Future Corporate Tax Strategies Examined By NZ Inland Revenue

by Mary Swire, Tax-News.com, Hong Kong

26 October 2009

The Tax Working Group has considered a paper on company tax issues facing New Zealand, prepared by the Policy Advice Division of the Inland Revenue Department and by the New Zealand Treasury.

The paper suggested that there are a number of potential concerns with New Zealand’s company tax system which need to be addressed as part of considering corporate tax reform options.

It identified the key potential concerns as relating to whether a broad-based tax system combined with full imputation is a sensible and coherent strategy; whether the company tax rate is currently too high, particularly if other countries continue to reduce their company tax rates; and whether the important role of company tax as a backstop to ensure the integrity of the personal tax system continues to be ensured.

With regard to the latter concern, it added that current rules allow people to use companies, trusts and savings entities to shelter income from higher rates of personal income tax. This has increased the importance of seeking tax advice before entering into commercial arrangements, and the boundaries between acceptable behaviour and tax avoidance have become extremely unclear.

This calls into question the fairness or efficiency of those rules, the paper suggested .

The document further stressed the importance of coherence with regard to tax strategy, explaining that New Zealand’s current tax structure had been developed with a strategy of taxing a broad base of income at low rates; attempting to make the tax treatment of different assets and entities as neutral as possible; and aligning the tax rate of entities with the top personal tax rate.

The current full imputation company tax system, it suggested, helps support the broad-based low-rate approach. It ensures that company income is taxed at the marginal rates of resident taxpaying shareholders when profits are distributed.

Unlike some other company tax systems (such as a dividend-deduction system), it also ensures that corporate profits that non-residents make that are sourced in New Zealand are subject to company tax as they are earned.

When imputation was introduced, it continued, the company tax rate, the trustee tax rate and the top personal marginal tax rate were aligned. This meant that companies and trusts could not be used to shelter income from higher rates of personal tax.

However in 2000, the top personal tax rate was increased from 33% to 39% (since reduced to 38%) in line with the government of the day’s equity concerns. In addition, and more recently, the company tax rate was reduced to 30% because of international competitiveness concerns.

These tax changes opened up a substantial gap between the company tax rate (now 30%), the trustee tax rate (33%) and the top personal marginal tax rate.

This movement away from an aligned tax system, the paper concluded, has undermined the “broad-base low-rate” strategy, made the current company tax system less coherent, and raised an important question for the Tax Working Group as to whether it thinks that a broad-based low-rate tax system combined with full imputation is a sensible and coherent strategy, or whether there are preferable directions for company tax reform.

It noted that a number of other countries have abandoned imputation, with New Zealand and Australia now being only two of three OECD countries with imputation systems.

Given New Zealand’s relatively high company tax rate and now unusual system of taxing companies, it considers that it is worth examining whether New Zealand too should abandon imputation and use any revenue to help lower the company tax rate.

The paper outlined the concerns relating to a too high company tax rate as including the discouragement of inbound investment, particularly for a small open economy such as New Zealand’s; the biases caused by treatment of taxed and untaxed income; and the streaming of profits by multinational companies away from New Zealand by the use of thin-capitalisation or transfer pricing arrangements.

It concluded that, in practice, the decision on the best rate of company tax for New Zealand may well be influenced by the actions of other countries.

For example, if other countries continue to cut their company tax rate, or if Australia decides to implement a significant cut in its rate, the question of whether or not it would be sensible for New Zealand to continue with its 30% company tax rate, which is already high by OECD standards, will become more urgent.

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