Excess tax for excess profits
Tax Alert - November 2022
By Robyn Walker & Patrick McCalman
While a capital gains tax is off the table for the Labour Party, and probably a wealth tax as well, the Green Party are back with a new proposal, an “excess profits tax”. The benefit of an excess profits tax is that it’s not directly levied on voters, instead businesses are the intended recipient of this new tax.
The Green Party has issued a discussion document in order to start a conversation about tax. There is an opportunity for anyone to comment, albeit there is no stated closing date for comments. This seems likely to be something that develops further into an official tax policy for Election 2023, so comments are best provided in 2022.
The discussion document sets the problem definition as “Successive governments have failed to ensure we have a fair tax system, which in turn means there is not enough revenue to provide the standard of public services New Zealanders deserve. … The aim of excess profits taxes is to level the playing field, so that big businesses are not able to profit in excess when so many people are struggling. … The Green Party considers that record profits during a time of economic hardship for many New Zealanders are immoral and unsustainable.”
What is proposed?
The precise nature of any proposed excess profits tax is left deliberately open, with the intention being to get feedback to determine the precise parameters. The inference from the discussion document is that the tax would be targeted toward “big business”, but similarly comments are invited on whether the company tax rate should simply be increased for all businesses.
Some options included within the paper are:
- Applying the tax to specific sectors that have been making “record profits” and/or having issues with competitiveness. The document notes that this could include banks, fuel companies, supermarkets, building product suppliers, and energy generators/retailers (gentailers).
- An “excess profit” could be determined by comparing current profits to pre-COVID-19 years or looking at a business's return on equity or total assets and comparing it with a benchmark rate for the industry. Both options could be available in order to not penalise a new business.
- The rate of tax could be set at 11% to bring the company tax rate in line with the top personal tax rate, or it could be 50% of the excess profit.
- For simplicity, the tax could be applied industry-wide for all companies over a threshold size.
- The tax could be retrospective to ensure that the tax is covering the period when excess profits have been made.
- There would be a complementary incentive to invest in emissions-reducing infrastructure or public benefit research and technology.
- The document notes that if the company tax rate were permanently raised back up to 33%, an additional $3 billion of annual tax revenue could be collected.
The discussion document provides an opening to discuss company taxes. On the flipside to the proposed increase in company taxes, what are some counter-arguments?
- At 28%, the current company tax rate is higher than many other countries (with Australia a notable exception) and well above the OECD average of around 22%. While in the past there have been references to a “race to the bottom” when it comes to company taxes, recent proposals around BEPS are likely to put an end to very low company tax rates.
- Company taxes are something which attract or detract investment to New Zealand. When mobile capital is looking for a home, the company tax rate is something that is considered as it materially impacts the necessary return on investment required. When there is worldwide demand for infrastructure investment and skills shortages, a high company tax rate will impact the level of capital which comes to New Zealand, with a flow-on impact on jobs, productivity and prosperity. The Inland Revenue in its recent Long-Term Insights Briefing looked at New Zealand’s tax settings and noted: “Compared to other OECD countries, New Zealand appears to have relatively high taxes on inbound investment. These taxes are likely to mean higher costs of capital (or hurdle rates of return) for investment into New Zealand than for investment into most other OECD countries. High taxes on inbound investment have the potential to reduce economic efficiency and be costly to New Zealanders by reducing New Zealand’s capital stock and labour productivity. OECD analysis suggests that New Zealand is an outlier with some of the highest costs of capital in the OECD.”
- International investors seek certainty and stability in investment locations. Variable and retrospective tax changes are not viewed positively.
- Accounting profits and taxable income are not equal. The Income Tax Act already contains many provisions which increase taxes on businesses, for example by denying interest deductions or depreciation on buildings, requiring costs which may be an expense for accounting to be capitalised etc. In some cases, the effective tax rate on companies is already in excess of 28%.
- Now is the time that businesses need to have strong balance sheets to invest in new technologies to reduce carbon emissions and drive a transformation to a cleaner future. Additional taxes will not assist with this; it was positive to see consideration given in the discussion document to incentives for such investments. Designing parameters for qualifying investments is likely to be tricky.
- Higher taxes may result in businesses reducing the size of their operation in New Zealand to ensure that only the bare minimum (non-mobile) profit is allocated to New Zealand. This could have the unintended consequence of higher taxes actually reducing taxes as businesses react to the incentive to move profits or activities offshore.
- In a domestic context, company tax is in substance a withholding tax as ultimately profits are taxed to the shareholder at their marginal rate. How does a 50% company tax sit when shareholders have a less than 50% tax rate (the top personal tax rate is 39%)? The risk is that such a level of tax acts as a disincentive for investors to invest in a productive economy.
- Some of the largest shareholders in companies are superannuation schemes, so dividends paid out to shareholders will be contributing to KiwiSaver accounts for many New Zealanders.
When taxes are targeted toward voters, politicians often get a clear view of the acceptability of a proposal, but there is also the risk that the feedback, in this case, could be “higher taxes are good … if someone else is paying it”. The problem with targeting the company tax rate is the potential for unintended consequences for jobs, investment, productivity and prosperity.
It’s always good to see some challenge to the status quo, and the Green Party should be commended for putting a proposal on the table for feedback. Now is the time to provide that feedback.