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Inland Revenue

Tax Policy

PUBLISHED 13 March 2008

Speech - tax reform update

In a speech today to the Spicers Portfolio Management Conference, Revenue Minister Peter Dunne spoke about recent tax reforms designed to help increase productivity and growth, make New Zealand businesses more competitive internationally and increase personal savings. For more information see the Minister's speech.

Speech by Hon Peter Dunne, Minister of Revenue
Spicers Portfolio Management Conference
Marlborough convention centre, Blenheim

I am very pleased to be here to address your conference today.

The main focus of the tax policy work programme over the last three years has been to introduce tax measures that will help to increase productivity and growth, to make New Zealand businesses more competitive internationally and to increase personal savings.

While tax policy alone cannot achieve these things, it can be used to support their achievement - by, for example, removing tax obstacles to growth and competitiveness reducing tax-related compliance costs, and increasing incentives to encourage certain activities or behaviours.

Fostering a climate of charitable giving is one such area.

It also happens to be a particular focus for the UnitedFuture Party, so I am especially pleased about the recent enactment of an incentive to increase charitable donations, the removal of caps on charitable rebates.

Another incentive under consideration is introducing a voluntary payroll giving system whereby employees can have their charitable donations deducted from their pay, to make donating easier.

That was the subject of a government discussion document released last year to gauge the views of interested parties.

My speech today will look at some of the fundamental tax reforms of the last three years that are aimed at supporting economic transformation, as well as transformation of New Zealand's savings culture.

The Business Tax Review is one of several projects that owe their presence on the government's tax policy work programme to the Confidence and Supply Agreement signed between UnitedFuture and the Labour/Progressive government shortly after the 2002 election.

A key plank of that agreement was to have a comprehensive review of our business tax rules, for the purpose of ensuring that the system works to give New Zealand businesses better incentives for productivity gains and improved competitiveness.

Therefore I take special pleasure in the fact that major changes resulting from the Business Tax Review will soon be a reality.

Last year saw the enactment of the reduction in the company tax rate from 33% to 30%.

That will allow successful companies to keep a greater share of their profits, and is expected to increase investment in New Zealand, which in turn will boost productivity.

It is also expected to increase profits recognised in New Zealand, which in turn will lift our international competitiveness, especially with Australia.

Also a product of the Business Tax Review, the new R&D tax credit, which also comes into effect in a few days' time, is designed to stimulate investment into research and development by New Zealand businesses.

The government wants to ensure that the R&D tax credit works as intended and is sustainable - meaning that it increases spill-over benefits from R&D, therefore making New Zealand businesses more competitive internationally.

It is not there to subsidise normal business expenditure.

The government will evaluate the success of the tax credit in three years' time, so that we can see if the country is getting value for money.

The reform of New Zealand's international tax rules, a project that has been under way for the last year and a half, represents a fundamental change in how we tax the offshore income of our controlled foreign companies.

We are moving from a system of taxing offshore income as it is earned, to exempting it from income tax.

That big change will bring us into line with the practice of other countries.

More importantly, it will put our businesses on a better footing internationally by freeing them from a tax cost that the controlled foreign companies of other countries do not face.

Legislation to implement the first stage of the review is scheduled to be introduced in June.

The second stage of the review will move to extend the active income exemption to non-portfolio foreign investment funds and overseas branches, which will be the subject of further extensive consultation with interested parties.

Legislation introducing new regulatory and tax rules for limited partnerships, as well as updating the tax rules for general partnerships, was introduced last year and is now passing through its final parliamentary stages this week.

The aim of that reform is to make it easier for New Zealand businesses to attract investment capital and to compete internationally.

We are also near the end of implementing major reforms designed to encourage personal savings and to improve the way they are used.

Those reforms involved introducing KiwiSaver, relieving the over-taxation of people who save through New Zealand-managed funds, and applying consistent tax rules to offshore portfolio investments in shares.

Last year saw the start-up of KiwiSaver, and Budget 2007 brought further enhancements to the scheme in the form of the member tax credit, compulsory matching employer contributions and associated employer tax credit, as incentives for people to join the scheme.

Enrolment figures confirm KiwiSaver's wide appeal.

In the first three months of its operation, enrolment broke through the 200,000 mark, which was an excellent start.

Now, nine months later, that figure is just about to hit the half a million mark.

An evaluation report of the first six months of KiwiSaver's operation will be released today.

It will indicate that, despite the inevitable teething problems, signs are positive for the scheme at this early stage - not only are enrolment figures higher than expected, but employers and providers are, on balance, positive about the way it has been implemented, despite the short time frames for implementation.

My view is that KiwiSaver is here to stay.

If take-up continues at this rate it may prove to be easier for all concerned to make the scheme compulsory, which would remove the employer compliance costs associated with people opting out. I stress, however, that these are my personal views.

All these savings-related reforms - the advent of the new PIE rules, the new foreign investment fund rules, and KiwiSaver - have, of course, had a huge impact on your industry.

I am aware that it has already involved a lot of work on your part, and that contribution is greatly valued.

But the foundations are there and it is now a matter of allowing the reforms to bed in.

You have asked me to include in my speech comments on a number of big topics ranging from how tax policy can be used to grow savings and investments, to whether tax cuts are good for New Zealand's growth, through to what can be done to increase our OECD ranking.

I have touched upon some of these, but to deal with all of them would undoubtedly take much more time than we have today.

However, I will touch briefly on a few more of the larger issues.

Tax is clearly becoming more important in international decision-making: where to invest is an important consideration for firms that operate internationally.

And yes, tax rates do come into planning about where to invest, but they are not the only consideration.

Globalisation, or whatever term you prefer to use for the phenomenon, has opened up new opportunities for business. At the same time it is creating enormous challenges for tax administrations everywhere because profits can be allocated anywhere in the world.

And that has led to complexity for tax administrations as well as firms.

In New Zealand, we are more heavily dependent on our corporate tax base than are many other countries, and that makes us particularly vulnerable.

For example, OECD figures show that in New Zealand in 2005, taxes on corporate income made up 6.3 percent of GDP, which put us in second place, after Norway.

Similarly, OECD figures for corporate tax as a percentage of total taxation for the same year had us in third place, at 16.8 percent, following Norway and Australia.

I reiterate that tax changes alone cannot bring about economic transformation, and for that reason they are unlikely to lead to sudden and rapid effects on our ranking in the GDP per capita stakes.

The best way of boosting New Zealand's economic performance through the tax system, in my view, is to keep tax rates as low as possible across a broad tax base.

Tax reforms across OECD countries in recent years have largely followed the base broadening and rate reduction theme.

The New Zealand government is following with interest the OECD's work on tax and growth.

With that work the OECD is attempting to discover whether some taxes are more harmful to growth than others are.

Its research is at an early stage, and conclusions should not be seen as definitive.

Even so, there is some evidence that company tax and personal income tax may be more harmful to growth than other taxes are.

I think it is generally accepted, however, that New Zealand cannot afford to join a race to the bottom as far as tax rates go.

We will never be able to compete internationally in that way.

Instead, we have other advantages that will help us to be competitive.

Our advantages include having a good tax system, which is fundamental to growth.

And for a tax system to be good it must be made up of a good tax administration and good tax policy.

Our policy and decision-making systems are such that we can work quickly to provide taxpayer certainty - as can be seen, for example, in the speed with which taxpayers can obtain a determination from Inland Revenue on whether the fair dividend rate method can or cannot be used for a particular investment.

When the new foreign investment fund rules came into effect, Inland Revenue quickly set up an efficient and streamlined process for people to apply for and obtain fair dividend rate determinations.

I am told that the department has fielded a number of enquiries about the determinations, has made about half a dozen of these determinations, and aims to turn around applications in four to six weeks.

To conclude with my own views on tax cuts, I have long advocated a 30/30/30 approach to tax rates.

That would involve reducing the top personal tax rate and the trustee tax rate to the level of the new company tax rate.

I stress that these are my personal views.

Even though we have entered uncertain times economically, I believe there is scope for achieving those remaining reductions, and that they would stimulate productivity, investment and personal savings, at a time when that is particularly needed.

A flatter alignment of tax rates would also deal with the so-called "integrity" issues that arise because of the difference in the company tax rate and the top personal and trustee tax rates.

My colleague the Minister of Finance has said that further tax cuts will be considered in the context of this year's Budget, and in my role as Minister of Revenue I will be working closely with him on the resulting proposals.

Thank you and I wish you a very successful conference.