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New Zealand To Cut Corporate Tax

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

18 May 2007


New Zealand Finance Minister Michael Cullen has announced a 3% cut in the country's rate of corporate income tax along with a series of other measures designed to improve the nation's international business competitiveness.

The most significant component of Cullen's 2007 Budget, announced in parliament on Thursday, was the decision to reduce the rate of corporate tax to 30% from April 1, 2008.

"Business has long argued that such a reduction will assist in boosting productivity and competitiveness and attracting more foreign direct investment increasing labour productivity and wage rates," Cullen stated, adding that the move would also "reduce the attractiveness of structuring businesses so as to report minimal profits within New Zealand."

The cost of the reduction is expected to be NZ$675 million (US$494 million) in the first full year, 2008/09.

Cullen announced that to ensure that dividend tax credits are not trapped in companies, the current 33% imputation credit ratio will be available until 31 March 2010. This will lead to a transitional cost for the government of around NZ$115 million in 2008/09 and NZ$40 million in 2009/10.

At the same time, the tax rate for widely held vehicles and the top tax rate for Portfolio Investment Entities will be reduced from 33% to 30% from 1 April 2008 at a cost of NZ$50 million in the first full year. Certain closely held saving vehicles will continue to be taxed at 33%.

Following the conclusion of a business tax discussion document, Cullen said that the government would proceed with research and development tax credits at the rate of 15% of eligible expenditure, but would drop proposals for export market development credits, and skills training credits. Instead, some NZ$87.8 million of new funding over the next four years will be provided for the Market Development Assistance Scheme to encourage firms to take new products to market and boost exports and productivity. NZ$53 million will be invested over four years to increase participation in industry training.

However, according to Cullen, the review of the international business tax regime could be of greater significance than the corporate rate cut or the research and development tax credit in contributing to future economic growth and could cost far less.

"Our current tax rules in relation to New Zealand companies investing in offshore activity impose additional costs that are not faced by businesses resident in other countries. This has created an incentive for New Zealand firms to migrate," Cullen observed.

Currently, New Zealand taxes New Zealand residents on their worldwide income. This includes any income that is earned by a foreign company that is controlled by New Zealand residents. This applies in all countries except the eight countries on the so-called 'grey list.' The discussion document released in December last year signalled an intention to provide a tax exemption for active income earned by such a controlled foreign company.

A new international tax package proposes: the introduction of a tax exemption for active income; tax exemption for ordinary dividends from controlled foreign companies; the replacement of the current grey list exemption relating to eight countries with a simple test treating controlled foreign companies with less than 5% passive income as exempt, no matter where they do business; a limited definition of passive income under the new rules; the introduction of interest allocation rules for offshore investments and; repeal of the conduit rules.

"This is a balanced package which is simpler, more consistently applied, and more internationally competitive than the current controlled foreign company rules," Cullen stated.

A second round of consultation will be undertaken to work through detailed design and implementation issues. However, this means that the proposals would be unlikely to come into effect until April 1, 2009 at the earliest.

The total cost of this Business Tax Reform package is estimated to be NZ$1.06 billion in 2008/09 rising to NZ$1.13 billion in 2010/11.

"It is easily the most comprehensive business tax package since the mid-1980s and marks the first reduction in the corporate headline rate since 1988 under the Fourth Labour Government," Cullen said.

A number of other business-friendly tax provisions were also introduced yesterday. These include changes to the compliance and penalties regime and measures to address a number of technical issues with the Portfolio Investment Entity rules.

Later this year a Limited Partnerships Bill will be introduced which the government hopes will assist new technology and venture capital companies. The government will also release a discussion document exploring further potential measures for simplifying tax compliance, focusing in particular on small to medium sized businesses.


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