KEY POINTS:
The day passed with barely a mention to the chagrin, no doubt, of the Government. Tax rates fell for every New Zealand company on April 1, from 33 cents to 30 cents in the dollar.
While the big news was last year when the cut was announced, there's been little recognition that every dollar of profit earned by our companies this month will have just that little bit less clipped off by the taxman.
And with the economic cycle heading into a downturn, this couldn't come at a better time for business in New Zealand.
Revenue Minister Peter Dunne told the Herald on Sunday that he hopes it will not be another 20 years before corporate tax rates are changed again.
"It's only been done two or three times over the past 50 years - think of all the big changes that have happened since then. You can't sit on your laurels. Some kind of regular look at corporate tax - smaller regular adjustments - are needed."
Dunne agrees the tax cuts have come into effect at a useful time in the economic cycle.
"New Zealand used to be the first into recession and the last one out. Now it looks like we won't have negative growth, but just slowing growth."
PricewaterhouseCoopers chairman and leading tax accountant, John Shewan, says the move to 30 per cent corporate tax rate is significant, and its effects will start to be seen soon.
The difference between personal tax rates and the corporate rate, now even wider, makes it more likely for companies, particularly smaller ones, to retain earnings.
"For smaller companies it doesn't make a lot of sense to pay out profits and volunteer to pay tax at 39 per cent, or 33 per cent if the shares are held by a trust, so there's a clear and direct incentive for companies to retain profits," says Shewan.
"I have said many times we need to remove this ridiculous gap of 9 per cent between the company rate and the individual rate. It sends all the wrong signals. It's a bugger's muddle and we need to deal with it."
This gap "is causing quite a lot of problems and will cause distortion in the statistics", says Shewan. "The retention of profits in companies is going to be quite pronounced in that smaller company end of town.
"It's driving behaviour, incentivising people to do things for tax reasons only. Incentives that are purely tax-driven are bad. They should try to remove them as soon as possible."
Lowering the tax rate means a reduction in Government revenues of $600 million a year, although this will depend on how profitable New Zealand companies are.
"That's a direct cost, but it's also hoped there will be some benefits, because there's going to be more money in the system, higher spending, so the flow-on effects will be hard to quantify," says Shewan.
On the face of it, the Government is forgoing $600m a year, which could be spent on schools or hospitals, for instance.
"But the question to ask is what would the fiscal cost have been had we not dropped the corporate tax rate?
"If you keep your rate propped up high, people will fund from offshore by way of debt [and so on]."
The real cost, he says, although hard to quantify, will be much higher than the $600m forgone by lowering the rate to 30 per cent.
While the top personal tax rate should be cut, indications are that impending personal tax cuts will be changes to the thresholds at which rates are imposed, rather than the rates themselves.
Shewan says: "That is disappointing. We can't afford to keep on with that big gap."
Thomas Pippos, a tax partner at Deloitte, says the new 30 per cent corporate rate is a good first step in moving New Zealand towards "an optimal position", one where all tax rates - corporate, individual and trusts - are less than 30 per cent.
"To some extent that is one thing that is currently missing - clarity regarding the destination of reform rather the next step in the journey."
An effect of this move to 30 per cent for companies is that it is now further away from the top marginal individual tax rate of 39 per cent.
"An implication of the rate change is that corporate structures will be preferred from a tax perspective vis a vis trusts, partnerships or trading directly," says Shewan.
There is also now an incentive to keep money within corporates for reinvestment, rather than distributing it to shareholders - since these individuals will have to pay the higher 39 per cent.
Is this such a bad thing? Not necessarily, says Pippos, but it means companies will be now making decisions based not on commercial considerations, but on tax policy.
Previously it made little difference for a plumber, for example, to trade as a company or an individual. Now the lower tax rate means it will be better to run as a company. "It's not the end of the world [but] what's wrong with it is that it creates regulatory arbitrage," says Pippos. "Tax is part of the decision-making structure."
When individual, corporate and trust tax rates were all fixed at 33 per cent, there was also a free flow of money between different structures.
"You could move the money around without tax costs if there was a free flow of money around different structures. That's because the company paid tax, it could pay an imputed dividend, the trust could pay money to different people because of how the rules worked. One layer of tax, and the money could move around.
"You're now incentivised to keep it in the company because, as soon as you move it out of the company, the benefit of the reduced corporate tax rate is away."
Pippos refers to the theory money should be able to freely flow to the economy to find its best place for investment, and through whatever structure - rather than tax driving that outcome. "It's a double-edged sword", he says.
New Zealand's listed companies traditionally paid out high rates of dividends to shareholders, mainly because it didn't attract extra taxation. In countries such as the US, tax policy meant low dividend payouts.
"The reality is they won't be distributing as much money to share holders as they may have in the past," says Pippos.
Smaller companies - such as our local plumber - will be more likely to keep money in the company rather than pay it out because, unlike many larger listed corporates, its shareholders are individuals rather than other companies.
