## 1cokea2019001 — PREFACE

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### Mission and scope
- A technical assistance mission was conducted in Rarotonga, Cook Islands during the period October 29 to November 9, 2018 to estimate the economic and revenue contributions of the international financial services industry in the Cook Islands.
- The mission was conducted in response to a request from the Ministry of Finance and Economic Management (MFEM).
- Data compilation support was provided by Veia Teipo, Cook Islands Statistics Office, and David Toleafoa, Revenue Management Division.
- The International Monetary Fund’s Statistics Department reviewed and provided comments on the report.

### Executive summary — key findings
- International financial services industry contribution to GDP (direct plus indirect) between 2010 and 2017: fluctuated between 3.8 and 4.8 percent.
- Direct contribution to GDP:
  - Increased from NZ$ 12.5 million in 2010 to NZ$ 14.9 million in 2017.
- Indirect contribution:
  - Averaged around NZ$ 3.5 million a year and has remained flat because purchases of production inputs from other businesses in the Cook Islands have been falling.
- Comparison of GDP and revenue contributions:
  - 2010: industry contributed 3.7 percent to GDP but only 3.1 percent to tax collection.
  - 2016: industry contributed 3.3 percent to GDP and paid/collected 2.2 percent of taxes.
- Tax-to-GDP ratios:
  - Economy as a whole: each dollar of economic activity generates between 28 and 32 cents of tax.
  - International financial services industry: averaged 24 percent from 2010 to 2014; 21 percent in 2015; 19 percent in 2016.
- Fall in industry tax-to-GDP ratio attributed to lower reported company profits driven by increased other deductions; insufficient information to establish which costs increased.
- Estimated net impacts if industry lost:
  - One-off decline in GDP between 2.1 and 2.6 percent.
  - Revenue lower by NZ$ 3.5 to 4.1 million a year, about 3.1 to 3.2 percent of total VAT, income and withholding taxes.
  - Revenue loss estimate includes all Financial Supervisory Commission (FSC) revenue.

### Background and policy context
- EU raised issues that could result in the Cook Islands being placed on the EU’s list of non-cooperative jurisdictions.
- One EU concern: international companies are exempt from all taxes in the Cook Islands.
- Taxing international companies could address EU concern but could also result in the end of international companies in the Cook Islands and loss of associated economic and revenue contributions.

### Cook Islands finance sector — structure and regulation
- Financial system composition:
  - About thirty financial entities including domestic and international banks, insurers, captive insurers, trustee companies, and money-changing and remittance businesses.
- Currency and central bank:
  - The Cook Islands does not have a central bank; the New Zealand dollar is used as legal tender.
- Trustee companies explicitly identified:
  - Alpha Trust (Cook Islands) Limited; Asiaciti Trust Pacific Limited; Cook Islands Trust Corporation Limited; Metis Global (Cook Islands) Limited; Ora Fiduciary (Cook Islands) Limited; Portcullis (Cook Islands) Ltd; Southpac Trust Limited; Trustees & Fiduciaries (Cook Islands) Limited.
- Financial regulation and supervision:
  - Financial Supervisory Commission (FSC): independent body; licensing authority for financial institutions; operates registries for international and foreign companies, limited liability companies, international trusts, international partnerships, and foundations.
  - Financial Services Development Authority (FSDA): responsible for growing the international financial services industry.
  - Financial intermediaries must be licensed and meet other requirements.
- Key legislation administered by the FSC includes:
  - Financial Supervisory Commission Act 2003; Financial Legislation Amendment Act 2012; Banking Act 2011 and Amendments; Digital Registers Act 2011; Foundations Act 2012; Insurance Act 2008 and Amendments; Captive Insurance Act 2013 and Regulations; Money-Changing and Remittance Businesses Act 2009; Trustee Companies Act 2014; International Companies Act 1981-82 and Amendments; Limited Liability Companies 2008 and Amendments; International Trusts 1984 and Amendments; International Partnership 1984 and Amendments.

### Measurement approach
- Economic contribution measured as value added of resident institutional units engaged directly or indirectly in producing international financial services — i.e., contribution to gross domestic product (GDP).
- Direct contributors counted:
  - Eight trustee companies, a ship registry, the FSC, and the FSDA.
- Indirect contribution channels:
  - (i) Purchases of goods and services by the international financial services industry (e.g., electricity, accounting services, telecommunications).
  - (ii) Business generated for other sectors: banking services, captive insurance, and business travel.
- Estimates use tax data and Cook Islands Statistics Office data.

### Net impact scenario assumptions and labor focus
- Taxing international companies could lead to loss of the industry; net effects evaluated using salaries and wages data because labor is the largest input.
- If industry lost:
  - About half of the economic activity currently generated is estimated to shift to other sectors as most international financial services employees would find alternative employment in the Cook Islands at lower wages.
  - Only the most highly paid employees are assumed to leave.

### Fiscal and institutional implications
- FSC is self-funded mainly from registration and renewal fees from incorporated entities and trusts established and administered by the international financial services industry.
- If international companies and associated registrations disappear, FSC funding would need alternative sources to continue regulating and supervising the domestic financial services industry.

### Caveats, limitations, and potential biases
- Estimates based on available information and involve assumptions and judgments.
- Factors contributing to potential overestimation:
  - All activities by the FSC and ship registry counted as international financial services, although they serve domestic as well as international entities and ships/yachts can be registered other than through international companies.
  - No corrections were made for possible overestimation.
- Analysis may understate contributions through channels not considered.

### FSC staffing and revenues (as at June 30, 2018)
- Staffing:
  - Commissioner; Deputy Commissioner / Registrar; Head of the Financial Intelligence Unit; nine staff members.
- Revenue sources:
  - Licensing, registration, renewal, and other fees; Crown appropriations received in fiscal years 2014 and 2015.
  - Renewal fees contributed between 76 and 80 percent to the FSC’s annual revenue.
- Table 3 (Revenues of the Financial Supervisory Commission, In NZ$):
  - Crown appropriation (Year ended June): 2014 = 35,000 ; 2015 = — ; 2016 = — ; 2017 = — ; 2018 = 35,000
  - Licensing fees: 2014 = 89,573 ; 2015 = — ; 2016 = 113,207 ; 2017 = 136,285 ; 2018 = 115,027 ; 111,478 (note: source lists both 115,027 and 111,478 in same row—preserve as presented)
  - Registration fees: 2014 = 143,487 ; 2015 = — ; 2016 = 138,090 ; 2017 = 165,942 ; 2018 = 119,033 ; 126,754
  - Renewal fees: 2014 = 1,105,643 ; 2015 = 1,186,037 ; 2016 = 1,320,180 ; 2017 = 1,199,295 ; 2018 = 1,126,783
  - As % of total revenue (renewal fees): 2014 = 76% ; 2015 = 76% ; 2016 = 76% ; 2017 = 80% ; 2018 = 78%
  - Other fees revenue: 2014 = 71,892 ; 2015 = — ; 2016 = 97,947 ; 2017 = 116,402 ; 2018 = 73,613 ; 73,757
  - Total revenue: 2014 = 1,445,595 ; 2015 = 1,570,281 ; 2016 = 1,738,809 ; 2017 = 1,506,968 ; 2018 = 1,438,772

### International financial services industry: structure and trends
- Established in the 1980s; provides corporate, trust, and financial planning services including corporate entity formation.
- Registrations (International Corporate Entities, year ended June):
  - International companies: 2014 = 1,090 ; 2015 = 1,090 ; 2016 = 1,095 ; 2017 = 987 ; 2018 = 931
  - International partnerships: 2014 = 6 ; 2015 = 3 ; 2016 = 4 ; 2017 = 4 ; 2018 = —
  - International trusts: 2014 = 2,620 ; 2015 = 2,505 ; 2016 = 2,373 ; 2017 = 2,275 ; 2018 = 2,182
  - Limited liability companies: 2014 = 383 ; 2015 = 408 ; 2016 = 402 ; 2017 = 365 ; 2018 = 358
  - Foundations: 2014 = 518 ; 2015 = 285 ; 2016 = 251 ; 2017 = —
- Eight registered trustee companies provide services.
- Capital Security Bank (CSB):
  - Only Cook Islands bank used onshore by trustee companies for international clients.
  - CSB is itself an international company; clients generally non-residents, international entities, and international trusts.
  - CSB’s contribution included in indirect contribution to maintain confidentiality, leading to a small underestimation of industry economic and revenue contribution.

### Ship and yacht registry
- Cook Islands operate an open register for ships and yachts.
- Flag state duties performed by Maritime Cook Islands through an agreement with the Ministry of Transport.
- Registration channels: CISOA, CIYS, establishing a Cook Islands international company, or registering an existing foreign company on the international companies register.
- Vessel registrations and gross tonnage (selected):
  - Vessel registrations: 2015 = 427 ; 2016 = 557 ; 2017 = (value missing in supplied excerpt)
  - Gross tonnage: 2015 = 1,783,805 ; 2016 = 1,773,866 ; 2017 = 1,840,614

### Restrictions on resident participation and foundations
- International entities generally prohibited from trading in the Cook Islands.
- Restrictions on residents registering international entities contained in:
  - Section 11 of Limited Liability Companies Act 2008;
  - Section 2 of International Trusts Act 1984;
  - Section 10 of International Partnership Act 1984;
  - Section 6 of International Companies Act 1981-82.
- Foundations Act 2012 does not contain restrictions on residents incorporating entities on the international registry; FSC considers this an oversight and applies same restrictions to foundations.

### Financial Services Development Authority (FSDA)
- Objective: encourage, promote, and develop the Cook Islands’ financial services industry to achieve sustained growth that is economically beneficial, socially responsible, and reputable.
- FSDA staffing: three employees — Chief Executive Officer, Marketing Director, and a staff member.
- FSDA survey finding: most international entities established in the Cook Islands for general asset holding purposes.

### Measuring economic activity and GDP overview
- SNA framework: GDP measured by production (GDP(P)), expenditure (GDP(E)), and income (GDP(I)).
- GDP by production compiled by Cook Islands Statistics Office; main data source: VAT data.
- GDP identities: GDP = C + G + I + X - M; income components include compensation of employees, gross operating surplus, taxes less subsidies.
- Constant prices reported in 2016 prices.
- GDP growth (current prices and constant 2016 prices):
  - Current prices GDP: 2006 = NZ$ 316 million ; 2017 = NZ$ 486 million.
  - Constant 2016 prices GDP: 2006 = NZ$ 391 million ; 2017 = NZ$ 487 million.
- Top five industries (selected current price values, NZ$ million and % of GDP):
  - Trade (NZ$ million): 2006 = 51 ; 2017 = 66 ; as % of GDP 2006 = 16% ; 2017 = 14%
  - Accommodation services (NZ$ million): 2006 = 30 ; 2017 = 64 ; as % of GDP 2006 = 9% ; 2017 = 13%
  - Public administration (NZ$ million): 2006 = 28 ; 2017 = 37 ; as % of GDP 2006 = 9% ; 2017 = 8%
  - Transportation (NZ$ million): 2006 = 19 ; 2017 = 38 ; as % of GDP 2006 = 6% ; 2017 = 8%
  - Finance and insurance (NZ$ million): 2006 = 22 ; 2017 = 32 ; as % of GDP 2006 = 7% ; 2017 = 7%
- Finance industry on average has contributed around 86 to 87 percent to finance and insurance in current and constant prices respectively since 2006.

### Contribution of international financial services to current price GDP (methodology and results)
- Focus on current price GDP because key data reported in current New Zealand dollars.
- Trustee companies, ship registry, and FSC GDP contribution (sales, expenses, value added, 2010–2017, NZ$ million):
  - Sales (2010–2017): 15.0 ; 14.0 ; 16.0 ; 15.1 ; 15.1 ; 18.2 ; 16.8 ; 17.2
  - Expenses (2010–2017): 2.7 ; 3.0 ; 3.0 ; 2.9 ; 3.1 ; 2.9 ; 2.6 ; 2.5
  - Value added (sales minus expenses, 2010–2017): 12.3 ; 11.1 ; 13.0 ; 12.2 ; 12.1 ; 15.3 ; 14.3 ; 14.7
  - As % of GDP (2010–2017): 3.7% ; 3.2% ; 3.5% ; 3.5% ; 3.1% ; 3.5% ; 3.2% ; 3.0%
- Observations:
  - Value added rose from NZ$ 12.3 million in 2010 to NZ$ 14.7 million in 2017.
  - Contribution to GDP fell from 3.7 percent in 2010 to 3.0 percent in 2017 because value added grew slower than the rest of the economy.
  - Industry accounted for 25 percent of transportation and finance and insurance industries’ value added in 2010, dropping to 21 percent in 2017.
  - Fees and charges collected in US dollars cause value added to be sensitive to NZ$/US$ exchange rate fluctuations.

### Employment and wages in international financial services
- 2007–2017:
  - Average annual wage increased by 25 percent from NZ$ 44,844 to NZ$ 56,206.
  - Current price GDP increased by 58 percent over same period.
- Number of employees (PAYE employees, no part-time adjustment):
  - Fluctuated between 89 and 107 with an average of 98 employees.

### FSDA contribution to GDP
- FSDA has no trading revenue and does not charge/collect VAT.
- Contribution estimated via GDP by income from budget appropriations:
  - Personnel and depreciation yield estimated contribution around NZ$ 250,000 or 0.1 percent of GDP.
- FSDA appropriations (Year ended June, NZ$):
  - Personnel: 2015 = 231,200 ; 2016 = 235,200 ; 2017 = 235,200 ; 2018 = 240,339 ; 2019 = 241,541
  - Operating: 2015 = 178,906 ; 2016 = 177,906 ; 2017 = 177,906 ; 2018 = 177,906 ; 2019 = 177,906
  - Depreciation: 2015 = 9,867 ; 2016 = 9,867 ; 2017 = 9,867 ; 2018 = 9,867 ; 2019 = 9,868
  - Gross current appropriation: 2015 = 419,973 ; 2016 = 422,973 ; 2017 = 422,973 ; 2018 = 428,112 ; 2019 = 429,315

### Purchases and GDP contribution (expenses composition and value added ratios)
- Trustee companies average expense composition (percent of total expenses):
  - Audit fees: 7% ; Insurance: 9% ; Legal fees: 18% ; Office expenses: 16% ; Professional fees: 30% ; Rent: 12% ; Other expenses: 8%
- Industries’ value added as percent of gross turnover (2013–2017 and average):
  - Finance and business services average value added: 53 percent (used for calculating GDP contribution of purchases).
- Total expenses and GDP contribution of purchases (NZ$ million, year ended December):
  - Trustee companies, ship registry, FSC expenses (2010–2017): 2.7 ; 3.0 ; 3.0 ; 2.9 ; 3.1 ; 2.9 ; 2.6 ; 2.5
  - FSDA expenses (2010–2017 estimated): 0.2 each year
  - Total expenses (2010–2017): 3.0 ; 3.2 ; 3.2 ; 3.1 ; 3.2 ; 3.1 ; 2.8 ; 2.7
  - GDP contribution of expenses (total × 53%): 2010 = 1.6 ; 2011 = 1.7 ; 2012 = 1.7 ; 2013 = 1.6 ; 2014 = 1.7 ; 2015 = 1.6 ; 2016 = 1.5 ; 2017 = 1.4
  - As % of GDP (2010–2017): 0.5% ; 0.5% ; 0.5% ; 0.5% ; 0.4% ; 0.4% ; 0.3% ; 0.3%
- Note: Using finance and business services value added likely overestimates contribution for purchases like electricity but offsets underestimation from VAT-exempt financial services.

### Contributions to other sectors (indirect contributions)
- Banking services (indirect):
  - Method: scale direct contribution by finance sector GDP share.
  - Banking services contribution (NZ$ million, 2010–2017): 1.0 ; 0.8 ; 0.9 ; 0.8 ; 0.7 ; 0.8 ; 1.0 ; 0.9
  - As % of GDP (2010–2017): 0.3% ; 0.2% ; 0.2% ; 0.2% ; 0.2% ; 0.2% ; 0.2% ; 0.2%
- Captive insurance (indirect):
  - Captive insurance GDP (NZ$ million, 2010–2017): 3.5 ; 3.8 ; 4.0 ; 3.9 ; 3.6 ; 4.8 ; 4.3 ; 3.2
  - Indirect contribution (captive insurance, NZ$ million, 2014–2017): 0.7 ; 0.9 ; 0.8 ; 0.6
  - As % of GDP (2014–2017): 0.2% ; 0.2% ; 0.2% ; 0.1%
- Business travel (indirect):
  - Tourist arrivals: 2010 = 104,234 ; 2017 = 161,362
  - Business arrivals: 2010 = 2,495 ; 2017 = 3,569
  - Business professionals arrivals: 2010 = 333 ; 2017 = 233
  - Average spending per tourist (NZ$): 2010 = 1,754 ; 2017 = 1,843
  - Assumption: business professionals spend five times average tourist spending; average spending per business professional arrival (NZ$): 2010 = 8,769 ; 2017 = 9,214
  - Business professional tourist spending (NZ$ million): 2010 = 2.9 ; 2017 = 2.2
  - GDP contribution of business travel (NZ$ million): 2010 = 1.0 ; 2011 = 0.7 ; 2012 = 0.8 ; 2013 = 0.5 ; 2014 = 0.6 ; 2015 = 0.6 ; 2016 = 0.6 ; 2017 = 0.7
  - As % of GDP: 2010 = 0.3% ; 2017 = 0.1%
  - Business travel related to international financial services estimated to have contributed between NZ$ 0.5 to 1 million annually (around 0.1 to 0.3 percent of GDP) over 2010–2017.

### Total GDP contribution (direct + indirect, NZ$ million and % of GDP)
- GDP (NZ$ million): 2010 = 334.2 ; 2011 = 344.3 ; 2012 = 369.5 ; 2013 = 352.7 ; 2014 = 385.1 ; 2015 = 433.3 ; 2016 = 445.1 ; 2017 = 486.4
- Direct contribution to GDP (NZ$ million): 2010 = 12.5 ; 2011 = 11.2 ; 2012 = 13.3 ; 2013 = 12.4 ; 2014 = 12.3 ; 2015 = 15.5 ; 2016 = 14.5 ; 2017 = 14.9
- Direct contribution as % of GDP (2010–2017): 3.7% ; 3.3% ; 3.6% ; 3.5% ; 3.2% ; 3.6% ; 3.3% ; 3.1%
- Indirect contribution to GDP (NZ$ million): 2010 = 3.5 ; 2011 = 3.2 ; 2012 = 3.3 ; 2013 = 3.0 ; 2014 = 3.6 ; 2015 = 3.9 ; 2016 = 3.9 ; 2017 = 3.6
- Indirect contribution as % of GDP (2010–2017): 1.0% ; 0.9% ; 0.9% ; 0.8% ; 0.9% ; 0.9% ; 0.9% ; 0.7%
- Total GDP contribution (NZ$ million): 2010 = 16.0 ; 2011 = 14.4 ; 2012 = 16.5 ; 2013 = 15.4 ; 2014 = 15.9 ; 2015 = 19.5 ; 2016 = 18.4 ; 2017 = 18.5
- Total GDP contribution as % of GDP (2010–2017): 4.8% ; 4.2% ; 4.5% ; 4.4% ; 4.1% ; 4.5% ; 4.1% ; 3.8%
- Notes:
  - Direct contribution increased from NZ$ 12.5 million in 2010 to NZ$ 14.9 million in 2017.
  - Indirect contribution averaged around NZ$ 3.5 million a year and has remained relatively flat.
  - Purchases of production inputs by the industry from other businesses have been falling.
  - Business travel appears to have declined consistent with decreasing international entity registrations.
  - Note 1: The direct contribution for 2010 to 2014 is assumed to be the same as in 2015.

### Contribution to government revenues (payments from FSC and Maritime Cook Islands)
- International companies are exempt from all taxes but income and value added generated by production of international financial services are subject to taxation.
- Government receives payments from the FSC and Maritime Cook Islands (ship registry).
- Payments averaged NZ$ 0.8 million over 2014–2017 (selected calendar-year totals):
  - 2014 total: 435 (NZ$ thousand)
  - 2015 total: 991
  - 2016 total: 1,071
  - 2017 total: 459
  - 2018 total: 586
- Selected FSC payments (year ended June, NZ$ thousand):
  - Financial Supervisory Commission: 2014 = 303 ; 2015 = 899 ; 2016 = 843 ; 2017 = 324 ; 2018 = 262
  - FSDA levy: 2014 = 274 ; 2015 = 279 ; 2016 = 305 ; 2017 = 274 ; 2018 = 262
  - Maritime Cook Islands: 2014 = 132 ; 2015 = 92 ; 2016 = 228 ; 2017 = 135 ; 2018 = 324

### Tax revenue from trustee companies, ship registry, FSC, and FSDA
- Taxes collected reported on cash basis for VAT, PAYE, income tax on directors’ fees and domestic dividends, and company income and withholding taxes.
- Assumptions:
  - Dividends to non-residents taxed at company income tax rate plus 15 percent withholding tax.
  - Dividends to domestic shareholders and directors’ fees taxed at 30 percent (assumed).
- Total tax collection (2007–2017) varied between NZ$ 2.4 and 3.3 million per year.
  - VAT, PAYE, directors’ fees and dividend taxes (NZ$ million, 2010–2017): 2010 = 2.1 ; 2011 = 2.2 ; 2012 = 2.5 ; 2013 = 2.5 ; 2014 = 2.4 ; 2015 = 2.5 ; 2016 = 2.5 ; 2017 = 2.9
  - Company income and withholding taxes (NZ$ million, selected): 2007 = 0.3 ; 2008 = 0.5 ; 2009 = 0.7 ; 2010 = 0.6 ; 2011 = 0.6 ; 2012 = 0.5 ; 2013 = 0.6 ; 2014 = 0.4 ; 2015 = 0.4 ; 2016 = 0.2
  - Total tax revenue (NZ$ million, selected): 2007 = 2.4 ; 2008 = 2.7 ; 2009 = 3.2 ; 2010 = 3.1 ; 2011 = 2.9 ; 2012 = 3.0 ; 2013 = 3.0 ; 2014 = 2.9 ; 2015 = 3.3 ; 2016 = 2.8
- Note: Directors' fees estimated as 10% of expenses. For 2007 to 2009 they are assumed same as in 2010.

### Contributions to tax collection and GDP (trends and ratios)
- Contribution of international financial services industry to total VAT, income and withholding tax collection has fallen more than its contribution to GDP:
  - GDP contribution dropped by 0.4 percentage points whereas tax contribution dropped by 0.9 percentage points.
  - 2010: contribution to VAT and income taxes = 3.1% ; direct GDP contribution = 3.7%
  - 2016: contribution to VAT and income taxes = 2.2% ; direct GDP contribution = 3.3%
- Tax-to-GDP ratios (selected):
  - International financial services industry Tax to GDP: 2010 = 24% ; 2011 = 26% ; 2012 = 23% ; 2013 = 24% ; 2014 = 24% ; 2015 = 21% ; 2016 = 19%
  - Total economy Tax to GDP: 2010 = 29% ; 2011 = 32% ; 2012 = 32% ; 2013 = 32% ; 2014 = 30% ; 2015 = 31% ; 2016 = 28%

### Company income, deductions, and taxable profits (selected figures)
- Sales and components (In NZ$ million, selected):
  - Sales (2010–2017): 15.0 ; 14.0 ; 16.0 ; 15.1 ; 15.1 ; 18.2 ; 16.8 ; 17.2
  - Expenses (2010–2017): 3.0 ; 3.2 ; 3.2 ; 3.1 ; 3.2 ; 3.1 ; 2.8 ; 2.7
  - Wages (including employer superannuation, 2010–2017): 4.9 ; 4.9 ; 4.9 ; 4.9 ; 5.7 ; 5.6 ; 5.5 ; 5.4
  - Net VAT (calculated, 2010–2017): 1.3 ; 1.2 ; 1.4 ; 1.3 ; 1.5 ; 2.0 ; 1.8 ; 1.9
  - Other deductions (calculated, 2010–2016): 2.8 ; 1.9 ; 3.8 ; 2.8 ; 2.6 ; 5.6 ; 5.8
  - Company taxable income (2010–2016): 3.0 ; 2.8 ; 2.7 ; 2.9 ; 2.1 ; 2.0 ; 0.9
- Ratios (as percent of sales, selected):
  - Expenses: 2010 = 20% ; 2011 = 23% ; 2012 = 20% ; 2013 = 20% ; 2014 = 21% ; 2015 = 17% ; 2016 = 16% ; 2017 = 16%
  - Wages (incl. superannuation): 33% ; 35% ; 30% ; 33% ; 38% ; 31% ; 33% ; 31%
  - Net VAT (calculated): 9% ; 9% ; 9% ; 9% ; 10% ; 11% ; 11% ; 11%
  - Other deductions (calculated): 19% ; 14% ; 24% ; 19% ; 17% ; 30% ; 35%
  - Company taxable income as % of sales: 20% ; 20% ; 17% ; 20% ; 14% ; 11% ; 5%
- Observations:
  - Company taxable income averaged 19 percent of sales in 2010–2013; fell to 14 percent in 2014, 11 percent in 2015, and 5 percent in 2016.
  - Decline in taxable profits implies an increase in other deductions (residual-calculated).

### Other deductions: magnitude and possible causes
- Other deductions (residual) averaged 18 percent of sales in 2010–2014; rose to 23 percent in 2015 and 31 percent in 2016.
- Typical components: interest expense and bank charges, depreciation, exchange rate losses.
- Historically interest expense, bank charges, and depreciation have tended to be small because industry is not capital intensive; largest input is labor.
- Growth in other deductions exceeds exchange rate movements of NZ$ against the US$.
- Caveats: other deductions understated because taxes reported on cash basis and net VAT may be overstated.

### Total tax contribution of the international financial services industry (percent of VAT, income and withholding taxes)
- VAT, income and withholding taxes (NZ$ million, selected): 2010 = 97.9 ; 2011 = 108.6 ; 2012 = 118.1 ; 2013 = 112.7 ; 2014 = 116.3 ; 2015 = 132.9 ; 2016 = 124.3
- Direct contribution to tax collection (%): 2010 = 3.1% ; 2011 = 2.9% ; 2012 = 3.0% ; 2013 = 3.0% ; 2014 = 2.9% ; 2015 = 3.3% ; 2016 = 2.8%
- Indirect contribution to tax collection (%): 2010 = 1.0% ; 2011 = 0.9% ; 2012 = 0.9% ; 2013 = 0.8% ; 2014 = 0.9% ; 2015 = 0.9% ; 2016 = 0.9%
- Total tax contribution of international financial services (%): 2010 = 4.2% ; 2011 = 3.6% ; 2012 = 3.4% ; 2013 = 3.5% ; 2014 = 3.5% ; 2015 = 3.4% ; 2016 = 3.1%

### Net GDP impacts of taxing or losing the industry (assumptions and estimated one-off impacts)
- Labor and wage distribution (2017, trustee companies, ship registry, FSC, FSDA vs Banks):
  - Total employees: Trustee etc. = 91 ; Banks = 216
  - Total wages (excluding employer superannuation): Trustee etc. = NZ$ 5,114,770 ; Banks = NZ$ 6,844,299
  - Average wage: Trustee etc. = NZ$ 56,206 ; Banks = NZ$ 31,687
  - Wage brackets (Trustee etc., 2017):
    - 0 - 20,000: Employees 20 ; Wages 214,086 ; Average wage 10,704
    - 20,001 - 40,000: 32 ; 1,026,866 ; 32,090
    - 40,001 - 60,000: 15 ; 724,886 ; 48,326
    - 60,001 - 100,000: 11 ; 828,002 ; 75,273
    - Above 100,000: 13 ; 2,320,930 ; 178,533
- Assumptions to estimate direct GDP impact of losing the industry:
  - Top 14 percent of income earners who earn salaries above NZ$ 100,000 are assumed to leave the Cook Islands while all other employees remain but may accept lower salaries.
  - Based on 2017 data total salaries and wages would fall by 49 percent and GDP is assumed to decline proportionately.
  - 51 percent of economic activity currently generated by the industry would shift to other sectors.
- Indirect GDP impact assumptions:
  - 49 percent of GDP generated by purchases would be lost.
  - All banking services and business travel generated by the industry and captive insurance activities would cease.
- Estimated one-off GDP decline from losing industry (Table 24, selected):
  - Total reduction in GDP contribution (NZ$ million): 2010 = -8.8 ; 2011 = -7.8 ; 2012 = -8.9 ; 2013 = -8.2 ; 2014 = -8.8 ; 2015 = -10.7 ; 2016 = -10.2 ; 2017 = -10.1
  - Total reduction in GDP contribution (% of GDP): 2010 = 2.6% ; 2011 = 2.3% ; 2012 = 2.4% ; 2013 = 2.3% ; 2014 = 2.3% ; 2015 = 2.5% ; 2016 = 2.3% ; 2017 = 2.1%
  - Overall one-off decline in GDP estimated between 2.1 and 2.6 percent.

### Estimated revenue impacts of losing the industry
- Loss of industry estimated to reduce revenue by NZ$ 3.5 to 4.1 million, about 3.1 to 3.2 percent of total VAT, income and withholding taxes.
- Estimates include all FSC revenue (76 to 80 percent from renewal fees).
- Selected table extract (NZ$ million and % of VAT, income and withholding taxes):
  - VAT, income and withholding taxes (NZ$ million): 2010 = 97.9 ; 2011 = 108.6 ; 2012 = 118.1 ; 2013 = 112.7 ; 2014 = 116.3 ; 2015 = 132.9 ; 2016 = 124.3
  - Total reduction in revenues (NZ$ million): 2010 = -3.7 ; 2011 = -3.5 ; 2012 = -3.8 ; 2013 = -3.6 ; 2014 = -3.7 ; 2015 = -4.1 ; 2016 = -4.0
  - Total reduction in revenues (% of VAT, income and withholding taxes): 2010 = -3.8% ; 2011 = -3.2% ; 2012 = -3.2% ; 2013 = -3.2% ; 2014 = -3.2% ; 2015 = -3.1% ; 2016 = -3.2%
  - Direct reduction in tax collection (NZ$ million): 2010 = -1.5 ; 2011 = -1.4 ; 2012 = -1.5 ; 2013 = -1.5 ; 2014 = -1.4 ; 2015 = -1.6 ; 2016 = -1.4
  - Indirect reduction in tax collection (NZ$ million): 2010 = -0.8 ; 2011 = -0.7 ; 2012 = -0.8 ; 2013 = -0.7 ; 2014 = -0.8 ; 2015 = -0.9 ; 2016 = -0.9
  - Other revenue foregone (NZ$ million): 2010 = -1.4 ; 2011 = -1.3 ; 2012 = -1.5 ; 2013 = -1.4 ; 2014 = -1.4 ; 2015 = -1.6 ; 2016 = -1.7

### Assumptions, limitations, and caveats (summary)
- Estimates rely on available information and required assumptions and judgments.
- Potential overestimation factors:
  - All FSC and ship registry activities counted as international financial services though they serve domestic activities.
  - FSC licenses, registers, and supervises all financial institutions, not only international entities.
  - Ships and yachts can be registered other than through international companies.
- No corrections made for overestimation because the industry may also contribute through channels not considered.

*Source: 1cokea2019001 - PREFACE; Ministry of Finance and Economic Management; Cook Islands Statistics Office; Financial Supervisory Commission; Financial Services Development Authority; author's calculations and estimates (as presented in the source content).*

### PREFACE __________________________________________________________________________________________ 6

### PREFACE

### Mission and scope
- A technical assistance mission was conducted in Rarotonga, Cook Islands during the period October 29 to November 9, 2018 to estimate the economic and revenue contributions of the international financial services industry in the Cook Islands.
- The mission was conducted in response to a request from the Ministry of Finance and Economic Management (MFEM).
- Data compilation support was provided by Veia Teipo, Cook Islands Statistics Office, and David Toleafoa, Revenue Management Division.
- The International Monetary Fund’s Statistics Department reviewed and provided comments on the report.

### Executive summary — key findings
- The international financial services industry’s contribution to GDP (direct plus indirect) between 2010 and 2017 has fluctuated between 3.8 and 4.8 percent.
- Direct contribution to GDP increased from NZ$ 12.5 million in 2010 to NZ$ 14.9 million in 2017.
- Indirect contribution averaged around NZ$ 3.5 million a year and has remained flat because purchases of production inputs from other businesses in the Cook Islands have been falling.
- Comparison of GDP and revenue contributions:
  - In 2010 the industry contributed 3.7 percent to GDP but only 3.1 percent to tax collection.
  - In 2016 the industry contributed 3.3 percent to GDP and paid/collected 2.2 percent of taxes.
- Tax-to-GDP ratios:
  - For the economy as a whole each dollar of economic activity generates between 28 and 32 cents of tax.
  - The tax-to-GDP ratio for the international financial services industry averaged 24 percent from 2010 to 2014, dropped to 21 percent in 2015, and 19 percent in 2016.
- The fall in the industry’s tax-to-GDP ratio is attributed to lower reported company profits driven by increased other deductions; insufficient information is available to establish which costs increased.
- Estimated net impacts if the international financial services industry was lost:
  - One-off decline in GDP between 2.1 and 2.6 percent.
  - Revenue lower by NZ$ 3.5 to 4.1 million a year, about 3.1 to 3.2 percent of total VAT, income and withholding taxes.
  - The revenue loss estimate includes all Financial Supervisory Commission (FSC) revenue.

### Background and policy context
- The European Union (EU) raised issues that could result in the Cook Islands being placed on the EU’s list of non-cooperative jurisdictions.
- One EU concern is that international companies are exempt from all taxes in the Cook Islands.
- Taxing international companies could address the EU concern but could also result in the end of international companies in the Cook Islands and loss of associated economic and revenue contributions.
- The Pacific Financial Technical Assistance Centre was approached to estimate the contributions and trade-offs.

### Cook Islands’ finance sector — structure and regulation
- The Cook Islands’ financial system comprises about thirty financial entities including domestic and international banks, insurers, captive insurers, trustee companies, and money-changing and remittance businesses.
- The Cook Islands does not have a central bank; the New Zealand dollar is used as legal tender.
- Trustee companies explicitly identified include:
  - Alpha Trust (Cook Islands) Limited
  - Asiaciti Trust Pacific Limited
  - Cook Islands Trust Corporation Limited
  - Metis Global (Cook Islands) Limited
  - Ora Fiduciary (Cook Islands) Limited
  - Portcullis (Cook Islands) Ltd
  - Southpac Trust Limited
  - Trustees & Fiduciaries (Cook Islands) Limited
- Financial regulation and supervision:
  - The Financial Supervisory Commission (FSC) is an independent body; it is the licensing authority for all financial institutions and operates the registry of international and foreign companies, limited liability companies, international trusts, international partnerships, and foundations.
  - The Financial Services Development Authority (FSDA) is responsible for growing the Cook Islands’ international financial services industry.
  - Financial intermediaries must be licensed and meet other requirements to operate in the Cook Islands.
- Key legislation administered by the FSC includes (as listed):
  - Financial Supervisory Commission Act 2003; Financial Legislation Amendment Act 2012; Banking Act 2011 and Amendments; Digital Registers Act 2011; Foundations Act 2012; Insurance Act 2008 and Amendments; Captive Insurance Act 2013 and Regulations; Money-Changing and Remittance Businesses Act 2009; Trustee Companies Act 2014; International Companies Act 1981-82 and Amendments; Limited Liability Companies 2008 and Amendments; International Trusts 1984 and Amendments; International Partnership 1984 and Amendments.

### Measurement approach
- The economic contribution is measured by the value added of resident institutional units engaged directly or indirectly in producing international financial services in the Cook Islands, i.e., contribution to gross domestic product (GDP).
- Direct contributors counted: eight trustee companies, a ship registry, the FSC, and the FSDA.
  - Trustee companies provide corporate, trust, and financial planning services including corporate entity formation.
  - The ship registry performs flag state responsibilities for the Cook Islands’ open registry of ships and yachts.
  - The FSC is the licensing authority and supervisor, and operates registries for international entities.
  - The FSDA focuses on industry development.
- Indirect contribution channels:
  - Purchases of goods and services by the international financial services industry (e.g., electricity, accounting services, telecommunications).
  - Business generated for other sectors: banking services, captive insurance, and business travel.
- Estimates use tax data and Cook Islands Statistics Office data.

### Net impact scenario assumptions and labor focus
- Taxing international companies could lead to the loss of the international financial services industry; net effects are evaluated using salaries and wages data because labor is the largest input to producing international financial services and contributor to GDP.
- If the industry was lost, about half of the economic activity currently generated is estimated to shift to other sectors as most international financial services employees would find alternative employment in the Cook Islands (because they are highly skilled), albeit at lower wages; only the most highly paid employees are assumed to leave.

### Fiscal and institutional implications
- The FSC is currently self-funded mainly from registration and renewal fees generated from incorporated entities and trusts established and administered by the international financial services industry.
- If international companies and associated registrations disappear, FSC funding would need alternative sources to continue regulating and supervising the domestic financial services industry.

### Caveats, limitations, and potential biases
- Estimates are based on available information and involve assumptions and judgments.
- Several factors contribute to potential overestimation of the industry’s contribution to GDP:
  - All activities by the FSC and the ship registry are counted as international financial services, although they serve domestic as well as international entities and ships/yachts can be registered other than through international companies.
  - No corrections were made for possible overestimation.
- At the same time, the analysis may understate contributions through channels not considered.

*Source: 1cokea2019001 - PREFACE*

### 5.      As at June 30, 2018, employees of the FSC comprised a Commissioner, a Deputy

### 5.      As at June 30, 2018, employees of the FSC comprised a Commissioner, a Deputy Commissioner / Registrar, a Head of the Financial Intelligence Unit, and nine staff members.

### FSC staffing and revenues
- Staffing as at June 30, 2018:
  - Commissioner
  - Deputy Commissioner / Registrar
  - Head of the Financial Intelligence Unit
  - Nine staff members
- Revenue sources:
  - Licensing, registration, renewal, and other fees
  - Crown appropriations received in the fiscal years 2014 and 2015
  - Most revenue generated from registration of international financial services providers; renewal fees contributed between 76 and 80 percent to the FSC’s annual revenue (Table 3)
- Table 3: Revenues of the Financial Supervisory Commission (In NZ$)
  - Year ended June 2014 2015 2016 2017 2018
  - Crown appropriation: 35,000 — — — 35,000
  - Licensing fees: 89,573 — 113,207 136,285 115,027 111,478
  - Registration fees: 143,487 — 138,090 165,942 119,033 126,754
  - Renewal fees: 1,105,643 1,186,037 1,320,180 1,199,295 1,126,783
  - As % of total revenue: 76% 76% 76% 80% 78%
  - Other fees revenue: 71,892 — 97,947 116,402 73,613 73,757
  - Total revenue: 1,445,595 1,570,281 1,738,809 1,506,968 1,438,772

### International Financial Services Industry: structure and trends
- Established in the 1980s; provides corporate, trust, and financial planning services including corporate entity formation.
- Registrations (Table 4) for years ended June 2014 to 2018 show overall declines except for foundations.
- International financial services are provided by eight registered trustee companies.
- Capital Security Bank (CSB):
  - Only Cook Islands bank used onshore by trustee companies for international clients.
  - CSB is itself an international company; carries on banking business locally only in the international market; clients generally non-residents, international entities, and international trusts.
  - CSB’s contribution is included in the indirect contribution of the international financial services industry to economic activity and revenue collection to maintain confidentiality; including CSB in the indirect contribution leads to an underestimation of the industry’s economic and revenue contribution because CSB’s use of production inputs (e.g., electricity, telecommunications, rent) is not captured. The underestimation is likely to be small because use of goods and services in the finance sector relative to labor inputs tends to be small.
- Table 4: International Corporate Entities (Year ended June 2014 2015 2016 2017 2018)
  - International companies: 1,090 1,090 1,095 987 931
  - International partnerships: 6 3 4 4 —
  - International trusts: 2,620 2,505 2,373 2,275 2,182
  - Limited liability companies: 383 408 402 365 358
  - Foundations: 518 285 251 —

### Ship and yacht registry
- Cook Islands operate an open register for ships and yachts.
- Flag state duties performed by Maritime Cook Islands through an agreement with the Ministry of Transport.
- Registration channels: CISOA, CIYS, establishing a Cook Islands international company, or registering an existing foreign company on the international companies register.
- Vessel registrations and tonnage increasing (Table 5 and Figure 1).
  - Table 5:
    - 2015 vessel registrations: 427
    - 2016 vessel registrations: 557
    - 2017 vessel registrations: (value missing in supplied excerpt)
    - Gross tonnage: 2015 = 1,783,805; 2016 = 1,773,866; 2017 = 1,840,614

### Restrictions on resident participation and foundations
- International entities generally prohibited from trading in the Cook Islands and hence do not directly contribute to the Cook Islands economy.
- Restrictions on residents registering international entities/trusts contained in:
  - Section 11 of Limited Liability Companies Act 2008
  - Section 2 of International Trusts Act 1984 (as per definition of international trust)
  - Section 10 of International Partnership Act 1984
  - Section 6 of International Companies Act 1981-82
- Foundations Act 2012 does not contain restrictions on residents incorporating entities on the international registry; FSC considers this an oversight and applies the same restrictions to foundations.

### Financial Services Development Authority (FSDA)
- FSDA responsible for growing the international financial services industry and promoting the jurisdiction to new markets.
- Objective: encourage, promote, and develop the Cook Islands’ financial services industry to achieve sustained growth that is economically beneficial, socially responsible, and reputable.
- FSDA staffing: three employees — Chief Executive Officer, Marketing Director, and a staff member.
- FSDA survey finding: most international entities established in the Cook Islands for general asset holding purposes.

### Measuring economic activity and GDP overview
- SNA framework: GDP measures production of goods and services; can be measured by production (GDP(P)), expenditure (GDP(E)), and income (GDP(I)).
- GDP by production compiled by Cook Islands Statistics Office at sector/industry level.
- Main data source for production GDP: VAT data.
- GDP by expenditure identity: GDP = C + G + I + X - M.
- GDP by income components: compensation of employees; gross operating surplus; taxes less subsidies on production and imports.
- Official estimates available for production GDP; compensation of employees information available.
- GDP in current and constant prices; constant prices reported in 2016 prices.
- GDP growth 2006 to 2017:
  - Current prices GDP increased from NZ$ 316 million in 2006 to NZ$ 486 million in 2017.
  - Constant 2016 prices GDP rose from NZ$ 391 million in 2006 to NZ$ 487 million in 2017.
- Table 6: GDP and Top Five Largest Industries (In NZ$ million and percent of GDP)
  - Current prices NZ$ million (selected values)
    - GDP: 2006 = 316; 2007 = 308; 2008 = 321; 2009 = 345; 2010 = 334; 2011 = 344; 2012 = 370; 2013 = 353; 2014 = 385; 2015 = 433; 2016 = 445; 2017 = 486
    - Trade (NZ$ million): 51 50 45 47 45 47 51 46 50 50 58 66
    - Accommodation services (NZ$ million): 30 28 35 40 38 49 51 50 53 54 62 64
    - Public administration (NZ$ million): 28 29 31 35 37 38 37 37 32 45 42 37
    - Transportation (NZ$ million): 19 22 21 27 19 18 21 23 27 32 30 38
    - Finance and insurance (NZ$ million): 22 24 29 35 30 28 28 27 25 27 34 32
  - As % of GDP (current prices):
    - Trade: 16% 16% 14% 14% 13% 14% 14% 13% 13% 12% 13% 14%
    - Accommodation services: 9% 9% 11% 12% 11% 14% 14% 14% 14% 12% 14% 13%
    - Public administration: 9% 10% 10% 10% 11% 11% 10% 10% 8% 10% 10% 8%
    - Transportation: 6% 7% 7% 8% 6% 5% 6% 7% 7% 7% 7% 8%
    - Finance and insurance: 7% 8% 9% 10% 9% 8% 8% 8% 7% 6% 8% 7%
  - Constant 2016 prices NZ$ million (selected values)
    - GDP: 2006 = 391; 2007 = 398; 2008 = 393; 2009 = 393; 2010 = 373; 2011 = 376; 2012 = 379; 2013 = 381; 2014 = 401; 2015 = 424; 2016 = 445; 2017 = 487
    - Trade (NZ$ million): 60 62 60 52 52 51 52 52 56 56 58 61
    - Accommodation services (NZ$ million): 32 33 31 35 34 36 37 44 47 49 62 68
    - Public administration (NZ$ million): 46 44 45 43 41 39 39 41 42 42 42 43
    - Transportation (NZ$ million): 23 27 24 31 24 21 23 24 26 27 30 36
    - Finance and insurance (NZ$ million): 28 26 36 45 38 38 35 32 24 24 34 32
  - As % of GDP (constant 2016 prices):
    - Trade: 15% 15% 15% 13% 14% 14% 14% 14% 14% 13% 13% 13%
    - Accommodation services: 8% 8% 8% 9% 9% 10% 10% 12% 12% 11% 14% 14%
    - Public administration: 12% 11% 11% 11% 11% 10% 10% 11% 10% 10% 10% 9%
    - Transportation: 6% 7% 6% 8% 6% 6% 6% 6% 6% 6% 7% 7%
    - Finance and insurance: 7% 7% 9% 12% 10% 10% 9% 8% 6% 6% 8% 7%
- Finance industry on average has contributed around 86 to 87 percent to finance and insurance in current and constant prices respectively since 2006.

### Contribution of international financial services to current price GDP
- Focus on current price GDP because:
  - Main interest is present contribution and differences between current and constant prices GDP are currently small after rebasing to 2016 prices.
  - Data used (tax data, compensation of employees, financial statements) reported in current New Zealand dollars.

#### Trustee companies, ship registry, and FSC: GDP contribution measurement
- Method: use VAT data to compute value added = total sales minus expenses (excluding salaries and wages) reported in VAT returns. Sales include registration and renewal fees.
- Financial services are exempt from VAT; VAT returns' expenses exclude bank fees and interest, leading to potential underestimation of expenses and overestimation of value added. Financial statements suggest bank fees and interest are around 1 percent of total operating expenses; no adjustments made.
- Table 7: GDP Contribution of the Trustee Companies, Ship Registry, and FSC (In NZ$ million and percent of GDP)
  - Sales: Trustee companies, ship registry, and FSC (2010–2017): 15.0 14.0 16.0 15.1 15.1 18.2 16.8 17.2
  - Expenses: Trustee companies, ship registry, and FSC (2010–2017): 2.7 3.0 3.0 2.9 3.1 2.9 2.6 2.5
  - Value added (sales minus expenses), Trustee companies, ship registry, and FSC (2010–2017): 12.3 11.1 13.0 12.2 12.1 15.3 14.3 14.7
  - As % of GDP (2010–2017): 3.7% 3.2% 3.5% 3.5% 3.1% 3.5% 3.2% 3.0%
- Observations:
  - Value added rose from NZ$ 12.3 million in 2010 to NZ$ 14.7 million in 2017.
  - Increase in vessel registrations likely contributed to the rise, partly offsetting declines in international entity registrations.
  - Contribution to GDP fell from 3.7 percent in 2010 to 3.0 percent in 2017 because value added grew slower than the rest of the economy.
  - The international financial services industry accounted for 25 percent of transportation and finance and insurance industries’ value added in 2010, dropping to 21 percent in 2017.
  - Fees and charges collected in US dollars cause value added to be sensitive to NZ$/US$ exchange rate fluctuations; depreciation of NZ$ (increase in NZ$ per US$) increases NZ$ value of GDP for these activities.

#### Employment and wages in international financial services
- Between 2007 and 2017:
  - Average annual wage increased by 25 percent from NZ$ 44,844 to NZ$ 56,206.
  - Current price GDP increased by 58 percent over the same period.
- Number of people employed measured by PAYE employees; no adjustments for part-time or part-year work.
  - Number of employees fluctuated between 89 and 107 with an average of 98 employees.

### FSDA contribution to GDP
- FSDA does not have trading revenue and does not charge/collect VAT.
- Contribution estimated via GDP by income: sum of compensation of employees, gross operating surplus (including depreciation), and taxes less subsidies on production and imports.
- Contribution calculated from budget appropriations (Table 8). FSDA contribution consists of personnel expense and depreciation; estimated around NZ$ 250,000 or 0.1 percent of GDP (Table 9).
- Table 8: FSDA Appropriations (In NZ$) — Year ended June 2015 2016 2017 2018 2019
  - Personnel: 231,200 235,200 235,200 240,339 241,541
  - Operating: 178,906 177,906 177,906 177,906 177,906
  - Administered payments: 0 0 0 0 0
  - Depreciation: 9,867 9,867 9,867 9,867 9,868
  - Gross current appropriation: 419,973 422,973 422,973 428,112 429,315
  - Trading revenue: 0 0 0 0 0
  - Net current appropriation: 419,973 422,973 422,973 428,112 429,315
- Note: June year fiscal data converted to calendar years by averaging the current and subsequent fiscal years.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1cokea2019001.pdf*

### 31.      The trustee companies, ship registry, FSC, and FSDA purchase goods and services, such

### 31.      The trustee companies, ship registry, FSC, and FSDA purchase goods and services, such

### Purchases and GDP contribution
- Purchases by trustee companies, ship registry, FSC, and FSDA (electricity, telecommunications, insurance, rent, etc.) add to Cook Islands’ GDP.
- Information needed to estimate contribution:
  - (i) the amount of domestic purchases by the trustee companies, ship registry, FSC, and FSDA;
  - (ii) the goods and services purchased;
  - (iii) the value added or GDP contribution of the purchases.
- VAT returns provide information on the amount of domestic purchases for trustee companies, ship registry, and FSC (expenses in Table 7); FSDA expenses are in appropriation bills (operating expense in Table 8).

### Composition of goods and services purchased (trustee companies)
- Average expense composition (in percent of total expenses):
  - Audit fees: 7%
  - Insurance: 9%
  - Legal fees: 18%
  - Office expenses: 16%
  - Professional fees: 30%
  - Rent: 12%
  - Other expenses: 8%
- Expenses by trustee companies are mainly for business services (professional, audit, legal fees), rent, and office operations.

### Value added calculation and industry averages
- VAT data from the Cook Islands Statistics Office used to derive purchases and value added (value added = gross turnover − expenses and purchases).
- Industries’ value added as percent of gross turnover (2013–2017 and average):
  - All industries: 34% 35% 39% 38% 35% Average 36%
  - Agriculture and fishing: 31% 31% 41% 36% 45% Average 37%
  - Mining, manufacturing and electricity: 29% 32% 39% 34% 40% Average 35%
  - Construction: 26% 23% 69% 36% 50% Average 41%
  - Wholesale and retail trade: 18% 16% 18% 19% 20% Average 18%
  - Restaurants and bars: 36% 25% 29% 25% 10% Average 25%
  - Hotels and motels: 49% 49% 48% 48% 46% Average 48%
  - Transport and communication: 50% 57% 60% 60% 56% Average 57%
  - Finance and business services: 59% 58% 66% 57% 24% Average 53%
  - Community and personal services: 32% 51% 50% 44% 30% Average 42%
- For simplicity, the average value added of finance and business services (53 percent) is used to calculate GDP contribution of goods and services purchased by international financial services providers.
  - Note: Using finance and business services value added likely overestimates contribution for purchases like electricity that have lower value added, but this overestimation offsets underestimation from VAT-exempt financial services not reported in VAT returns.

### Expenses and GDP contribution of purchases (international financial services industry)
- Total expenses of international financial services industry declined from NZ$ 3 million in 2010 to NZ$ 2.7 million in 2017 (Table 12).
- GDP contribution of purchases (total expenses × 53 percent):
  - Estimated to have declined from NZ$ 1.6 million in 2010 (0.5 percent of GDP) to NZ$ 1.4 million in 2017 (0.3 percent of GDP).

Key yearly expense and GDP-contribution figures (Year ended December)
- Expenses: Trustee companies, ship registry, and FSC:
  - 2010: 2.7
  - 2011: 3.0
  - 2012: 3.0
  - 2013: 2.9
  - 2014: 3.1
  - 2015: 2.9
  - 2016: 2.6
  - 2017: 2.5
- Expenses: FSDA (note 1: 2010–2014 estimated based on 2015 percent):
  - 2010–2017: 0.2 each year
- Total expenses:
  - 2010: 3.0
  - 2011: 3.2
  - 2012: 3.2
  - 2013: 3.1
  - 2014: 3.2
  - 2015: 3.1
  - 2016: 2.8
  - 2017: 2.7
- GDP contribution of expenses:
  - 2010: 1.6
  - 2011: 1.7
  - 2012: 1.7
  - 2013: 1.6
  - 2014: 1.7
  - 2015: 1.6
  - 2016: 1.5
  - 2017: 1.4
- As % of GDP:
  - 2010: 0.5%
  - 2011: 0.5%
  - 2012: 0.5%
  - 2013: 0.5%
  - 2014: 0.4%
  - 2015: 0.4%
  - 2016: 0.3%
  - 2017: 0.3%

### Contributions to other sectors: overview
- International financial services activity creates business for other sectors including:
  - Banking services
  - Captive insurance
  - Business travel

#### Banking services (indirect contribution)
- Method: Multiply direct contribution of trustee companies, ship registry, FSC, and FSDA to GDP with the Statistics Office’s estimate of finance sector GDP (assumption: financial intermediaries provide services proportionate to size of economic unit).
- Estimates (Table 13) suggest:
  - Banking services resulting from international financial services activities contribute about 0.2 percent to GDP or roughly around NZ$ 1 million annually.
- Indirect contribution: Banking services (NZ$ million)
  - 2010: 1.0
  - 2011: 0.8
  - 2012: 0.9
  - 2013: 0.8
  - 2014: 0.7
  - 2015: 0.8
  - 2016: 1.0
  - 2017: 0.9
- As % of GDP for banking services:
  - 2010–2017: 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

#### Captive insurance (indirect contribution)
- Captive insurance legislation enacted in mid-2013; three captive insurers registered in the Cook Islands.
- Method: Assume all insurers contribute equally to GDP generated by the insurance industry as measured by the Statistics Office.
- GDP: Insurance (NZ$ million):
  - 2010: 3.5
  - 2011: 3.8
  - 2012: 4.0
  - 2013: 3.9
  - 2014: 3.6
  - 2015: 4.8
  - 2016: 4.3
  - 2017: 3.2
- Indirect contribution to GDP (captive insurance, NZ$ million):
  - 2014–2017: 0.7 0.9 0.8 0.6
- As % of GDP (captive insurance):
  - 2014–2017: 0.2% 0.2% 0.2% 0.1%

#### Business travel (indirect contribution)
- Business travel estimates use tourist arrivals and balance of payments data.
- Assumption: Professionals coming for business are those considering establishing international entities.
- Tourist and business-professional arrival data:
  - Tourist arrivals:
    - 2010: 104,234
    - 2011: 113,129
    - 2012: 122,230
    - 2013: 120,774
    - 2014: 121,458
    - 2015: 125,130
    - 2016: 146,473
    - 2017: 161,362
  - Tourist arrivals: Business:
    - 2010: 2,495
    - 2011: 2,584
    - 2012: 3,068
    - 2013: 2,649
    - 2014: 2,684
    - 2015: 2,771
    - 2016: 3,244
    - 2017: 3,569
  - Business arrivals as % of total arrivals: 2.4% 2.3% 2.5% 2.2% 2.2% 2.2% 2.2% 2.2%
  - Tourist arrivals: Professionals:
    - 2010: 13,908
    - 2011: 9,643
    - 2012: 10,124
    - 2013: 7,754
    - 2014: 7,894
    - 2015: 7,953
    - 2016: 9,512
    - 2017: 10,556
  - Professionals as % of total arrivals: 13% 9% 8% 6% 6% 6% 6% 7%
  - Tourist arrivals: Business professionals:
    - 2010: 333
    - 2011: 220
    - 2012: 254
    - 2013: 170
    - 2014: 174
    - 2015: 176
    - 2016: 211
    - 2017: 233
- Average spending per tourist (in NZ$):
  - 2010: 1,754
  - 2011: 1,913
  - 2012: 1,945
  - 2013: 1,957
  - 2014: 1,987
  - 2015: 2,054
  - 2016: 2,011
  - 2017: 1,843
- Assumption: Business professional tourists spend five times average tourist spending:
  - Average spending per business professional arrival (in NZ$):
    - 2010: 8,769
    - 2011: 9,564
    - 2012: 9,724
    - 2013: 9,784
    - 2014: 9,933
    - 2015: 10,269
    - 2016: 10,055
    - 2017: 9,214
- Business professional tourist spending (in NZ$ million):
  - 2010: 2.9
  - 2011: 2.1
  - 2012: 2.5
  - 2013: 1.7
  - 2014: 1.7
  - 2015: 1.8
  - 2016: 2.1
  - 2017: 2.2
- GDP contribution of business travel (in NZ$ million):
  - 2010: 1.0
  - 2011: 0.7
  - 2012: 0.8
  - 2013: 0.5
  - 2014: 0.6
  - 2015: 0.6
  - 2016: 0.6
  - 2017: 0.7
- As % of GDP (business travel):
  - 2010: 0.3%
  - 2011: 0.2%
  - 2012: 0.2%
  - 2013: 0.1%
  - 2014: 0.1%
  - 2015: 0.1%
  - 2016: 0.1%
  - 2017: 0.1%
- Over 2010–2017 business travel related to international financial services estimated to have contributed between NZ$ 0.5 to 1 million annually (around 0.1 to 0.3 percent of GDP).

### Total GDP contribution (direct + indirect)
- GDP (NZ$ million):
  - 2010: 334.2
  - 2011: 344.3
  - 2012: 369.5
  - 2013: 352.7
  - 2014: 385.1
  - 2015: 433.3
  - 2016: 445.1
  - 2017: 486.4
- Direct contribution to GDP (NZ$ million):
  - 2010: 12.5
  - 2011: 11.2
  - 2012: 13.3
  - 2013: 12.4
  - 2014: 12.3
  - 2015: 15.5
  - 2016: 14.5
  - 2017: 14.9
- Direct contribution as % of GDP:
  - 2010: 3.7%
  - 2011: 3.3%
  - 2012: 3.6%
  - 2013: 3.5%
  - 2014: 3.2%
  - 2015: 3.6%
  - 2016: 3.3%
  - 2017: 3.1%
- Indirect contribution to GDP (NZ$ million):
  - 2010: 3.5
  - 2011: 3.2
  - 2012: 3.3
  - 2013: 3.0
  - 2014: 3.6
  - 2015: 3.9
  - 2016: 3.9
  - 2017: 3.6
- Indirect contribution as % of GDP:
  - 2010: 1.0%
  - 2011: 0.9%
  - 2012: 0.9%
  - 2013: 0.8%
  - 2014: 0.9%
  - 2015: 0.9%
  - 2016: 0.9%
  - 2017: 0.7%
- Total GDP contribution of international financial services (NZ$ million):
  - 2010: 16.0
  - 2011: 14.4
  - 2012: 16.5
  - 2013: 15.4
  - 2014: 15.9
  - 2015: 19.5
  - 2016: 18.4
  - 2017: 18.5
- Total GDP contribution as % of GDP:
  - 2010: 4.8%
  - 2011: 4.2%
  - 2012: 4.5%
  - 2013: 4.4%
  - 2014: 4.1%
  - 2015: 4.5%
  - 2016: 4.1%
  - 2017: 3.8%
- Notes:
  - Direct contribution has increased from NZ$ 12.5 million in 2010 to NZ$ 14.9 million in 2017.
  - Indirect contribution averaged around NZ$ 3.5 million a year and has remained relatively flat.
  - Purchases of production inputs by international financial services industry from other businesses have been falling.
  - Business travel appears to have declined with fewer people visiting to establish international entities, consistent with decreasing international entity registrations.
  - Note 1: The direct contribution for 2010 to 2014 is assumed to be the same as in 2015.

### Contribution to government revenues
- International companies are exempt from all taxes in the Cook Islands but income and value added generated by production of international financial services are subject to taxation.
- Government receives payments from the FSC and Maritime Cook Islands (ship registry).
- Financial Supervisory Commission returns to government include:
  - FSDA levy collected;
  - return of excess to crown;
  - vested assets.
- Maritime Cook Islands payments include:
  - International Maritime Organization subscriptions;
  - shipping registration;
  - international shipping license.
- Payments from Financial Supervisory Commission and Maritime Cook Islands averaged NZ$ 0.8 million over 2014–2017.
  - Year ended June and calendar-year conversions applied as described.

Selected yearly payments (In NZ$ thousand)
- Financial Supervisory Commission (year ended June):
  - 2014: 303
  - 2015: 899
  - 2016: 843
  - 2017: 324
  - 2018: 262
- FSDA levy (year ended June):
  - 2014: 274
  - 2015: 279
  - 2016: 305
  - 2017: 274
  - 2018: 262
- Maritime Cook Islands (year ended June):
  - 2014: 132
  - 2015: 92
  - 2016: 228
  - 2017: 135
  - 2018: 324
- Calendar-year totals (selected):
  - 2014 total: 435
  - 2015 total: 991
  - 2016 total: 1,071
  - 2017 total: 459
  - 2018 total: 586

### Tax revenue from trustee companies, ship registry, FSC, and FSDA
- Taxes collected reported on cash basis for VAT, PAYE, income tax on directors’ fees and domestic dividends, and company income and withholding taxes.
- Dividends to non-residents taxed at company income tax rate plus 15 percent withholding tax.
- Dividends to domestic shareholders give rise to a deduction and taxed at shareholder’s marginal tax rate; a 30 percent tax rate is assumed for domestic dividends and directors’ fees; 30 percent tax rate also assumed for directors’ fees.
- Over 2007–2017 total tax collection varied between NZ$ 2.4 and 3.3 million per year.
  - Annual VAT, PAYE, directors’ fees and dividend taxes fluctuated between NZ$ 2.1 and 2.9 million.
  - Company income and withholding taxes fluctuated between NZ$ 0.2 and 0.7 million per year.
- Company income and withholding taxes tended to move closely with sales but diverged in 2014 and fell more sharply than sales in 2016.

Figure (sales exclusive of VAT and company income and withholding taxes)
- VAT, PAYE, directors' fees, and dividend taxes:
  - 2010: 2.1
  - 2011: 2.2
  - 2012: 2.5
  - 2013: 2.5
  - 2014: 2.4
  - 2015: 2.5
  - 2016: 2.5
  - 2017: 2.9
  - 2016 (later in figure): 2.6
- Company income and withholding taxes:
  - 2007: 0.3
  - 2008: 0.5
  - 2009: 0.7
  - 2010: 0.6
  - 2011: 0.6
  - 2012: 0.5
  - 2013: 0.6
  - 2014: 0.4
  - 2015: 0.4
  - 2016: 0.2
- Total tax revenue (selected years):
  - 2007: 2.4
  - 2008: 2.7
  - 2009: 3.2
  - 2010: 3.1
  - 2011: 2.9
  - 2012: 3.0
  - 2013: 3.0
  - 2014: 2.9
  - 2015: 3.3
  - 2016: 2.8
- Note: Directors' fees are estimated as 10% of expenses. For 2007 to 2009 they are assumed to be the same as in 2010. Directors' fees and domestic dividends are assumed to be taxed at 30%.

*Source: Ministry of Finance and Economic Management, Cook Islands Statistics Office, Financial Supervisory Commission, and author's calculations and estimates*

### 53.      Table 19 reports the contributions of the international financial services industry to

### 1cokea2019001 - 53.      Table 19 reports the contributions of the international financial services industry to

### Contributions to tax collection and GDP
- The contribution of the international financial services industry to total VAT, income and withholding tax collection has fallen by more than the industry’s contribution to GDP.
- The GDP contribution dropped by 0.4 percentage points compared to a 0.9 percentage points decline for taxes.
- Tax collection has not been proportionate to the size of the international financial services industry:
  - In 2010 the industry contributed 3.7 percent to GDP but only 3.1 percent to tax collection.
  - In 2016 the industry contributed 3.3 percent to GDP and paid / collected 2.2 percent of taxes.
- Table extract (Contributions to VAT and income taxes; Direct contribution to GDP):
  - 2010: Contribution to VAT and income taxes 3.1% ; Direct contribution of international financial services to GDP 3.7%
  - 2011: 2.7% ; 3.3%
  - 2012: 2.6% ; 3.6%
  - 2013: 2.7% ; 3.5%
  - 2014: 2.5% ; 3.2%
  - 2015: 2.5% ; 3.6%
  - 2016: 2.2% ; 3.3%

### Tax-to-GDP ratios (Table 20) — industry vs total economy
- For the economy as a whole each dollar of economic activity generates between 28 and 32 cents of tax.
- International financial services GDP produces less revenue and its tax-to-GDP ratio has been falling:
  - Tax to GDP for the international financial services industry: averaged 24 percent from 2010 to 2014; 21 percent in 2015; 19 percent in 2016.
  - Decline driven by lower reported company profits and withholding tax collection.
- Table extract (selected series):
  - International financial services industry (VAT and income tax in NZ$ million): 2010 97.9 ; 2011 108.6 ; 2012 118.1 ; 2013 112.7 ; 2014 116.3 ; 2015 132.9 ; 2016 124.3
  - International financial services industry (Direct contribution to GDP in NZ$ million): 2010 334.2 ; 2011 344.3 ; 2012 369.5 ; 2013 352.7 ; 2014 385.1 ; 2015 433.3 ; 2016 445.1
  - International financial services industry Tax to GDP: 2010 24% ; 2011 26% ; 2012 23% ; 2013 24% ; 2014 24% ; 2015 21% ; 2016 19%
  - Total economy Tax to GDP: 2010 29% ; 2011 32% ; 2012 32% ; 2013 32% ; 2014 30% ; 2015 31% ; 2016 28%

### Company income, deductions, and taxable profits (Tables 21 and discussion)
- Company income tax, taxes on dividends, and withholding taxes are taxes on companies’ profits. Taxable profits are income minus allowable deductions.
- Company taxable income can be calculated by dividing company income tax by the resident company income tax rate which is 20 percent.
- VAT returns provide sales and expenses; PAYE returns provide salaries and wages (excluding employers’ superannuation contributions).
- Main allowable deductions not reported in VAT returns typically include interest expense and bank charges (exempt from VAT), depreciation of fixed assets and buildings, and exchange rate losses. Bad debts are adjusted in VAT returns under section 20 of the Value Added Tax Act 1997.
- Table 21 extract (In NZ$ million and percent of sales):
  - Sales (NZ$ million): 2010 15.0 ; 2011 14.0 ; 2012 16.0 ; 2013 15.1 ; 2014 15.1 ; 2015 18.2 ; 2016 16.8 ; 2017 17.2
  - Expenses (NZ$ million): 2010 3.0 ; 2011 3.2 ; 2012 3.2 ; 2013 3.1 ; 2014 3.2 ; 2015 3.1 ; 2016 2.8 ; 2017 2.7
  - Wages (including employer superannuation) (NZ$ million): 2010 4.9 ; 2011 4.9 ; 2012 4.9 ; 2013 4.9 ; 2014 5.7 ; 2015 5.6 ; 2016 5.5 ; 2017 5.4
  - Net VAT (calculated) (NZ$ million): 2010 1.3 ; 2011 1.2 ; 2012 1.4 ; 2013 1.3 ; 2014 1.5 ; 2015 2.0 ; 2016 1.8 ; 2017 1.9
  - Other deductions (calculated) (NZ$ million): 2010 2.8 ; 2011 1.9 ; 2012 3.8 ; 2013 2.8 ; 2014 2.6 ; 2015 5.6 ; 2016 5.8
  - Company taxable income (NZ$ million): 2010 3.0 ; 2011 2.8 ; 2012 2.7 ; 2013 2.9 ; 2014 2.1 ; 2015 2.0 ; 2016 0.9
  - As percent of sales (selected): Expenses 2010 20% ; 2011 23% ; 2012 20% ; 2013 20% ; 2014 21% ; 2015 17% ; 2016 16% ; 2017 16%
  - Wages (including employer superannuation) as % of sales: 33% ; 35% ; 30% ; 33% ; 38% ; 31% ; 33% ; 31%
  - Net VAT (calculated) as % of sales: 9% ; 9% ; 9% ; 9% ; 10% ; 11% ; 11% ; 11%
  - Other deductions (calculated) as % of sales: 19% ; 14% ; 24% ; 19% ; 17% ; 30% ; 35%
  - Company taxable income as % of sales: 20% ; 20% ; 17% ; 20% ; 14% ; 11% ; 5%
- Observations:
  - Expenses as percent of sales varied between 21 and 23 percent in 2010–2014, dropping to 17 percent in 2015 and 16 percent in 2016 and 2017.
  - Wages as percent of sales fluctuated between 30 and 38 percent, declining somewhat over the past three years.
  - Net VAT as percent of sales steady around 9 to 11 percent.
  - Company taxable income averaged 19 percent of sales in 2010–2013; fell to 14 percent in 2014, 11 percent in 2015, and 5 percent in 2016.
  - Decline in taxable profits implies an increase in other deductions (residual-calculated).

### Other deductions: magnitude and possible causes
- Other deductions (residual) averaged 18 percent of sales in 2010–2014; rose to 23 percent in 2015 and 31 percent in 2016.
- Typical components: interest expense and bank charges, depreciation, exchange rate losses.
- Historically interest expense, bank charges, and depreciation have tended to be small because the industry is not capital intensive; largest input is labor.
- Growth in other deductions exceeds exchange rate movements of the NZ$ against the US$.
- Caveats on measurement:
  - Other deductions are understated because taxes are reported on a cash basis (loss carried forward results in income tax payment zero rather than negative).
  - Other deductions are also understated because calculated net VAT is overstated (calculations assume no zero-rated supplies).

### Total tax contribution of the international financial services industry (Table 22)
- Indirect contribution calculated by multiplying indirect contribution to GDP with the total economy tax-to-GDP ratio.
- Captive insurance services are tax exempt; only purchases by captive insurance give rise to tax collection. A value added to sales ratio of 53 percent and the economy-wide tax-to-GDP ratio used to calculate indirect tax for captive insurance.
- Total contribution of the international financial services industry to VAT, income and withholding taxes is estimated between 3.1 and 4.2 percent.
- Table extract (NZ$ million and % of VAT, income and withholding taxes):
  - VAT, income and withholding taxes (NZ$ million): 2010 97.9 ; 2011 108.6 ; 2012 118.1 ; 2013 112.7 ; 2014 116.3 ; 2015 132.9 ; 2016 124.3
  - Direct contribution to tax collection (% of VAT, income and withholding taxes): 2010 3.1% ; 2011 2.9% ; 2012 3.0% ; 2013 3.0% ; 2014 2.9% ; 2015 3.3% ; 2016 2.8%
  - Indirect contribution to tax collection (%): 2010 1.0% ; 2011 0.9% ; 2012 0.9% ; 2013 0.8% ; 2014 0.9% ; 2015 0.9% ; 2016 0.9%
  - Total tax contribution of international financial services (%): 2010 4.2% ; 2011 3.6% ; 2012 3.4% ; 2013 3.5% ; 2014 3.5% ; 2015 3.4% ; 2016 3.1%
  - Component numeric series (NZ$ million): Direct and indirect contributions shown in source tables (e.g., Purchases 0.5 ; Banking services 0.3 ; Business arrivals 0.3 etc. as NZ$ million and percent)

### Net GDP impacts of taxing or losing the industry (Tables 24, assumptions)
- Taxing international companies could lead to the loss of the international financial services industry.
- Estimation relies on salaries and wages since labor is the largest input and contributor to GDP.
- Key labor and wage data (2017) and distribution:
  - Average wages in international financial services exceed banking sector by almost NZ$ 24,000 a year.
  - In 2017 14 percent of employees in the international financial services industry earned annual incomes above NZ$ 100,000 compared to 3 percent in the banking sector.
  - In 2017 12 percent earned between NZ$ 60,000 and 100,000 compared to 6 percent in the banking sector.
- Table 23 extract (2017) — Trustee companies, ship registry, FSC, and FSDA vs Banks:
  - Total employees: Trustee etc. 91 ; Banks 216
  - Total wages (excluding employer superannuation): Trustee etc. NZ$ 5,114,770 ; Banks NZ$ 6,844,299
  - Average wage: Trustee etc. NZ$ 56,206 ; Banks NZ$ 31,687
  - Wage brackets (Trustee etc. employees, wages, average wage):
    - 0 - 20,000: Employees 20 ; Wages 214,086 ; Average wage 10,704
    - 20,001 - 40,000: 32 ; 1,026,866 ; 32,090
    - 40,001 - 60,000: 15 ; 724,886 ; 48,326
    - 60,001 - 100,000: 11 ; 828,002 ; 75,273
    - Above 100,000: 13 ; 2,320,930 ; 178,533
  - Banks wage-bracket data provided in source tables (see Table 23 extract).

- Assumptions to estimate direct GDP impact of losing the industry:
  - The top 14 percent of income earners who earn salaries above NZ$ 100,0000 are assumed to leave the Cooks Islands while all other employees remain but may accept lower salaries (if currently higher than banking sector).
  - Based on 2017 data total salaries and wages would fall by 49 percent and GDP is assumed to decline proportionately.
  - 51 percent of economic activity currently generated by the international financial services industry would shift to other sectors as most employees find alternative employment.
- Indirect GDP impact assumptions:
  - 49 percent of GDP generated by purchases would be lost in line with the above estimate.
  - All banking services and business travel generated by the industry and captive insurance activities would cease.
- Net GDP impact (Table 24):
  - Loss of the international financial services industry estimated to lead to a one-off decline in GDP between 2.1 and 2.6 percent.
  - Table excerpts (selected years):
    - Total reduction in GDP contribution (NZ$ million): 2010 -8.8 ; 2011 -7.8 ; 2012 -8.9 ; 2013 -8.2 ; 2014 -8.8 ; 2015 -10.7 ; 2016 -10.2 ; 2017 -10.1
    - Total reduction in GDP contribution (% of GDP): 2010 2.6% ; 2011 2.3% ; 2012 2.4% ; 2013 2.3% ; 2014 2.3% ; 2015 2.5% ; 2016 2.3% ; 2017 2.1%

### Estimated revenue impacts (Table 25)
- Loss of the international financial services industry estimated to reduce revenue by NZ$ 3.5 to 4.1 million, about 3.1 to 3.2 percent of total VAT, income and withholding taxes.
- Estimates assume inclusion of all FSC revenue because most of the FSC’s revenue, 76 to 80 percent (Table 3), is generated from renewal fees of international financial services providers.
- Table extract (selected series):
  - VAT, income and withholding taxes (NZ$ million): 2010 97.9 ; 2011 108.6 ; 2012 118.1 ; 2013 112.7 ; 2014 116.3 ; 2015 132.9 ; 2016 124.3
  - Total reduction in revenues (NZ$ million): 2010 -3.7 ; 2011 -3.5 ; 2012 -3.8 ; 2013 -3.6 ; 2014 -3.7 ; 2015 -4.1 ; 2016 -4.0
  - Total reduction in revenues (% of VAT, income and withholding taxes): 2010 -3.8% ; 2011 -3.2% ; 2012 -3.2% ; 2013 -3.2% ; 2014 -3.2% ; 2015 -3.1% ; 2016 -3.2%
  - Direct reduction in tax collection (NZ$ million): 2010 -1.5 ; 2011 -1.4 ; 2012 -1.5 ; 2013 -1.5 ; 2014 -1.4 ; 2015 -1.6 ; 2016 -1.4
  - Indirect reduction in tax collection (NZ$ million): 2010 -0.8 ; 2011 -0.7 ; 2012 -0.8 ; 2013 -0.7 ; 2014 -0.8 ; 2015 -0.9 ; 2016 -0.9
  - Other revenue foregone (NZ$ million): 2010 -1.4 ; 2011 -1.3 ; 2012 -1.5 ; 2013 -1.4 ; 2014 -1.4 ; 2015 -1.6 ; 2016 -1.7

### Assumptions, limitations, and caveats
- Estimates based on available information and required assumptions and judgments.
- Factors contributing to overestimation of the international financial services industry's contribution to GDP:
  - All activities by the Financial Supervisory Commission and the ship registry are counted as international financial services even though they are not solely international activities.
  - The FSC licenses, registers, and supervises all financial institutions in the Cook Islands, not only international entities.
  - Ships and yachts can be registered in the Cook Islands other than through international companies’ registration.
- No corrections were made for overestimation because the industry may also contribute through channels not considered in the analysis.

*Source: Ministry of Finance and Economic Management and author's calculations and estimates (as presented in the source content).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1cokea2019001.pdf_