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Inland Revenue

Tax Policy

PUBLISHED 31 October 2006

Govt on Business Tax Review progress

Finance Minister Michael Cullen outlined progress on the Business Tax Review in a speech delivered today. Submissions have been analysed, and the government is now trying to determine the most effective package of business tax changes and considering the details of how they would work in practice. A likely outcome, he said, was "an attractive mix of a lower corporate tax rate and tax credits". For more information see the speech.

Hon Dr Michael Cullen
Deputy Prime Minister
Minister of Finance
Minister for Tertiary Education
Leader of the House


Speech at inaugural meeting of Open 2 Business

Thank you for inviting me to be with you here today.

I would like to congratulate Stuart, Tony and everyone else involved in launching this business network which has as its motto, I understand, 'Fiscal Accountability with Social Responsibility'.

Those are two objectives that I myself have a great deal of affinity with.

And I would like to think that your motto is also one that summarizes two of this government's priorities over the past seven years.

Economic and social progress cannot be separated. They are two sides to the same coin. We have made great strides in both areas in the last seven years. Briefly, New Zealand has been one of the top performing economies in the OECD, unemployment is now one of the lowest in the world, more than 330,000 jobs have been created, and household incomes have risen. Prudent fiscal management has turned the government into a net saver, and allowed significant long term investments in upgrading vital infrastructure, hospitals, schools, roads, as well as investments in the NZ Super Fund. People are wealthier, healthier and more secure.

But we can't afford to rest on our laurels. Economic transformation is not a job that ever finishes; it is a long term game. We must continue to strive to improve our productivity and lift our game in an increasingly globalised world.

This government is particularly focused on the key drivers of transformation – savings, infrastructure, skills, research and development and exports.

And a critical part of that agenda is the Business Tax Review.

I do not want to use the full time allotted to me to speak because I think it is more useful for you if I open the floor to any questions that you may have of me on these or any other matters that are of concern to you as business people in the commercial capital.

The driving force behind the range of options identified by the business tax review discussion document released three months ago is the strong desire by the government to further improve the capability of business to grow and to compete in an increasingly borderless international economy.

The purpose of the review process is to facilitate the progressive transformation of our economy into becoming a higher-wage, higher-skill and more knowledge-based economy over time.

We want to ensure that our business tax rules best encourage innovation, better support business investment and further encourage New Zealand-based firms to either enter or to expand their engagement in offshore market opportunities.

The discussion document, as you will know, suggested options for consideration such as reducing the company tax rate, tax base changes and measures to reduce the cost of complying with tax rules. Options being examined include targeted tax credits to encourage increased investment by companies in R&D, in export market development and in skills development.

Inland Revenue and Treasury received more than a hundred submissions on the review. A broad spectrum of submitters were represented – including businesses of all sizes, industry/business groups, tax practitioners, business advisers, private individuals, unions, local government, and some political parties. Overall, I have been impressed by the high quality of many submissions, a lot of time and effort has gone into considering the issues and prioritising the options.

Officials have reviewed the submissions and this feedback from submitters is providing an important input into the next stage of the review.

We are currently addressing two main issues. First, developing advice on the best package of reforms to lift the performance of businesses and to support the transformation of the economy. Second, and in parallel, working through the more detailed issues around how these potential reforms would be implemented in practice. The review is working to a very tight timetable – in order to deliver reforms to be in place for April 2008 – and this means that it is necessary to make progress on the detail of how the reforms would be implemented at the same time as considering what the best package of reforms would be.

It is important to remember at a time of great clamour for tax cuts that fiscal policy does not exist in isolation of the wider macroeconomic environment. Responsible governments must also be sensitive to ensure their fiscal stance does not complicate the job of the central bank. Who would forgive us if our fiscal decisions cause interest rates to rise?

This means that we will need to make room for tax reforms within existing fiscal policy. Stronger tax revenues – if recent outturns translate into higher forecasts – will help, but we will still need to keep tight control on other priorities and we will need to defer spending increases that we might otherwise want to pursue.

The economy is also close to a number of constraints, in particular the large current account deficit, relatively high dollar, and high rates of capacity utilisation. The strength of the public finances has been a key factor reassuring the Reserve Bank not to increase interest rates further, and reassuring ratings agencies to not downgrade NZ. Maintaining a prudent fiscal policy is critical to prevent injecting further stimulus into the economy – which would only result in increasing these pressures, higher inflation, and higher interest rates. This is a point National's finance spokesman John Key seems oblivious to as he seems to think billions of dollars of tax cuts – I am not sure how much as he seems to change his mind on this score every day – are affordable and responsible right now.

I should also reiterate that contrary to headlines you may have seen the surplus last year does not of itself indicate any permanent strengthening of the government's fiscal position. We will need to wait for the economic and fiscal forecasts (in December) to get a better idea of the likely future path.

We want to foster a business environment that encourages greater innovation, investment in the business and their staff, and exporting. The business tax review is likely to produce an attractive mix of a lower corporate tax rate and tax credits, particularly helping those businesses focused on lifting their performance, expanding and tackling overseas markets.

The review of international tax currently underway is also looking at important issues that will contribute to this business environment, and changes in these areas will also have a fiscal cost.

I also recognise that changes to company tax have implications for personal taxation and these will be considered at the same time as the changes to business taxation.

The current phase of work is perhaps the most difficult. We are trying to determine the most effective package of business tax changes – that would make the greatest contribution to lifting the performance of businesses and the economy.

Inevitably, this requires consideration of the more detailed design issues – essentially, how the different tax changes would work in practice – in order to develop a view on the highest priority tax changes.

For example, we are keen to foster greater innovation, more investment in the business and in staff and a stronger engagement with the global economy by businesses. There are a great many ways that businesses can innovate and invest to develop and grow their business, and there is no single right answer that applies for all businesses – investing in research to develop new science may be the best strategy for some businesses, for others investing in their staff or innovating around new products, processes or markets.

We know that targeted tax credits can encourage these activities directly, but their effectiveness depends in part on how accurately we can define the relevant activities. This would need robust definitions of eligible expenditure and other eligibility criteria. So we are working on these definitions to get a better idea of how the tax credits might work, to help inform the decision whether to pursue them.

Equally, we know that some of the other possible initiatives raised in the discussion document – for example, the company rate reduction – would encourage a wide range of business activities, without trying to identify those that contribute most to raising performance. However, company rate reductions are more expensive because a lot of the cost may not feed through to greater innovation or other shifts in behaviour – if instead it is simply distributed as higher dividends to shareholders.

The international tax review is looking at the tax treatment of overseas subsidiaries and, hence, whether New Zealand is an attractive place to base an international company. Investing overseas – to set up a distribution network or other in-market presence – can also be an important part of the expansion of a business into exporting.

The review will also consider our non-resident withholding tax rates, as bilateral reductions in these rates would make it easier for outbound investors to repatriate their profits from overseas.

The need to reform our international tax rules was also given a high priority in submissions on the Business Tax Review, in particular by larger, more internationally active businesses. A discussion document on international tax will be released later this year.

I want to assure you that this government is actively engaged in making a difference to our futures. We have a long term strategy and a great confidence in this country that at times is not shared by some who delight in knocking our great land. We have achieved much already in the past seven years and I want to leave you with some positive words from an outsider which not surprisingly were barely reported last week.

The commentary, originally published in Forbes magazine, was from the founder and president of California-based Barclay Partners Asset Management, William J. Buechler, after a recent trip to New Zealand to assess investment opportunities here.

"To my surprise," Mr Buechler said, "I continually experienced a strange, yet pervasive, lack of optimism for the future of New Zealand and a lack of confidence in business and the economy. For lack of a better term, it might be called 'The New Zealand Blues'."

He went on to note that as someone that does not live in New Zealand, he begs to differ.

His advice to potential international investors in New Zealand is that when it comes to leadership and vision, "the Kiwis have it.

"As other investors from around the world realise the opportunities and advantages of investing in New Zealand, new money from these outside investors – both retail and institutional – will flow to New Zealand in amounts well beyond anything experienced in the past and will serve as the catalyst that jumpstarts an economic boom in New Zealand that will simply defy current expectations. At least that is the way I see it, as an outsider looking in."

I certainly share his confidence in our future and I welcome your thoughts.

Thank you.