New Zealand Stock Exchange Calls For Corporate Tax Deferment

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

13 October 2008

A new report by the New Zealand Stock Exchange and the New Zealand Institute has urged the government to defer the payment by companies of provisional corporate tax and provide more generous capital allowances in a bid to counter the negative effects of the global credit crunch.

In a report entitled 'Economy on the Edge: Swan Dive or Belly Flop', the bodies warned the government that the current credit environment is having a devastating impact on companies' cash flows and threatening the viability of many them as a result. To ease the cash flow problem and get companies investing again, the report recommends that provisional taxes should be paid in arrears, rather than up front.

Currently provisional tax is required to be paid in advance on estimated profits, and penalties for incorrectly estimated future profits are high. In addition there is an automatic uplift between years for profit growth.

"Eliminating provisional tax is recommended for this period," the report states. "A next-best policy would be to eliminate provisional tax entirely for firms with revenues under NZD100mn, and eliminate the uplift component for firms with revenues over NZD100mn. This policy, allows firms some wiggle-room in managing their cash-flows - which is critical with the risk of capital rationing from the bank sector, and a high cost of capital for those firms that make it through the credit rationing hurdles."

"We therefore propose that for the next 24 months provisional tax be paid in arrears, at the end of the year, by businesses. This means that high interest charges will not apply, which will give small businesses some breathing space by removing the need to pre-pay tax and crunching their already tight cash flow. We see this as an easy, quick, effective way to help business survive credit restrictions, without bailing out bad businesses or subsidising their operations," the report argued.

It is believed that the the cost to the government of the proposal would be relatively slight, and limited to the interest earned on the timing of revenue received by the Inland Revenue Department (IRD).

"The benefit to the government will be that more jobs survive, fewer welfare payments accrue, and productivity increases at firms who are not spending scarce time and resource on tax compliance and scrambling for expensive credit to finance cash-flow. While not as dramatic as the Fed lending direct to corporates, this will, system-wide, be more effective," the report adds.

The institutions also warned that a reduction in capital investment at a time when capital is scarce is a "real risk" to New Zealand's competitiveness in the medium-term, especially given that the country already faces "deep productivity issues." They propose that, for the next 24 months (through to 31 December 2010), capital investment and IT spending be allowed a 100% depreciation write-off for tax purposes.

"For firms to invest meaningfully in capital, they either have to have been well managed with strong cash flows, or still have access to credit or equity. We can therefore expect that the firms that take advantage of this tax window will be the ones who will drive the economy forward, and around whom the economy should recalibrate," the report stated.

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