New Zealand Budget

Analysis

Business tax: Standing on the edge…

2017 New Zealand Budget

By Patrick McCalman

Budget 2017 was unsurprisingly light on business tax announcements. The small adjustment to tax bands for individuals is of little consolation to companies who will continue to pay tax at 28 percent for the foreseeable future; the Government having chosen to leave our corporate tax rate as one of the highest in the region and the 7th highest in the OECD (before the recent Australian and US announcements).

It is interesting to contrast this to what we saw two weeks ago in the Australian budget, which saw Australia set a destination to reduce its corporate tax rate from 30 to 25 percent over a ten year period.  Against a backdrop of an OECD average corporate tax rate of 22 percent, an Australian destination of 25 percent, and the flow-on impacts of the US proposals to reduce its corporate tax rate to 15 percent, providing some signal on the future direction for corporate tax would have been welcome to New Zealand business. Ensuring that our corporate tax rate is competitive helps our companies to compete on the world stage and invest in their business to adapt to changing market conditions.

On the positive side, alongside the Budget we have seen the release of a Discussion Document on “Black hole and feasibility expenditure” proposing changes to claw back the negative consequences for business from the Supreme Court decision in Trustpower[1] last year.

The proposal is to align the tax treatment with that adopted for accounting – so if there is no “asset” on the balance sheet, feasibility expenditure will be deductible. In addition capitalised feasibility expenditure on an abandoned asset would be deductible if expensed under IFRS. The devil will be in the detail of the proposals, but overall this is a positive move and a relief to businesses – although some may say it is too little too late, and there is are still remaining areas of black hole expenditure that require a resolution.

As expected, Budget 2017 does not include any further measures in relation to base erosion and profit shifting (BEPS) as how this will happen is still subject to consultation. Officials are still digesting submissions received last month on a suite of consultation papers. While we appreciate the need to act on BEPS, our response needs to be measured and relevant to the issues here in New Zealand. It is important that any response does not undermine the world’s view of New Zealand as an investment destination. As the changes in Australia show, tax competition is alive and well and New Zealand needs to ensure that while acting against BEPS it signals that it is open for business.

In this respect it is important to note that the New Zealand tax system is currently viewed favourably. The recent Deloitte Asia Pacific Tax Complexity Survey revealed that predictability is now the key factor in today’s business decision-making. Interestingly, over 90 percent of survey respondents indicated that reputational risk is an important consideration in their businesses' tax strategy. This self-policing may negate the need to implement harsh BEPS measures, with 75 percent of respondents stating they would not enter into a planning strategy if it is perceived by some to be aggressive, even if the strategy is legal or the tax law did not specifically consider it illegal.

While New Zealand is the centre of our world, we should remember that we lack the critical mass to be an essential sales destination for many. If measures are too severe then multinationals may choose to take their business elsewhere.

  OECD Country Corporate Tax Rate
1 Switzerland 8.50
2 Hungary 9.00
3 Ireland 12.50
4 Canada 15.00
5 Latvia 15.00
6 Poland 15.00
7 Germany 15.83
8 Czech Republic 19.00
9 Slovenia 19.00
10 United Kingdom 19.00
11 Estonia 20.00
12 Finland 20.00
13 Iceland 20.00
14 Turkey 20.00
15 Luxembourg 20.33
16 Slovak Republic 21.00
17 Denmark 22.00
18 Korea 22.00
19 Sweden 22.00
20 Japan 23.40
21 Israel 24.00
22 Italy 24.00
23 Norway 24.00
24 Austria 25.00
25 Chile 25.00
26 Netherlands 25.00
27 Spain 25.00
28 New Zealand 28.00
29 Portugal 28.00
30 Greece 29.00
31 Australia 30.00
32 Mexico 30.00
33 Belgium 33.00
34 France 34.43
35 United States 35.00

 

 

[1] Trustpower Ltd v Commissioner of Inland Revenue [2016] NZSC 91

[1] Trustpower Ltd v Commissioner of Inland Revenue [2016] NZSC 91

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