Have your say: Should NZ try to build an Asia-Pacific funds hub?

John Key has indicated an interest in tweaking tax rules to encourage the development of a financial services hub in New Zealand to provide back office type services for fund managers in the Asia Pacific region. The NZHerald reported on Monday Key as saying such a move had been studied (but not released) by the Capital Markets Development Taskforce and could generate 3,000 to 5,000 jobs with an extra NZ$250 million of tax revenue. (Adds My View below)

Mr Key said Ireland had "done a lot of this work. It was cost effective, but also predictable." The Prime Minister became very familiar with the reforms in Ireland when he was London-based head of Merrill Lynch's global foreign exchange business. He shifted a lot of the bank's business to Dublin.

Fran O'Sullivan has focused her NZHerald column this morning on the idea of a Asia Pacific Funds hub and the involvement of Craig Stobo. He is the chairman of fund management administration business Appello Services, which is 30 per cent-owned by the NZX. Stobo presented the idea at last year's Job Summit, Adam Bennett reported in Tuesday's Herald. Stobo is looking for a tax-free set-up.

"It doesn't work unless you've got the tax right and the tax has to be zero at the fund and investor level. Because of the PIE regime we're able to do that, to tax different classes of investors at different rates, and in this case non-residents at zero."

Fran is not so sure this is an easy win and points out the involvement of Stobo.

There is a high risk of failure if the hub "goes live" without major changes to tax and regulatory platforms in place, and, without a firm commitment already secured from some leading funds to situate their back offices here. Key has plans to engage a"Craig Stobo-type person" in his office to drive the Asia-Pacific hub forward. He has not spelt out whether it will be Stobo who gets to lead the group which will be tasked with developing an implementation plan. The group will include representatives from Treasury, IRD, and, the Ministry of Economic Development (MED). There are other possible candidates. But it would be hard to imagine that after claiming credit for the hub idea in yesterday's Business Herald, Stobo would decline a prime ministerial invite.

My view I worry that John Key's enthusiasm for the idea is based on the attractiveness of appearing to 'do something' to boost the economy without having to take any political pain. This all seems like a 'no-brainer' until you look a little closer. Firstly, it involves further 'tweaking' a tax system that is already riddled with loopholes, exceptions and special treatments. This looks like another loophole that tax lawyers paid for by multi-nationals will jump through, charging hundreds of dollars an hour as they go. The problem is our system needs fundamental reform, not more tweaks. This 'tax free funds hub' idea further entrenches a tax system driven by tweaks creating loopholes for tax lawyers designing clever schemes. It also drives the IRD to spend years and millions of dollars trying to use the court system to close them down. We have seen years of court action around Trinity, the bank structured finance cases and now the 'Penny and Hooper' (Optional Convertible Note) OCN case grinding through the courts as the IRD tries to achieve through legal system what politicians are failing to do through the parliament. Why doesn't John Key take on the much more economically sustainable (but politically difficult) task of broadening, flattening and simplifying our tax system? The system was broken by Labour when it introduced the 39 cent top income tax rate, opening up a big gap between the 33% corporate and family trust rates. John Key should fix it properly and extend the tax net to property. Instead he is latching onto another clever 'scheme/dream' that achieves nothing, but employing more tax lawyers and accountants. Questions need to be asked, in particular, around the potential conflicts of interest for Craig Stobo, if he is appointed as a sort of 'Pension Fund Hub Tsar'. He runs a pension funds administration service. I'm also sceptical about the idea that financial services are a sustainable source for growth. The huge problems in Ireland and the UK are partly because their banks and other financial institutions were way too clever for their own good and took on too much debt. Back office services for funds management are a different beast, but I'd much rather grow the productive sector and small businesses than focus on the money changers. It also creates new distortions. Why should foreign fund managers receive tax breaks when other foreign companies don't. Do we widen it to other 'special' foreign companies? How about pharmaceuticals? That's what Ireland did. Or maybe investment banking? Or maybe we should try to set up some tax-free zone for foreign companies? Down that path Caymans Islands' madness lies. It's all very nice to want to be the Geneva of the South Pacific, but what happens when the other tax gathering authorities such as America's Inland Revenue Service (IRS) or the Australian Tax Office come calling to ask some tough questions. Switzerland's notoriously secretive banks are currently under concerted attack from the IRS and others over this very issue. John Key should stop looking for magic bullets and just do the hard work. He could do it. All he has to do is blame Labour for the economic, taxation and spending distortions now evident and convince New Zealanders they are better off in the long run with a cleaner, simpler, broader and flatter tax system. He needs to think beyond the next election. He has the support of the public and some real political gifts. Why doesn't he use them instead of looking for short cuts? Your view? We welcome your comments and insight in the comments below.