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Key: Speech to 'Mood of the Boardroom'

John Key MP
National Party Finance Spokesman

8 August 2006

Speech to ‘Mood of the Boardroom’

(Delivered at NZ Herald ‘Mood of the Boardroom’ Breakfast, Auckland, 8am)

A fortnight ago today, the Government released the report of its long-awaited business tax review.

This was the report, you might recall, that was going to contain some very big and bold measures, perhaps too big and bold for some people to stomach, and wasn’t just going to be a matter of tinkering with the tax rules. This was the report that took more than seven months to complete and involved the combined intellectual grunt of the Treasury and the IRD.

I’m sure you’ll agree with me that, far from being big and bold, the document was in the end pretty underwhelming.

Rather like a 30-second promo for Hollywood’s latest blockbuster movie, the hype surrounding this review whetted the appetite and promised a lot. Sadly the document itself ended up about as exciting as backyard fireworks on a wet Auckland night.

Why am I so disappointed in this review? I felt it could have taken one of two different approaches, and each of those two approaches would have had its merits.

The first possibility – and the most useful in my view – would have been a report with a generous vision, which offered a road map for progress on business tax reform, which set out the Government’s broad goals in this area, and put forward a wide range of options for achieving those goals over time, and as funding permitted. In other words – what are we aiming for, and how can we progress there over time?

This sort of review would canvass opinions from businesses and other stakeholders on how it thought these various options would or wouldn’t contribute to achieving the Government’s goals.

Well, we didn’t get that kind of review.

The other possibility was a much narrower, but more precise, report which set out how much money was available to spend on business tax measures, what this necessarily constrained the options to, and what the Ministers’ preferences were - with a few limited but well-costed alternatives.

This sort of review would be more like a typical IRD discussion paper, which says “right, this is what we are going to do, here are the costs and benefits, and what holes can you see in it?”

Well, we didn’t get that kind of review either.

What we got instead was a strange kind of watered-down mix of both approaches – or rather, I should say, of neither approach.

We still have no idea how much money the Government is prepared to spend on business tax. The report contains scant costings, and its few options are embarrassingly under-described. There is precious little flesh on its bones.

But then neither does the report give us a goal, a coherent plan for getting there, or a discussion of truly wide-ranging options.

That’s a shame, since much more could have been achieved through this review.

Surely, if we are to have a serious debate about taxation, then this is what we need. And in fact now is the perfect time to do this – to put a range of ideas on the table and to canvass opinions about them.

In the final analysis, many of those ideas would be rejected. That’s fine. What’s important is that we discuss their merits, and their costs, and have a genuine process around doing this - not some half-hearted exercise in fulfilling a coalition obligation to United Future.

And, after all, I think that business in New Zealand is realistic. It doesn’t expect a big-bang approach, it knows things take time, that measures can be expensive, and that governments have other priorities as well. But I think business does want to know what is going on, to have some genuine say in this, and to know that the Government is committed to thinking broadly and to making some bold tax changes over time.

In this spirit, I want to outline 10 other ideas I think a more thorough and wide-ranging review of business tax should have discussed. I’m sure many of you here could add to this list.

I am not arguing that my ten would all make the cut, or would be affordable, or could be implemented fully on day one. They do, however, constitute a stronger dose than the proposals in the decaffeinated report we saw a fortnight ago.

1. To me, the most important issue that should have been included in the report was a strategy for any future changes to the company, personal and trust rates, so that changes to these rates are principled and co-ordinated. In particular, the review should have discussed the trade-off between aligning these three rates - as we used to do - and changing the various headline rates.

2. Changes to the taxation of foreign investment in New Zealand. In particular a review of non-resident withholding taxes on interest, dividends and royalties, considering that Australia is moving to a zero rate of withholding tax with a number of other countries.

3. Changing the controlled foreign company regime to distinguish between active and passive investments in foreign countries.

4. A 100% write-off for all R&D spending.

5. A 100% write-off for all purchases of plant and equipment, as is the case in Germany.

6. A differential rate for new businesses, for example a lower rate of company tax payable in the first 3 to 5 years, as is the case in Singapore and the UK.

7. Extending the 4-year exemption for foreign income of new migrants who satisfy defined criteria, and relaxing the rules for returning New Zealanders.

8. Adoption of an Irish-type approach where a low rate is applied to new greenfield operations in defined high-growth sectors.

9. A renewed push for mutual recognition of imputation credits with Australia.

10. Addressing issues around compliance costs and the administration of the Tax Act.

Let me conclude by saying that last year when we gathered here for the “Mood of the Boardroom” only weeks before the general election, tax was also the centre of debate.

On that occasion, Michael Cullen took the opportunity to characterise National’s proposed tax plan as a Ferrari when compared to his faithful and reliable old Honda Accord.

What I think this business tax review shows is that putting a plastic spoiler and a pair of fluffy dice on your Honda Accord doesn’t fool anyone into thinking you have a faster or better-performing car. And ultimately, if we want New Zealand to be in the fast lane of the world’s economies we need to have a fast car. It’s no fun having to keep pulling over to let others overtake us.



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