“The evidence in New Zealand that reducing the corporate tax rate drives investment is, is quite weak,” he said.
“Our company tax rate has come down from the early 1980s, from 48% all the way down now to 28%. And each time it’s been reduced, there’s no clear evidence that it drove investment.”
Nightingale recognised that internationally there was evidence of lower rates supporting growth, but many of the success stories involved exceptionally low rates, likely deemed unaffordable for New Zealand, especially as the Government tries to slow, if not stop, its debt levels from rising.
Singapore and Ireland, which Prime Minister Christopher Luxon has been talking up as model countries, have corporate tax rates of 17% and 12.5% respectively, for example.
The Crown collected $17 billion in corporate tax in 2023/24, the equivalent of 14% of its total tax take.
If the corporate tax rate was, say, 20%, it would have brought in $12b of tax. If it was 15%, the corporate tax take would have been only $9b.
By way of context, net core Crown debt hit nearly $176b by the end of the year, while core finance costs (interest on the debt) reached $9b.
The other issue, in Nightingale’s view, was that it would be unfair for some overseas companies that make a lot of money from New Zealand to pay less tax.
He questioned how people would feel about ANZ’s $2b profit being taxed at a lower rate than is currently the case.
“ANZ is not going anywhere at 28%, so why would we give them 14%?”
Nightingale suggested the Government consider three other tax changes.
One would be to provide tax concessions to those involved in the building of nationally significant infrastructure.
This could mean allowing a foreigner with specialist skills to stay in New Zealand to work on a project for longer without having to become a New Zealand tax resident.
Concessions could also be made to attract capital from sovereign wealth funds.
“Generally, sovereign wealth funds in their country of origin are either not taxed or taxed very lowly,” Nightingale explained.
“And so, when they come to New Zealand and we tax them at 28%, they say, ‘Hang on, we might go somewhere else where it’s a bit cheaper’.
“Unlike banking or supermarket capital, sovereign wealth capital for infrastructure is sensitive to tax rates.”
Secondly, Nightingale believed the approach taken for employees who receive shares in the company they work for could be changed.
Rather than apply tax to a portion of the value of the shares, he suggested the point of paying tax be deferred. This is something Inland Revenue has just started consulting on.
It explained, in its consultation document: “Taxing share benefits is problematic when the employee cannot sell the shares at the taxing point. This is for two reasons.
“First, it might be difficult to find the cash to pay the tax. Second, valuation might be problematic.
“Both these issues are likely to be at their most pressing for early-stage or start-up companies.”
Nightingale said Inland Revenue was “sensibly” proposing allowing employees to defer paying tax until there is a liquidity event – they sell their shares, or there is an initial public offering, for example.
Finally, Nightingale believed the FIF regime, which can penalise those with more than $50,000 invested in offshore entities, needed softening.
Under the rules, a portion of the value of an investor’s investment is taxed, rather than the dividend income derived from the investment.
While this can hit anyone with more than $50,000 invested offshore harder than if that money was invested in New Zealand, it can be a particular deterrent for wealthy immigrants or Kiwis abroad thinking about returning home, as they are more likely than Kiwis to have large offshore investments.
Speaking to the Herald last week, Deloitte tax partner Robyn Walker noted there was a raft of other tweaks that could be made to the tax system to make it easier to comply with.
She pointed to fringe benefit tax, which is also being looked at by Inland Revenue, as well as niggly rules, such as one that requires businesses to capitalise assets purchased for more than $1000.
This meant that if a business bought two new chairs for $600 each in one go, the chairs would be considered a capital investment that could be depreciated.
But if the business bought the two chairs separately, they would be considered a tax-deductible expense.
Exploring compliance cost reductions is also on Inland Revenue’s “work programme”.
The Government is not, however, considering easing the tax burden on commercial and industrial property owners by allowing them to deduct depreciation as an expense.
Depreciation deductibility rules have flip-flopped over the years, with the coalition Government preventing deductibility to generate more than half a billion dollars a year in tax revenue to help pay for adjusting income tax brackets and to account for some inflation.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
