Capital Markets: Aussie silence on tax credits worrying

Australian Treasurer Scott Morrison arrives at Parliament in Canberra to read the Budget. Picture / Getty

Despite a cut to the Australian company tax rate, New Zealand is still in a sound competitive space, writes Alex Malley

For New Zealanders, two things would have stood out in the Australian Government's Budget, handed down earlier in the month by first time Treasurer Scott Morrison.

With the Kiwi company tax rate at 28 per cent, a cut to the rate in Australia from 30 per cent to 25 per cent might, at first blush, appear to be something of a threat to New Zealand competitiveness in terms of attracting investment and talent.

However, when you consider Treasurer Morrison is proposing phasing this in over 10 years, the initiative becomes somewhat less concerning.

New Zealand is set to retain its competitive edge for the foreseeable future. Finance Minister Bill English has been upfront in ruling out tax cuts in his Budget later this month, citing "continuing tight fiscal conditions" and an emphasis on additional debt repayments.

When he does move, which he has flagged he will do when the fiscal situation improves, it's a safe wager that it won't just be a promise to implement cuts some time over the next decade, not least because in 10 years' time other sovereign nations' tax rates will also have moved.

Though Morrison's plan for cuts in Australia might underwhelm, it sends a further signal to markets that the long-term trend in company tax rates is down. This is important as we are all engaged in a global competition for investment and the jobs that accompany that investment.

Another element of tax competitiveness concerns multi-nationals and the issue of Base Erosion and Profit Sharing (BEPS). Morrison's Budget outlined a number of "integrity" measures to ensure compliance with Australian tax laws.

Initiatives to improve public trust in the tax system are welcome but it's important to acknowledge that competitiveness -- including tax competitiveness -- is the name of the game for many jurisdictions.

Bolting new sets of regulation on to an existing body of laws can obscure the need to address more fundamental assumptions, and Australia and Morrison need to address the underlying problem, not just the symptom.

English and Prime Minister John Key have rightly hitched their wagon to the multi-lateral efforts led by the OECD and G20 to tackle BEPS at a global level, and incremental progress is being achieved. This process needs to be supported by all nations.

Disappointingly from a New Zealand perspective, there is nothing in the Australian Budget indicating that New Zealand's proposal for the mutual recognition of imputation credits has gained any traction.

As Key pointed out in his submission to the Australian Government's now abandoned white paper tax reform process, the mutual recognition of imputation credits would be the "next leap forward in Trans-Tasman integration."

Mutual recognition -- the ability for a New Zealand investor to claim an imputation credit on an investment in an Australian company and vice versa -- is one of the most significant barriers to a seamless Trans-Tasman capital market. It discourages the free flow of capital between both markets and limits investment opportunities in both markets.

There is nothing in the Australian Budget indicating that NZ's proposal for the mutual recognition of imputation credits has gained traction.

However, it is not surprising that the Australian Government has not moved to progress the issue. It has previously been reviewed by both countries' Productivity Commissions, which concluded that, though it would be beneficial for the freer flow of capital between the two nations, Australian Government revenues would be the net loser.

In a time when the Australian Government is clearly focused on budget repair, it is unlikely this issue will gain favour in the short to medium term. Key has been pragmatic about Australia's capacity to afford such a move, noting: "If Australia is not able to move now to mutual recognition, we seek at least an in-principle decision to implement mutual recognition when fiscal circumstances permit."

With Australia now in election campaign mode counting down to a July 2 poll, the issue will need to be pursued with whoever forms the next Australian government.

Alex Malley is Chief Executive of CPA Australia.