IRD adds weight to case for tax cut

Prospects of a cut in the company tax rate have received another boost with Inland Revenue telling the Government that its revenue base would likely be eroded without a reduction.

In its briefing to incoming Revenue Minister Peter Dunne, Inland Revenue said it was concerned "whether we will be able to continue to collect as much company tax as we do at present if we do not lower the rate of company tax".

The department said New Zealand had a relatively high reliance on corporate tax as a revenue source - at present 15 per cent of the total take - and the possible erosion of that tax base was a "material fiscal risk".

With much of the economy in foreign ownership, New Zealand's relatively high levels of business tax and unfavourable imputation credit regime acted as incentives for companies to stream profits abroad.

High company taxes could also see potential investors passing New Zealand over in favour of countries with more favourable headline rates.

"International moves are placing downward pressure on New Zealand's company tax rate and whether we should lower this rate is an important issue for New Zealand to consider," the IRD said.

New Zealand's 33 per cent company tax rate places it ninth among the 30-member OECD group of economically developed countries. In the early 1990s, New Zealand was well below the OECD average.

The department said a particular area of vulnerability was Australia's heavy investment in New Zealand combined with its lower 30 per cent business tax rate and its full imputation system.

"The future of the transtasman tax relationship needs to be considered as a matter of priority."

Even if New Zealand and Australian company tax rates were aligned, imputation credit differences meant there would still be an incentive for New Zealand subsidiaries of Australian companies to divert profits to Australia. "Stemming these incentives may require New Zealand to have a significantly lower company tax rate than Australia's."

Deloitte tax partner Thomas Pippos said with Dunne already set to review the corporate tax rate, a cut was now "almost inevitable".

"You've got a pretty strong steer from Treasury, you've got a Minister of Revenue outside of the Labour Party who is looking to make a mark, so he's got ammunition now to do what he wanted to do.

"His party and a couple of the other parties were already very sympathetic and now you've got officials basically saying you've got to do it."

PricewaterhouseCoopers tax partner John Shewan said Inland Revenue's comments set out a strong framework for Dunne's business tax review and for a wider examination of the tax structure.

The department said there was growing evidence of income splitting and tax sheltering - tax dodges that appeared to be partly related to company and trustee tax rates being lower than the top personal rate. Any cut in the corporate rate would likely add to further tax sheltering.

"I think what the IRD paper is saying to the minister is you cannot examine company tax in isolation from personal tax." 

Possible tax reforms

* Lower the top personal marginal tax rate from 39 per cent to reduce the gap between it and the 33 per cent company rate

* Increase the company rate and trustee rate to the top personal rate of 39 per cent.

* Reduce top personal rate to 36 per cent, increase trustee rate to 36 per cent and cut corporate rate to 30 per cent.

* Directly confront income splitting and tax sheltering