Business tax review still falls short

Michael Cullen

Chief executives do not believe that the Government's menu of business taxation options will enable New Zealand to strongly compete with Australia.

They rated the proposed drop in the corporate rate to 30 cents in the dollar as the most important measure on the list released by Finance Minister Michael Cullen and Revenue Minister Peter Dunne two weeks ago.

But they also believe other options should have been tabled, such as the alignment between corporate and personal rates and the mutual recognition of imputation credits with Australia.

NZ's ability to compete with Australia is important to CEOs, who rated it at 4.5 on a scale of one to five, making it the most important of nine criteria set by Deloitte as a framework for measuring review options. Other criteria included the ability to invest in capital infrastructure, R&D, plant and machinery, the ability to attract and retain foreign capital, the ability to retain labour and attract it from overseas, and the ability to invest or expand into foreign markets.

CEOs considered taxation as an important factor in attracting and retaining foreign capital (rated at 4), just marginally ahead of the importance they see it as playing in NZ's ability to compete with Australia. But there is a gap between ambition and reality when the impact of the business taxation reviews are measured against the same criteria. For instance, the impact of the initiatives on NZ's ability to compete with Australia was rated at just 2.6.

Other criteria such as the ability to attract and retain foreign capital fared marginally better, as did investment in R&D, plant and machinery, and capital infrastructure.

The package does little for the 80 per cent of CEOs who are concerned about the loss of skilled staff to Australia. The impact of the review options on the labour drift or on the ability to attract new labour from offshore was rated 1.8.

The 40 per cent of businesses that are not registered as companies are particularly affected, says Auckland Regional Chamber of Commerce CEO Michael Barnett: "They might get export incentives but will miss out unless the personal rate is cut."

Fonterra CEO Andrew Ferrier said it "was a shame" that the review had not addressed a key issue in New Zealand's competitiveness with other major trading partners, in particular Australia, where the mutual recognition of imputation/franking credits and the reduction of withholding tax on dividends, interest and royalties, in line with the recently renegotiated Australian double tax treaty with the US, would increase NZ's ability to remain competitive.

Deloitte CEO Murray Jack pointed to the need for coherent policies to improve NZ's capacity to be competitive: "It's not necessarily about picking winners."

Business Roundtable executive director Roger Kerr, who has played a leading role in challenging the Government's taxation assumptions, is disappointed with the review options.

The Business Roundtable, Federated Farmers and the NZ Chambers of Commerce, with support from the NZ Institute of Chartered Accountants, had argued that the basic strategy of the review should be to lower and flatten the income tax scale in line with the key recommendation of the 2001 Tax Review led by Rob McLeod (now Business Roundtable chair). Their menu included a cut in the top personal tax rate to 28 per cent and a cut in company tax to 25 per cent, together with a "responsible funding package".

McLeod is concerned that a return to tax concessions would lead to distortions in the economy: "A reduction in the company tax rate is desirable, particularly in the context of cross-border investment, but it should not be made in isolation from other income tax rate reductions."

McLeod's stance is reflected in the survey responses which indicate that 90 per cent of chief executives agree with the general structure of NZ's tax system: a broad-based income tax with no comprehensive capital gains tax and a broad-based consumption tax. A similar proportion says the corporate and personal rates need to be aligned.

"The alignment of corporate/trust/top personal tax rates would be the best answer, with the corporate rates below Australia's and double tax agreements in line with Australia's treaties with the UK and USA," an Auckland banker said.

What is also notable is that while the Government rejected the McLeod review, chief executives still rate its relevance at 3.4 as part of an overall tax package - the same importance they accorded to R&D incentives, the second rated option from the Government's paper.

The taxation debate has been dominated by business lobbyists who prefer a neutral system. NZ Institute CEO David Skilling - who is playing an influential role with Cabinet ministers in the tax debate - argues that changes are needed to reduce the financial disincentives for firms investing offshore. In a report out yesterday, Skilling proposed a rebate for international market development which would enable firms to cover off 50 per cent of their expenses in establishing a presence in an offshore market.