor I believe Australian citizens, are required to do.

Professor Craig Elliffe
Tax law expert Professor Craig Elliffe

Does Article 24 apply to a transaction tax?

Double Tax Treaties apply to the taxes covered in Article 2 of the Treaty. These are typically income taxes (which include corporation taxes). However, it is made clear in Article 24 that the provisions of Article 2 do not restrict the scope of the Article.

The non-discrimination Article applies to all taxes “of every kind and description”. The OECD Commentary explains that the Article “therefore applies to taxes of every kind and description levied by, or on behalf of, the State, its political subdivisions or local authorities”.

Therefore, a transaction tax such as a foreign buyer tax would be subject to Article 24.


The tax treaty prohibits the imposition of a foreign buyer tax in the following circumstances: (1) when there is a double taxation treaty between New Zealand and the foreign country that has a non-discrimination article modelled on Article 24 (1) of the OECD Model; and (2) the tax is imposed on a “national” of that foreign country.

What happens if it were to be imposed, notwithstanding the double tax agreements? In New Zealand, a common-law country with a dualist legal system, following the United Kingdom’s broad framework, it is possible for our Parliament to introduce domestic legislation to override a tax treaty. Although this is a breach of international law, treaty override can be justified where taxpayers have been abusing a tax treaty provision and using the tax treaty in a way the contracting parties would not have anticipated.

Domestic law tax treaty override would be a much more severe matter if New Zealand introduced a new tax of this kind and purported to override our double tax treaties. I would expect a significant possibility of a challenge by the taxpayers concerned based on non-discrimination (i.e. a dispute about the tax payable by the taxpayers individually or collectively). Still, there would also be a significant political and legal risk with our treaty partners.

The treaty partners could terminate the double tax treaty or negate various parts of the agreement. Of course, there are many other political consequences, such as the termination of other agreements (such as free trade agreements) for such a serious breach of international law.

Professor Craig Elliffe is a tax law expert with the University of Auckland's law faculty.

This article reflects the opinion of the author and not necessarily the views of Waipapa Taumata Rau University of Auckland.

It was first published on 1 News

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