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Cullen Speech to NZBio Auckland CEO breakfast

Business Tax Review and economic transformation

Michael Cullen Speech notes to NZBio Auckland CEO breakfast, HSBC House, Queen St, Auckland

Can I thank Jim for that introduction and the warm welcome to be here with you today.

It is a real pleasure to be with an audience that is enthusiastic about cross-company, cross-industry and sector-government partnerships to collectively build on our natural advantages as an economy.

Jim has outlined forcefully the vital role that biotechnology can and must play to create more New Zealand-based businesses with large flows from offshore operations for patented products across the medicine and industrial sectors and from the by-products of our competitive primary industries.

You know that you have in my government a willing partner in growing the potential of biotechnology-based exports.

I also do not think many of you will be surprised to know that you have, in this government, an ally in the view that there are benefits to be gained from having deeper capital markets in New Zealand.

You have outlined some of the systems and programmes in place across the developed O.E.C.D. economies designed to promote the expansion of the biotechnology sector.

You can be assured that officials are studying the experiences of other O.E.C.D. nations as we develop our responses to submissions we received on the Business Tax Review.

The purpose of the Business Tax Review

The driving force behind the range of options identified by the business tax review discussion document released three months ago is the strong desire by the government to further improve the capability of businesses to grow and to compete in the increasingly borderless international economy in which New Zealand-based firms must trade.

The review is an important part of our strategy to facilitate the progressive transformation of our economy into a higher-wage, higher-skill and more knowledge-based economy.

We want to ensure that our business tax rules best encourage innovation, better support business investment and further encourage New Zealand-based firms to either enter or to expand their engagement in offshore market opportunities.

We need to lift our game in this area if we are to drive higher growth and raise incomes for all of us. Exporting as a proportion of GDP has barely changed in recent decades and if we are to climb the OECD ladder we must do better in encouraging higher value exporting.

The discussion document suggested options for consideration such as reducing the company tax rate, tax base changes and measures to reduce the cost of complying with tax rules. Options being examined include, as you know, potential targeted tax credits to encourage increased investment by companies in R&D, in export market development and in skills development.

Summary of submissions

Inland Revenue and Treasury received more than a hundred submissions on the Business Tax Review representing a broad spectrum of the economy - including businesses of all sizes, industry/business groups, tax practitioners, business advisers, private individuals, unions, local government, and some political parties.

I have been impressed by the high quality of many submissions, the great deal of time and effort that has clearly gone into them and, also, the suggested ways forward in terms of how we might prioritise the different options. Submissions and the feedback from submitters are providing a vital input into the next stage of the Review.

The Review is currently addressing two main issues.

First, it is developing advice on the best package of reforms to lift the performance of businesses and to support the transformation of the economy.

Second, and in parallel, it is working through the more detailed issues around how these potential reforms could be implemented in practice.

The Review is working to a very tight timetable – in order to deliver reforms to be in place for April 2008 – and this means that it is necessary to make progress on the detail of how the reforms would be implemented at the same time as considering what the best package of reforms would be.

Fiscal and macro-economic context

It is important to remember at a time of great clamour for tax cuts that fiscal policy does not exist in isolation from the wider macroeconomic environment. Every businessperson knows how disruptive changes in exchange and interest rates can be.

Responsible government means running fiscal policy that does not complicate the job of exporters.

Our fiscal stance must not make the Reserve Bank's job more difficult at a time when the economy is close to a number of constraints, in particular the large current account deficit, a stubbornly high dollar, and high rates of capacity utilisation.

So any decisions on tax reform must be taken in the context of existing fiscal pressures and the macroeconomic climate.

What might the overall package contain?

Because we aim to foster a business environment that encourages greater innovation, investment in the business and their staff, and exporting, the business tax review is likely to produce an attractive mix of a lower corporate tax rate and tax credits.

Any potential change to the headline company tax rate will also have implications for personal taxation and these will be considered at the same time as changes to business tax rules.

Further work on business tax changes

The current phase of the Business Tax Review’s workload is perhaps the most difficult.

We are trying to determine the most effective package of business tax changes – that would make the greatest contribution to lifting the performance of businesses and the economy.

Inevitably this requires consideration of the more detailed design issues – essentially, how the different tax changes would work in practice – in order to develop a view on the highest priority tax changes.

For example, we are keen to foster greater innovation, more investment in the business and in staff and a stronger engagement with the global economy by businesses.

There are a great many ways that businesses can innovate and invest to develop and grow their business, and there is no single right answer that applies for all businesses – investing in research to develop new science may be the best strategy for some businesses, for others investing in their staff or innovating around new products, processes or markets.

We know that targeted tax credits can encourage these activities directly, but their effectiveness depends in part on how accurately we can define the relevant activities.

This would need robust definitions of eligible expenditure and other eligibility criteria.

So we are working on these definitions to get a better idea of how the tax credits might work, to help inform the decision whether to pursue them and we do so with your views firmly understood and appreciated.

With this in mind, officials from the Inland Revenue Department and the Treasury have produced issues papers on the three possible tax credits and are seeking feedback on these definitions and eligibility criteria. I would encourage you to engage with officials to ensure that the design of these potential tax credits is done in a way that captures the full range of relevant activities in New Zealand.

In parallel with the business tax review is an upcoming review of international tax rules. A discussion document will be released before the end of the year. This will be an important influence on our decisions as well. I note many of the large companies that made submissions to the business tax review said resolving issues around the tax treatment of controlled foreign companies and non-resident withholding tax was a higher priority than any reduction to the headline corporate rate. It's a theme picked up at the Budget Business Summit in Parliament last week and an issue I have discussed with investors overseas on my recent trip to Europe.

The government fully appreciates the significance of getting the international tax issues right and these too may have a fiscal cost.

How far we can go in all of this will depend on the fiscal picture that emerges in the months ahead and the macroeconomic environment as I have noted. Treasury's latest fiscal and economic forecasts to be issued in late December will provide further guidance on this.

The government is working to a tight time frame. Decisions will be made in early 2007 to take effect in 2008 and those decisions will be based on the knowledge, expertise, experience and evidence presented in forums like this one today.

But be rest assured we are committed to meaningful changes that have the greatest chance of lifting our economic performance.

Can I now open the floor to any questions that you may have.

ends

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