KEY POINTS:
Doing business outside New Zealand is set to get easier for local companies as the Government moves to reduce their tax burden for foreign income.
Yesterday the Government released the second of two discussion papers designed to introduce proposals for reforming the international tax system for companies.
The first paper, released for consultation in October, is aimed at making the active income - such as manufacturing income - for New Zealand businesses with controlled foreign companies tax exempt.
Submissions closed on the paper last week. Yesterday's paper addresses the treatment of foreign dividends for New Zealand companies.
It will be open for submissions until February 15 after which the Government expects to bring together the submissions and put forward a bill in May that would see the changes introduced from the 2009/10 tax year.
At present New Zealand taxes the foreign active income of its businesses while other countries do not.
In a joint statement Finance Minister Michael Cullen and Revenue Minister Peter Dunne said it was essential to remove the tax disincentives for businesses to locate in New Zealand and expand into other countries from a New Zealand base.
"Within an increasingly global economy, New Zealand must be able to attract and retain capital, and our businesses must be able to compete effectively in foreign markets," they said.
New Zealand Institute of Chartered Accountants tax director Craig Macalister said he expected most businesses to welcome the proposals.
The present rules did not necessarily put businesses off expanding overseas but some such as Lion Nathan had moved their head offices to Australia to reduce their tax burden.
"If you invest in a manufacturing plant in China, you pay no tax in China and under the home jurisdiction in Australia you can also pay no tax. But New Zealand is a different story," he said.
The changes are likely to make it easier for many of the large businesses in New Zealand such as Fonterra, Fletcher Building and Carter Holt Harvey to expand globally.
But plans to drop the exemption for companies which receive dividends from operations in countries on a so-called "grey list" will mean more may come under the radar and need the changes to stave off a higher tax bill.
John Pain, spokesman for the Corporate Taxpayers Group, which represents 30 of New Zealand's largest companies, said it welcomed the changes overall but the devil was in the detail.
He said removing the "grey list" could increase costs for companies as the new rules would require more compliance to prove that the income was an active income and to meet the interest allocation rules.
"Jurisdictions like Australia still have a grey list and our view is thatit would be better to keep that here too."
