Thomas Pippos and Mike Shaw: Year of the tax review

Next year has been heralded as the year that the tax review achieves some traction. Expectations are high.

The review has its genesis in the confidence and supply agreements Labour has with United Future and New Zealand First.

Carbon tax met a premature end before Christmas and even Michael Cullen referred to "some bold measures emerging" from the proposed review.

With such a backdrop, what could business be looking for from a tax standpoint next year and beyond? Possibly in order of importance:

* A corporate tax rate reduction: Twenty years ago, New Zealand led the charge for corporate tax reductions; unfortunately, it is far from leading the world now. This is the highest priority to attract and retain investment in New Zealand.

* The alignment of tax rates: Many businesses are not corporatised. For some, the highest tax rate is the highest individual tax rate.

A key success of the 80s tax reforms was the acknowledgment that business transactions should not have different tax outcomes depending on whether the taxpayer is an individual, a corporate or a trust.

Also, the taxation of business income and that derived by individuals should correlate. The broad application of the 33 per cent rate from the late 80s meant taxpayers could focus on making money, not on managing tax.

* Mutual recognition of imputation credits between New Zealand and Australia: We are becoming more commercially integrated with Australia. A key enabler of even greater integration would be for New Zealand investors to be able to claim credits for Australian franking credits (similar to imputation credits) and vice versa.

This would substantially increase the investment opportunities to New Zealand businesses and attract greater Australian capital here.

It would also help to reduce the drive to pay as little tax as possible in the other jurisdiction.

* Attracting foreign capital: New Zealand relies heavily on foreign capital. Foreigners that bring such capital here also bring jobs, wealth, expertise and, most important, opportunities for many New Zealanders.

Tax incentives should be used to encourage this. If Microsoft wanted to establish a substantial research facility in New Zealand, we should encourage it, even if we had to provide a permanent tax exemption; the jobs (and tax on that income) and economic wealth created would be substantial compared with any corporate taxes forgone.

Other less obvious tax concessions include an immediate reduction in withholding taxes and corporate taxes on non-residents.

Reductions of withholding taxes with Australia and the United States would also substantially benefit the many New Zealand businesses that have investments in those countries; such reductions would almost be revenue positive as this foreign tax would now be paid to the New Zealand Government.

* Continuing without a capital gains tax on foreign equities: The proposals to subject offshore portfolio investment to a full capital gains tax should be axed. New Zealand investors should not have to pay additional tax if they invest in foreign companies. They are not avoiding local tax.

New Zealand simply does not have enough public companies to provide investors a diversified investment portfolio. This is best recognised by the Cullen Fund, which invests 80 per cent of its assets offshore; interestingly, it is measured on a pre-tax basis.

* A fairer penalties and interest regime: Only as an example, taxpayers who want to voluntarily disclose errors are subjected to the fifth degree over whether penalties should be imposed. There should be no penalties if a taxpayer discovers a normal error and seeks to correct it with Inland Revenue.

The present rate of use of money interest charged by the Government on tax underpayments, 13.08 per cent, is punitive enough; this rate should also be reviewed.

* A dedicated group within tax policy dealing with remedial matters: Legislation requires constant tinkering to get it right. Changes need to be timely, otherwise errors linger and the tax system falls into disrepute.

The establishment of a dedicated group within tax policy dealing with minor and remedial tax issues would help to counter the resource dilemma faced by business seeking to address legislative anomalies.

* The death of gift duty: An archaic tax which serves little or no purpose. Even Inland Revenue does not dedicate resources to enforcing it. The annual revenue gathered is $2.3 million. It is a trap for the unwary.

* Thomas Pippos and Mike Shaw are senior tax partners at Deloitte.