New Zealand's Finance Minister Fights Back On Criticisms Over Refusal To Cut Company Taxes

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

07 June 2001

New Zealand's Finance Minister, Dr Michael Cullen, has responded to his critics who have urged him repeatedly to cut the country's company tax rate by explaining his reasons for refusing to meet their demands.

The National Party opposition spokesperson, Bill English, urged the government to cut the tax rate in last month's budget, saying New Zealand should at least rival Australia's corporate tax rate to attract investment. Mr English argued that a tax cut would "make all the difference" in combating a decline in business confidence that was revealed in the latest National Bank and Institute of Economic Research surveys.

But Dr Cullen delivered his Budget speech last month without a mention of the much-desired tax cut. At the time a disappointed chief executive of the Auckland Regional Chamber of Commerce, Michael Barnett, was quoted as saying: 'With Ireland's company tax at 10 per cent and Australia's now at 30 per cent, we are staying disadvantaged against the countries we want to be competing with for new business and skills. We say we want to be up there with the top group of rich countries, but we are not following their lead by setting a competitive tax for business to look at New Zealand.'

However, according to reports from the New Zealand Herald news service, Dr Cullen hit back at his critics this week by arguing that shareholders in New Zealand can treat company tax as 'merely a withholding tax.' He said: 'They are eventually taxed at their marginal tax rate, so if a shareholder has, say, a 39 cents marginal tax rate, the only difference between a company tax rate of 30 and 33 per cent is that an extra 9 cents rather than an extra 6 cents has to be paid at the end of the day.'

'The actual benefit of a lower company tax goes to foreign resident shareholders, for whom it is, in the main, the final tax. Leaving aside the political question of whether our fiscal priority is to give tax breaks to foreigners, the core question is whether this actually attracts any new foreign investment,' he continued.

He commented on whether businesses considered the profit potential of investment options for foreigners in New Zealand would be swayed by the 3 per cent difference, saying 'I doubt it. My recent experience is that after-tax profits in New Zealand have been driven by factors like the level of the dollar, the weather, consumer confidence, overseas prices and the state of the world economy. A 3 per cent tax on profits would have been swamped by these first-order influences on revenues and costs.'

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