Hon Bill English
Minister of Finance
Hon Peter Dunne
Minister of Revenue
Tax policy work programme (PDF 87KB)
Tax Policy Work Programme focused on international competitiveness, retaining revenue
The Government's new tax policy work programme will focus on better positioning New Zealand in the world economy and maintaining tax revenue during the current global economic crisis, Finance Minister Bill English and Revenue Minister Peter Dunne said today.
The Ministers said good tax design had an important role to play in improving New Zealand's international competitiveness and reducing business compliance costs.
"This Government is committed to a tax system that rewards effort, provides better incentives to get ahead and allows our businesses to thrive, both at home and on the world stage," Mr English and Mr Dunne said.
Mr Dunne, who released details of the work programme in a speech today to the International Fiscal Association in Christchurch today, said the continuing reform of New Zealand's international tax rules, to better align them with other countries, was high on the agenda.
"A primary emphasis of the work programme over the next 18 months is on tax policy that will help New Zealand to be more competitive in world markets, while ensuring the necessary revenue flow is not disrupted. This aims to free New Zealand-based businesses from a tax cost their overseas competitors do not face," the ministers said.
An international taxation bill, currently before Parliament, will make changes in this area. The next step will be considering extending the exemption of active income arising from the offshore operation of New Zealand-based businesses to non-portfolio investment funds, branches of New Zealand companies, and financial institutions.
Tax developments in other countries will also flow into the work programme.
"We must keep an eye on international influences such as Australia's current comprehensive review of its tax system, which is expected to be completed by the end of the year. We will also be watching downward trends in company tax rates in other countries and looking at any implications for New Zealand," Mr Dunne said.
The work programme will also follow developments emerging from forums such as last month's Job Summit and the Capital Market Development Taskforce.
Job Summit ideas include widening the tax deductions regime to include 'black hole' expenditure - which is currently not covered - on capital raising and new projects and an exemption from approved issuer levy and non-resident withholding tax for widely issued bonds held by non-residents.
Mr Dunne said the work programme also gave high priority to the development of a policy on income splitting for tax purposes. As part of its confidence and supply agreement with United Future the Government has agreed to support income splitting legislation through its first reading in Parliament.
Aligning the personal, company and trustee tax at a minimum of 30 percent is also a medium-term priority of the work programme, but Mr Dunne said that would depend on the country's economic and fiscal position.
Media contact: Mark Stewart 021 243 6985
For technical background tax information: Ainslie Fenwick 029 890 2452
Address to International Fiscal Association Conference 2009
Hon Peter Dunne, Minister of Revenue
Christchurch, 20 March 2009
Thank you for inviting me once again to open your conference.
Today, I would like to begin with a few comments about the current economic and fiscal environment, the challenges that poses to revenue collection and to the efficient operation of our tax system, and the thinking behind the Government's new tax policy programme for the next 18 months.
I will also cover some of the major projects on the work programme, which is being released today.
Economic and fiscal environment, challenges ahead, influences on the tax policy work programme
What started as a financial crisis has become a serious shock to the international economy.
Estimates of growth continue to be lowered.
New Zealand cannot escape the impact of many of our trading partners being in recession, and we are already feeling it in terms of a shrinking economy and job losses.
The short-term outlook is weak, with GDP in the UK expected to fall around 5 percent.
Similar falls are expected in Germany, Japan and the United States.
There have been even larger drops in GDP, particularly exports, in Korea and Taiwan.
While activity has held up more strongly in China, growth has slipped to 6 to 8 percent, down from 8 to 10 percent.
Even Australia, which was predicted by some forecasters to be able to avoid recession, has now reported negative growth in the December quarter, with a 0.5 percent reduction in GDP.
New Zealand is probably in its fifth quarter of falling GDP, and with the sharp deterioration in the international outlook it is likely that over 2009, the economy will be closer to the Treasury downside estimate of negative 0.2 percent growth presented in December's Economic Update.
A smaller economy means less tax for government.
Tax revenue is weaker than forecast, and the Government's operating balance shows a deficit of $5.5 billion for the seven months to January 2009.
Treasury's downside forecast scenario shows ongoing deficits of 4 to 5 percent of GDP – about $8 billion a year.
While the starting level of government debt is low by historical and international standards, it is expected to grow quickly in the future, in the absence of policy change.
The downside scenario forecast gross debt to reach 38.6 percent of GDP by 2013, with debt projected to increase to close to 80 percent by June 2023, in the absence of any policy changes.
This will clearly constrain tax policy choices.
A major tax give-away is simply not an option in the current environment.
As far as the tax policy work programme goes, there will need to be a greater focus on maintaining revenue flows.
We have not seen such a concern with revenue flows for more than ten years.
I cannot over-emphasise how significant this is.
If revenue flows deteriorate to the extent that New Zealand's sovereign risk increases, all New Zealanders will bear a cost in terms of higher interest rates.
Now, more than ever, therefore, it is essential to have a good, cost-effective tax system – one that collects the necessary revenue efficiently and at minimal cost – meaning low economic costs, low compliance costs and low administrative costs.
Such a system requires a combination of good tax policy and a good tax administration.
Both are essential to the success of the system.
It is not difficult to think of examples of countries with bad tax administrations that have tried to attract investment through tax incentives which no investor will go near.
By international standards, New Zealand is generally regarded as having a good tax system.
It is broadly based and has served us well thus far, while revenue collection has been robust.
By OECD standards, we collect substantial amounts of revenue from our three main tax bases – personal income, company income and GST – at mostly low or moderate tax rates.
One possible exception is our company tax rate, which, despite recently being cut to 30 percent, is still above the median for OECD countries.
Our costs of collecting revenue are moderate and tax-related compliance costs relatively low.
New Zealand taxpayers generally perceive the system to be fair and transparent.
That is essential if we are to ensure the voluntary compliance upon which all modern tax administrations depend.
Our process for developing tax policy – the Generic Tax Policy Process – is often cited overseas as a "best practice" model.
We are good at consulting with each other to make policy that works.
I know there are times when the Government's commitment to the GTTP is questioned.
Let me say this in response: GTTP remains a strong element of our tax policy formation process, and we will continue to take it seriously.
At the same time, there will be occasions when the Government needs to act quickly, and we will do so, but overall, our preference is to work through the GTTP process where possible.
Because we are a small country, we are fast and flexible in terms of policy and administrative response in ways that larger jurisdictions could never expect to achieve.
By international standards, our tax system has a lot going for it, and its strengths stand us in good stead.
That said, many challenges to its effectiveness as a whole, lie ahead.
Some of these arise from the current financial crisis and the pressure it is placing on tax revenue.
Others result from the increasing integration of worldwide commerce over the last decade or so.
Still others arise from a lack of coherence in our policy settings.
Clearly, tax policy cannot be set in isolation from international developments.
The internationalisation of financial and investment markets has made domestic tax settings increasingly important in determining patterns of investment.
With the deteriorating fiscal position, it becomes more important than ever to prevent significant erosion of our revenue base.
Maintaining a robust company tax system is a particular concern for us given the unusual degree to which we rely on company tax.
In developing tax policy, it is essential to have a good understanding of what is happening in the rest of the world, and with our trading partners.
Company tax rates have been falling in other countries.
As this happens, it provides incentives for multi-national firms to stream profits away from New Zealand.
A critical, ongoing concern for New Zealand is whether company tax rates in other countries will continue to fall.
So far, international cuts in company tax rates have largely been financed by expanding tax bases.
But this may become more difficult in the future.
In addition, the international financial crisis is leading to a worldwide reduction in tax collections, which may also make further company tax cuts less feasible.
We need to continually monitor what is happening in other countries as decisions overseas can constrain our choices.
Company tax rates are particularly important for New Zealand because our robust company tax base is crucial to allowing us to keep down our personal tax rates.
Tax policy developments in Australia, our closest economic partner, are of extreme importance to us, given that about 55 percent of foreign direct investment into New Zealand is from Australia, and we have effectively free labour mobility between the two countries.
The current "Australia's Future Tax System" review, chaired by Dr Ken Henry, is said to be Australia's most comprehensive examination of its tax system in over 50 years.
Dr Henry has stated that the review is looking to dramatic and far-reaching changes that may span 20 to 30 years.
Many of the problems Australia faces are relevant to New Zealand, and we will await with interest the review's conclusions and the subsequent response from the Australian government.
However, there are some important differences between the two economies that mean we will not always take the same approaches.
For example, Australia has a relatively high rate of tax on capital income, which may be a problem because of high capital mobility into and out of Australia.
While, capital into New Zealand is likely also to be very mobile, we also have a very mobile labour force, having the OECD's greatest proportion of skilled citizens living abroad.
So that means that New Zealand also needs to be concerned about high tax rates on labour income.
New Zealand's submission to the Henry review, made in October at the invitation of the Australian Treasurer, presented the case for introducing trans-Tasman mutual recognition of imputation and franking credits.
It concluded that establishing mutual recognition would benefit both Australia and New Zealand through greater trans-Tasman investment efficiency and increased product market competition.
That would also be an important step toward both governments' shared goal of having a single economic market.
In a speech to a tax forum in Sydney in February, Dr Henry commented on the possibility of the review recommending a company tax rate reduction as a trade-off for rolling back dividend imputation.
While these are early days for the review, which will canvas a number of potential directions, whatever ultimately emerges in Australia in the form of recommendations relating to imputation, will undoubtedly affect any changes or improvements that we want to make to our own imputation system.
What is happening overseas – in Australia and elsewhere – will also have implications for important areas in our own tax policy such as our continuing review of New Zealand's international tax rules.
I referred earlier to how tax revenue collection is being challenged not only by the financial crisis and developments internationally, but also by a lack of coherence in some of our policy settings.
One of the most significant examples of that can be found in the lack of alignment of the top personal tax rate, the company tax rate and the trustee tax rate.
This provides scope for people to use various entities to structure their tax affairs so as to reduce their tax liabilities.
The clear message resulting from the misalignment of rates is that how much tax you pay is determined by how you earn it.
That is patently harmful to the revenue and to public perception of the fairness of the tax system.
I have long advocated a 30/30/30 alignment of these rates as a simple solution to problems such as individuals using companies and trusts to shelter personal income.
I am therefore pleased that alignment of these rates, as a medium-term goal, occupies an important place in the new tax policy programme – although the economic and fiscal position will clearly limit our ability to reach this goal in the short term unless there is a quick turnaround in economic and fiscal conditions.
I will return to the subject of 30/30/30 alignment in a moment, when I discuss some of the detail of the tax policy work programme.
A very big challenge to the efficiency of our tax administration has arisen over the last decade or so from the strain placed on Inland Revenue tax systems by an ever increasing number of non-tax programmes that are administered through the tax system – programmes such as student loans, Working for Families tax credits and KiwiSaver.
Over recent years, Inland Revenue systems designed for tax collection have been progressively adapted to cope with these and other social policy programmes.
This has resulted in greater systems complexity, loss of agility and efficiency, and increased administration costs.
The Government is considering ways of helping Inland Revenue to improve its ageing systems and has made that a priority on the tax policy work programme, given that an efficient administration is essential to the success of the tax system.
The deteriorating economic and fiscal position calls for a tax system that is as efficient as possible in raising the revenue the Government needs to meet its funding requirements.
The new tax policy work programme
Turning now to the detail of the tax policy work programme that is being announced today, I do not think you will find many surprises here.
The goals of the work programme over the next 18 months are:
- to deliver a broadly based, low-rate tax system that raises revenue in the most efficient manner to support the medium-term goal of 30 percent rate alignment;
- to respond appropriately to the current economic position;
- to build a simple and certain tax system; and
- to support New Zealand as an internationally competitive economy.
The key priority of the tax policy work programme is to support the post-election confidence and supply agreements and the Government's post-election action plan.
National's post-election tax package was introduced and passed into law before Christmas, with personal tax cuts beginning on 1 April.
The two taxation bills before Parliament have also been given a high priority on the work programme.
The Taxation (Business Tax Measures) Bill, introduced under urgency in February, gives effect to several tax measures aimed at making it easier for small and medium sized businesses to manage their cash flows and meet their tax obligations – measures that should be particularly helpful in the current crisis.
The Finance and Expenditure Committee has reported back to Parliament on that Bill, and passage is expected in time for the changes to come into force on 1 April.
The Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, introduced last July, is still with the select committee.
It introduces a number of major reforms, including changing the way that the life insurance business is taxed, by introducing an integrated framework of changes that include taxing actual term insurance profits.
Of major importance in that bill is the first stage of the reform of New Zealand's international tax rules, a fundamental change in the way that we tax the offshore active income of our controlled foreign companies.
The cornerstone of the reform is the introduction of a tax exemption for active income resulting from the offshore operation of New Zealand-based businesses, which is introduced in the bill.
That will bring our tax rules on offshore income into line with the practice in other countries and help New Zealand-based business to compete more effectively in foreign markets by freeing them from a tax cost that their competitors do not face.
Other reforms in the same Bill include clarification of the law relating to employee relocation and overtime meal allowances, the introduction of a voluntary payroll giving system whereby employees can have their charitable donations deducted from their pay by employers, and changes to strengthen the definitions of "associated persons" in income tax law.
Given the time that has passed since the introduction of this very large Bill, the proposed application dates of the various measures it contains appear to be uncomfortably near for many of those affected and who have to prepare their systems for the changes.
All I can say at this point is that I am aware of the difficulties posed by the application dates as originally envisaged.
As I said earlier, alignment of company, top personal and trustee tax rates is a medium term-goal on the work programme.
That programme contributes to this goal through having a focus on maintaining the tax base to ensure there is sufficient fiscal room to lower tax rates later on.
The next step will be to consider base-broadening and tax design issues as part of developing a revenue strategy, responding to what emerges from the Henry review and considering alignment options for the future.
Setting out clear steps towards alignment would then be a primary focus of the next 18-month tax policy work programme.
Income splitting, or the idea of allowing families with children to split their income for tax purposes, also has high priority on the work programme.
The confidence and supply agreement between UnitedFuture and National includes support for the introduction of a Bill giving effect to UnitedFuture's income splitting policy.
That bill is planned for introduction next year.
A major group of inter-connected projects on the work programme is aimed at making New Zealand more competitive in world markets and will have a clear impact on investment into and within New Zealand.
These projects include the second stage of the continuing reform of our international tax rules, which will consider the extension of the active income exemption to non-portfolio foreign investment funds, branches of New Zealand companies, and financial institutions.
Also under consideration is the introduction of special rules to extend the active income exemption to certain controlled foreign companies and to non-portfolio foreign investment funds that would not otherwise qualify.
In a similar vein, the Government is also looking at the advisability of introducing an exemption from the approved issuer levy and non-resident withholding tax for New Zealand bonds issued to non-residents.
Such an exemption was raised at last month's Job Summit as a way to make bond issues and borrowing from overseas banks easier, thus reducing the cost to New Zealand firms of accessing funds.
We are also examining the provision of a relieving mechanism for non-resident withholding tax on dividends paid to shareholders if those dividends represent distributions of active offshore income.
We plan to consult on these ideas through a discussion document soon.
Submissions on last year's discussion document on whether the law should allow limited streaming of imputation credits to those who can use them and whether it should allow refunds of credits for charities and other tax-exempt entities are still under consideration.
Officials are expected to report on those by mid-year.
What emerges from the Henry review in Australia is likely to have a major influence on how our imputation review proceeds.
If mutual recognition of imputation and franking credits does proceed, we should aim to make our anti-streaming rules as compatible as possible.
Continuation of work on matters relating to the charitable, community and voluntary sectors are a high priority for me, as Minister of Revenue.
This work includes consideration of new tax incentives to encourage charitable giving, having a fresh look at the criteria and a process for approving overseas donee organisations for tax purposes, and considering the refundability of imputation credits for charities as part of the imputation project.
The child support system, especially the area of shared care, is also a high priority for me.
That work, assisted by work being done by the Families Commission, will involve seeking a better understanding of patterns of caring for children in the event of a parental separation.
This should help towards a better recognition of shared care in the child support formula, a very difficult and vexatious subject for those individuals involved.
For that, we will again need to look at developments in Australia, which now has an approach that takes into account both parents' income and accepts a lower level of shared care than our formula does.
The cost of caring for a child when parents separate is also an important issue for consideration.
I anticipate releasing a discussion document on these aspects of the child support system later in the year.
Any emerging recommendations on the child support formula will also have to take into account the work that is being done to modernise Inland Revenue systems.
I referred earlier of the urgent need to improve Inland Revenue systems, which were designed for tax matters and have come under increasing pressure in the last decade or so with the addition of a number of social policy programmes to the department's administrative role.
That has resulted in unnecessary complexity in the administrative systems.
The tax policy work programme therefore supports a number of operational projects that require policy support.
Work will begin with a review of improvements that can be made to the administration of student loans and PAYE.
The last major administrative shake-up of our tax system probably dates back to the introduction of PAYE in 1958 – now over half a century ago.
When one thinks back over all the changes and new policies we have introduced in that time it is in many ways quite remarkable that our tax administration has coped as well as it has done.
It is actually a powerful tribute to the dedication and commitment of Inland Revenue and its people over that time, which I want to publicly acknowledge.
At the same time, the combination of new technology and rapid changes in Inland Revenue's role means we cannot rely on more of the same to work for us in the future, hence the need for some form of transformation of our systems to continue to ensure the efficient operation of our tax system into the future.
While major policy change has been a hallmark of recent years, and will continue to be a focus in the years ahead, it has to be matched by the operational capability to deliver it efficiently, and the improvements I am foreshadowing in the operation of the PAYE and student loans systems will be the first steps in an important ongoing process of change.
These, then, are some of the high priority projects on the new tax policy work programme.
The work programme is not carved in stone, of course and, it is subject to change as conditions and priorities change.
What happens in the economy over the coming months will undoubtedly influence the contents of the work programme.
I have attempted to give you some idea of the thinking and conditions that have influenced the development of the work programme at this point in time, to give you a greater understanding of the Government's direction in tax policy.
The development of the work programme also involves consideration of the resources and time needed for policy development, legislation and implementation, as well as communication and consultation.
It is a complex business with many factors; many variables.
Once again, I thank you and the organisations that many of you represent for the important contribution that you make to the policy development in taking part in the consultative process.
Your contribution is greatly valued in what in many respects is an ongoing "conversation" between us.
I wish you a very successful conference.