Working group backs extending PIE tax rate to other investments

The Tax Working Group sees merit in extending the 30 per cent PIE regime to the taxation of other forms of investment income, at least as an interim measure.

The group, chaired by Professor Bob Buckle and comprising tax experts from the private sector, officialdom and academia, considered issues around corporate taxation in their most recent meeting.

They are critical of the "incoherence" of the current system arising from the misalignment of rates, with the top personal rate at 38 per cent, the trustee rate at 33 per cent, the company tax rate at 30 per cent and the capped rate for savings through portfolio investment entities (PIEs) also at 30 per cent. This can distort investment decisions and provides incentives to shelter income in corporate or trust structures (or a combination of both).

The Government's declared medium-term objective is to align the rates at 30 per cent. Officials estimate this would cost around $1.4 billion a year in lost revenue.

If alignment of the rates proved too difficult in the short term, the working group favoured extending the existing treatment of investment through PIEs, which are taxed at the lower of 30 per cent or the investor's marginal rate, to other forms of investment income including interest, rents and dividends.

But as capital income is concentrated among those on higher incomes, such a change would reduce the progressivity of the tax system overall.

The group supports the imputation system, where dividends come accompanied by credits for the shareholder's share of corporate tax already paid, especially if rates could be aligned, even though Australia and Mexico are the only other OECD countries to have it. Alignment of tax rates could come under pressure from the trend towards lower corporate tax rates globally. The New Zealand rate of 30 per cent is relatively high and, while it is in line with the Australian rate, that might change following the Henry tax review under way there.

The working group was also briefed on more radical possible changes to the corporate tax regime.

One would be to adopt the classical or Irish model, where the company tax rate is lowered but dividends carry no imputation credits, so profits are taxed a second time in the hands of local shareholders, and there is a capital gains tax.

This would encourage inbound foreign investment, boosting the capital stock and productivity, but it would increase the tax paid by domestic savers and encourage companies to retain earnings, which might not always be the best use of that capital.

The working group thought the Irish system should be considered if the preferred option of alignment of rates was not deemed possible or desirable and especially if a deep cut in the company tax rate was considered necessary to help to lift productivity.