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New Zealand Stock Exchange Calls For Corporate Tax Deferment,
by Mary Swire, Tax-News.com, Hong Kong
Monday, October 13, 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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