Lower tax rate no "silver bullet" for more foreign investment

Wednesday 8th February 2012 3 Comments

Cutting the company tax rate isn’t a “silver bullet” that would stoke foreign investment in New Zealand, according to the Inland Revenue Department.

Commissioner Bob Russell told Parliament’s Finance and Expenditure Select Committee lowering the corporate tax rate is just one in a series of factors that will encourage international entities to park their funds in New Zealand. The nation’s distance from other markets means it doesn’t have to compete on tax in the same way countries of a similar size might have to.

“New Zealand is a small country quite remote from lots of places,” Russell said. “In a sense it’s not as important for us to be competing in lowering our rates progressively as it might be if you were a small European country with lots of other alternatives to service a market.”

The National Party-led administration cut the company tax rate to 28 percent in the 2010 Budget, something the tax department lobbied against, saying the misalignment with personal tax rates created a bias towards company structures and reintroduced “incoherence into the taxation of savings vehicles.” The Treasury was in favour of the rate cut, saying it would bolster corporate investment, including from offshore.

Struan Little, IRD’s deputy commissioner policy advice division, told the committee tax rates can affect the movement of capital across boundaries, but it “is not a silver bullet” and “a lot of other factors influence investment.”

Russell said because New Zealand’s a smaller country, larger companies tend to invest to target the local market, and isn’t necessarily linked to lower taxes.

In its briefing to the incoming minister, the IRD reported the government’s tax take as a ratio of gross domestic product fell 4 percentage points since 2007. Little told the select committee about 2.5 percentage points of that was due to government policy, with the remainder stemming from the country’s recession.

Last month, government financial statements showed its personal tax take continued to fall short of Treasury forecasts in the five months ended Nov. 30, though corporate tax revenue was ahead of expectations.

Russell told the committee the 17 percent increase in overdue Pay As You Earn tax was the department’s biggest debt collection concern, and is a priority for it to recover.

The rise in outstanding PAYE was a result from the recession as ailing businesses fail over the subsequent years, he said.

Russell said the department was working towards a leaner, more efficient model, with further cuts to its headcount likely, having already reduced staff numbers by 2,800 since 2008.

“We still have a very active change agenda underway, and that puts pressure on the organisation,” he said.

(BusinessDesk)

BusinessDesk.co.nz

Comments from our readers

On 8 February 2012 at 1:46 pm Tribeless said:

They are right, but not for the reason they give: rather, because cutting the corporate tax rate in NZ is useless when IRD will prosecute the owners of the bulk of our companies (small to medium companies) who retain profit to be taxed at the lower (than personal) corporate tax rate, vis a vis, Penny and Hooper. Yes, they're saying they'll only apply it to service companies, but that's BS. They'll apply to every company ultimately simply because they can, and they know the judiciary no longer work under a civilising classical liberal ethic, but believes individual freedoms, individuals period, must be sacrificed on the violent altar of the welfare state. So we have a Minister of Finance who states he believes lower tax rates encourage economic activity, and an IRD which directly countermands him by effectively treating anyone not paying the highest personal rate of tax as a tax avoider. That's the New Zealand tax system. A pile of steaming, thieving, two-faced shite.

On 10 February 2012 at 10:52 am Observer said:

The Penny decision will cost NZ dearly in foreign investment. What an individual can or can't charge for his/her labour should not be subject to IRD control; even if it's given for free.

On 15 February 2012 at 1:53 pm Mat said:

Whatever the level you set the tax rates at, things work better when you align three key rates. You create boundary issues when you do not align the top individual tax rate, the company tax rate, and the trust tax rate. The IRD took 10 years to not properly address this issue their recent guidance is widely regarded as not helpful. With our imputation credit system the Company tax rate is largely a withholding tax, with the full incidence of tax being felt by the shareholders, generally individuals, other companies, or trusts. If the headline Company tax rate doesn’t make much difference then lets put it up to 33%, the current top individual tax rate and the Trust tax rate and move our energy onto things that actually make New Zealand’s boat go faster. Then we can have the separate discussion around whether that top rate should be 25% or 45% or whatever. Anytime the IRD is not supporting such a move they are letting the NZ Public down. Anytime the Politicians are not supporting such a move they are creating mischief for taxpayers, and letting the NZ public down.