Business Tax Review Discussion Document released
Hon Dr Michael Cullen
Minister of Finance
Minister of Revenue
25 July 2006 Media Statement
Business Tax Review Discussion Document released
Improving the ability of business to grow and compete in the global economy is the driving force behind the range of options identified in the business tax review discussion document released today.
"The government's goal, in line with its confidence and supply agreements with United Future and New Zealand First, is to help transform the New Zealand economy through internationally competitive business tax rules," said Finance Minister Michael Cullen and Revenue Minister Peter Dunne.
"If we are to build a high wage, high skill, knowledge-based economy we need business tax rules that encourage innovation, support business investment, encourage exporters to break in to new markets and help to build a more skilled workforce.
"The discussion document, therefore, suggests options including a reduction in the company tax rate, tax base changes and measures to reduce the cost of complying with tax rules. These are designed to increase competitiveness, improve productivity and so the potential for the economy to grow.
"As it will not be possible to go ahead with all of the options, we need businesses to tell us what they see as their priorities in relation to the options identified. We also welcome suggestions for other changes as well. This will help the government make informed decisions based on the obvious fiscal constraints we face.
"The business tax review aims to build on progress we have already made in fostering a supportive business environment. We are recognised internationally by the World Bank for the ease of doing business.
"But we can do better and we hope the document provokes meaningful debate. It is the first step in engaging with the public on how best to reform the business tax rules to achieve our economic goals.
"We have attempted, where possible, to estimate the annual cost of each option, being mindful of the fact that whatever mix is finally agreed upon, there will be a fiscal cost which could impact on government spending programmes.
Possible initiatives in the discussion document are:
Tax rate Estimated annual cost
Dropping the company tax rate from 33% to 30% $540m
Tax base Estimated annual cost
Targeted tax credits for:
R&D $45m - $350m
Export market development Uncertain*
Skills improvement Uncertain*
Deferring losses from significant upfront expenditure Uncertain*
Deduction for 'blackhole' expenditure, such as losses on buildings $150m - $300m
Increased depreciation loading on new assets
loading on new assets to:
Aligning depreciation loading at 20% on new and secondhand assets $90m
Tax compliance Estimated annual cost
Increasing low value asset write-off thresholds (e.g. from $500 to $1000) $170m
Reducing compliance costs for assets with low depreciated values Uncertain*
Increasing the threshold for taxpayers allowed to submit an annual FBT return Nil
*Until the detail of these initiatives has been designed it is not possible to give accurate costings.
"We acknowledge that company tax rate changes may have implications for the design of the wider income tax system. Changes to the system of personal income taxation are outside the scope of the Business Tax Review. Any changes in those areas will need to be considered within the context of the overall personal tax regime.
"We want to emphasise that, in changing the tax structure, the government is not interested in an ill-thought out, politically driven lolly scramble.
"Our concern is to lift the performance of the economy for the benefit of all New Zealanders," the Ministers said.
Submissions must be made by 8 September this year.
"We realise that the submission time is tight, but would point out that there is an extensive consultative and legislative process to be gone through. Tax law can take up to a year to pass. Best practice also suggests changes should apply from the start of a tax year, in this case, from 1 April 2008."
The document is available at:
Business Tax Review – Questions and Answers
What is the objective of the Business Tax Review?
The objective of the Business Tax Review is to provide better incentives for productivity gains and improved competitiveness with Australia. The release of the discussion document is a first step towards engaging with the public on business tax reforms that are aimed at continuing to transform the New Zealand economy into one that has higher levels of productivity, business investment, innovation and skills.
The discussion document outlines a range of possible initiatives involving a reduction in the company tax rate, tax base measures and compliance cost reduction measures.
How would a reduction in the company tax rate raise productivity and improve competitiveness with Australia?
A reduction in the company tax rate would encourage more investment into New Zealand by businesses that have decided to locate here. This would tend to increase New Zealand’s stock of plant, equipment and buildings, which would boost labour productivity.
A lower rate would reduce biases between different investments that companies undertake, which would tend to boost capital productivity.
Any reduction in the company tax rate would tend to encourage New Zealand companies to stay here, rather than shift to Australia or elsewhere. It would increase the after-tax profits of companies, which means more funds available for reinvestment.
How would the tax base measures raise productivity and improve competitiveness with Australia?
Firms undertake R&D to improve their products and processes, which directly contributes to productivity and competitiveness. At the moment, businesses are likely to under invest in R&D because they do not capture all of the benefits from that investment – the investment results in wider benefits that boost productivity and competitiveness for other firms as well. R&D tax credits should help to address this underinvestment, resulting in businesses developing more new products and processes.
Tax credits for export market development aim to raise productivity by encouraging businesses to seek new markets for their existing products, and to introduce new products to existing markets. As with R&D, businesses may not invest enough in developing new markets, and other New Zealand business can lose as a result.
When a New Zealand firm successfully launches its products overseas, other businesses are likely to benefit from knowledge of comparative advantage and networks developed by that firm. Tax credits for skills enhancement in the workplace aim to encourage employers to spend more on developing the skills of their employees. They may be reluctant to do this at the moment because these skills are easily transferred to other businesses and the benefits would be lost to the employer. Increasing skill levels should improve labour productivity.
Accelerated depreciation reduces the cost of investing in assets, encouraging more businesses to upgrade their plant and equipment. If businesses use more up-to-date plant and equipment this will make labour more productive and so increase economic output, adding to GDP growth.
How would reduced compliance costs raise productivity and improve competitiveness with Australia?
Complying with the tax systems costs companies money and valuable time. The less time a business spends complying the more time and money a business has to expand and reinvest. Even though the World Bank has recognised New Zealand as business friendly, the more we can do to free up management time, the better. This is especially true for small businesses where the burden is often higher.
How does the tax burden on New Zealand companies compare with that in Australia?
30 per cent company tax rate would be the same as
New Zealand companies do not pay payroll taxes (up to 6 per cent in some Australian states) or compulsory superannuation. Australia also has a comprehensive capital gains tax, and stamp duties on property sales, mortgage registration and the transfer of securities.
These options build on our already competitive tax and compliance system. The World Bank says New Zealand is the easiest place in the world to do business (Australia is sixth). We have the third lowest tax wedge in the OECD (Australia is sixth) – the OECD measures this as the difference between what it costs to employ a single production worker on an average wage and their take home pay.
Moreover, if adopted, the tax changes would increase New Zealand's competitiveness with the rest of the world. Latest OECD tax data shows New Zealand's total tax burden is not out of line with the rest of the developed world and is indeed lower than most rich industrial nations such as France and Italy.
Why not consider deep company tax cuts?
Deep cuts to the company tax rate are expensive, and without alternative revenue sources (such as a payroll tax) the government could not afford the high quality services it now provides. Competing countries with much lower company tax rates usually have other business taxes to boost revenue.
Even if a deep rate cut was affordable, by itself, it would increase further the gap between the company rate and the top personal rate of income tax. People would then have a greater incentive to use companies to avoid tax.
Deep company tax reductions would benefit only companies and not all those businesses engaged in productive investment. Some businesses such as sole traders are not incorporated as companies.
Finally, much of the benefit would flow to large, foreign owned companies and might do relatively little to promote productivity and competitiveness.
Why reject a payroll tax?
Imposing payroll taxes to fund deep company tax cuts creates a number of problems and is unlikely to promote productivity and growth.
It could be costly and complex to administer especially if there are thresholds and exemptions. It would increase compliance costs for companies and create incentives for companies to construct ways to avoid it increasing inefficiency and undermining the integrity of the payroll tax.
For example, companies could outsource labour to unincorporated entities and so avoid the tax. Therefore the rate might have to be higher on those paying the tax.
New companies that are rapidly expanding would be particularly hard hit. They could well be losing money as they reinvest for future expansion (and therefore not benefit from deep tax reductions), but would still be required to pay payroll tax.
Why are tax concessions being considered?
It is generally accepted that government support for certain business activities which result in wider benefits to society is justified when investment in those activities is less than is desirable because a business cannot secure all the benefits from its investment. On this basis, the government already provides assistance by way of discretionary grants for business R&D, export market development and increasing skill levels.
The discussion document raises the possibility of further support by way of tax concessions as the government considers that this can be a more effective way of supporting these activities than discretionary assistance alone.
Could tax concessions for exporters breach World Trade Organisation rules?
Many countries provide market development assistance of this sort to businesses, as the recent New Zealand Institute report acknowledges, without being challenged in the WTO. The current market development assistance provided as part of the Enterprise Development Grant scheme closely follows the design of the Australian scheme.
Does a reduction in the company tax rate cause problems with a much higher top personal rate?
The government acknowledges that company tax rate changes may have implications for the design of the wider income tax system. Changes to the system of personal income taxation are outside the scope of the Business Tax Review. Any changes in those areas will need to be considered within the context of the overall personal tax regime and have regard to revenue constraints and tax policy principles.
What does this all mean for indexing thresholds? Will that still go ahead?
The indexation policy is separate from the Business Tax Review. Final decisions on its affordability have yet to be made.
What will be affordable?
As indicated in Budget 2006, the government faces tight fiscal constraints over the next four years. How much fiscal headroom is available for tax changes will depend on careful management of the other pressures in the Budget and will be clearer closer to next year's Budget: when final decisions on the Business Tax Review will be made.
It is important to note that not all options will be progressed, and trade-offs will have to be made once consultation has identified what the business community regards as most effective.
Why are you doing this now and not years ago?
The review is a key part of the support agreement with United Future and New Zealand First. It is a natural next step building on past successes. In particular, the Labour-led government has already been actively engaged in reducing the tax burden on business and providing a more supportive environment. Budget 2005 introduced over $1 billion of changes relating to provisional tax, depreciation and other simplification measures.
Moving beyond taxes, the government's investment in research, science and technology has increased 65 per cent since 1999. There has also been considerable market development assistance for exporters, funding for venture capital and a major investment in skills training.
Why is there not a fiscal cost for all options?
Fiscal costs are provided when these can be estimated with some degree of reliability.
In the case of tax credits for export market development and skills enhancement, it is not possible to estimate a fiscal cost until it is clearer what the scope of the credit would be.
In the case of measures proposed to reduce compliance costs in relation to assets that reach a low depreciated value, Inland Revenue and the Treasury do not at present have sufficient data on asset schedules to cost the initiatives with any certainty.
How will the government decide which initiatives to proceed with?
The government will consider the costs and benefits of all initiatives raised in the Business Tax Review, including those put forward in submissions. Subject to fiscal restraints, it will progress those that represent the best value in terms of increasing productivity and competitiveness with Australia.
What's the timeframe for changes?
Submissions are due by 8 September. The timeframe allowed for submissions is tight as the government is committed to action by 1 April 2008. Tax law is complicated and changes take time. We want to give those providing input an opportunity to see details of the final package before legislation is introduced.
Final decisions will be made early in 2007 with a view to introducing legislation by May 2007.