Prime Minister John Key says the Government has no choice but to bend to demands from the United States to supply private information on Americans living in New Zealand.
Parliament is considering legislation that would allow the Inland Revenue Department to collect contact details, bank account numbers and transactions of Americans living in New Zealand to pass on to tax authorities in the US.
A report by the Treasury says New Zealand risks damaging its economy if does not supply the information. It says the US could block New Zealand's financial institutions from investing in America or face a 30 percent penalty on any profits derived from any investments.
From July this year, the US will require all overseas banks and other financial institutions to hand over private financial details of its American customers in a bid to clamp down on tax evasion.
Britain, France and Germany have already agreed to supply the information and John Key said on Tuesday that New Zealand has to follow suit.
"If we didn't comply, then there were significant complications for New Zealand and, in fact, they've made everyone in the world who wants to do business with them comply under those terms. There's nothing unique from New Zealand."
Revenue Minister Todd McClay said the financial implications of not complying with the order are too great to ignore.
New Zealand Bankers Association chief executive Kirk Hope said if the information is not supplied, the Americans would impose hefty penalties on any investment there.
"That could be say, for example, a payment where a customer of a bank like Fonterra was making a payment from their American subsidiary to New Zealand that could have suffered a 30 percent haircut."
The Labour Party's finance spokesperson, David Parker, believes the rules should be reciprocated for New Zealanders living in the US.
"I'm sure that there will be some people who are New Zealand residents who have tax information in the United States that they don't properly disclose in New Zealand, just as I'm sure there are some Americans who live in New Zealand, have tax obligations in America and don't pay tax as they should there."