KEY POINTS:
Change creates winners and losers - and Budget 2007 was no exception, creating winners and losers with its international tax proposals.
Publicised as being taxpayer-friendly, they give with one hand but take with the other. Whether the give outweighs the take will depend on each affected taxpayer.
The
generalisation that "New Zealand businesses will be better off under the proposals" will clearly not hold true for some.
The active income and wider dividend repatriation exemptions hold the limelight. The winners are those businesses currently operating outside the grey list in low-tax jurisdictions.
The repeal of the grey list and the interest allocation rules are lying in the shadows. Predicated on avoidance grounds, the losers will be a subset of taxpayers that operate within the grey list and/or have debt in New Zealand to fund their global expansion.
Why will they lose? Because those with a full grey-list exemption will need to reflect whether, and to what extent, they can benefit from the active-income exemption. To the extent that they can't, compliance costs will likely be huge relative to any extra tax New Zealand may gather.
All these taxpayers will face limits on how much capital they can raise in New Zealand to fund their total operations through restrictions on interest deductions. What is proposed is not best practice and is punitive by international standards.
How bad? It could be quite scary for many affected businesses - many are not even aware of these ramifications.
Other losers are those that can legitimately use the conduit and foreign investor tax credit regimes, which look like they may be on their way out.
Part of the debate is what the ultimate destination of tax reform should be - what tax strategy will retain New Zealand businesses and attract new ones from overseas. This is the missing link that simple positive statements do not address.
Part of the problem seems to be paranoia about avoidance, with the introduction of an active income exemption being used as the impetus for a total upheaval of the tax rules, rather than being seen as the final chapter of what was introduced nearly 20 years ago.
A further difficulty is that while the proposals deal largely with greater than 50 per cent holdings in international companies and the recently introduced fair dividend rate rules deal with holdings of less than 10 per cent, treatment of the 10 per cent to 50 per cent range is still up in the air.
It is hard to see how an active income exemption in substitution of a grey list would work here, given the information taxpayers would need to determine its application - that information becomes harder to glean as your shareholding reduces.
The dust is still to settle. For some, the ultimate destination of this reform can affect the other positive budget tax developments - which are very positive.
Avoidance needs to be addressed in a targeted manner, not through a wholesale change that also affects innocent bystanders.
* Thomas Pippos is a Managing Tax Partner with Deloitte