TAX NEWS - 2010

New Zealand Tax: Treasury and IRD at odds in company tax advice

Wellington, New Zealand -- Treasury and Inland Revenue Department (IRD) were at odds over the Government's decision to cut the company tax rate to 28 percent.

Treasury was in favour, while IRD was against, according to a reports to ministers ahead of the Government's May budget released today.

A reduction in the company tax rate would encourage increased foreign investment in New Zealand and was likely to deepen capital stock and improve productivity, Treasury said.

"From a strategic perspective, we see risks in New Zealand, as a capital-shallow investment-seeking economy, having a statutory tax rate for companies that is increasingly out of step with OECD comparators, then driving the effective tax rate even higher through base broadening measures without offsetting tax rate reductions," Treasury said.

IRD was of the view that reducing the company tax rate would be inconsistent with a number of the objectives of the tax reform.

"New Zealand is not competing for tax sensitive investments as part of a large continental market, we have an imputation system and the small difference between our company and top personal tax rate means that we can capture the efficiency and simplification benefits of having alignment of tax rates," IRD said.

"Thus reducing the company tax rate, funded by less depreciation, is likely to have the perverse effect of reducing incentives to invest in New Zealand. Scaling back on depreciation measures is likely to be more cost-effective than reducing the company tax rate as a way of promoting investment," IRD said.

The budget signalled a reduction in the corporate tax rate from 30 percent to 28 percent and Australia has since signalled a cut in its rate to 29 percent by 2013 / 2014. To help fund company and personal income tax reductions the New Zealand Government removed depreciation allowances on buildings for tax purposes.