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Urgent action is needed on a corporate retention scheme

By Greg Cole

Friday 24th November 2000

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New Zealand is a nation of non-savers. It has a small capital market. It is heavily dependent on constant infusions of foreign capital to ensure productive investment can occur. It is also becoming an increasingly unattractive place for those foreigners to invest.

Tax rates have risen, making it more expensive to send executives to New Zealand to keep an eye on those investments. The prospect of a capital gains tax as a result of the proposed review of tax laws will also have a negative impact on investor sentiment.

And it is not just foreigners who are turning their backs on New Zealand.

Domestic success stories such as Lion Nathan and Nufarm have taken their head offices to Australia in search of greener pastures.

It is time for the government to take action to try to stem this tide and some simple reforms to the tax system should be part of this process.

The issue of "triangular" taxation is one area where the government could do something in conjunction with Australia.

Both New Zealand and Australia operate imputation regimes. This means tax paid by a company can be passed on as a credit to the shareholder when dividends are paid. So if an Australian invests in an Australian company they will get a credit for Australian tax paid by that company.

However, if that Australian invests in a New Zealand company then no credit is available to that investor for New Zealand tax paid. So-called "mutual recognition" of tax credits has sputtered along on and off the agenda of both countries for more than a decade.

Triangular taxation arises in a third case where an Australian invests in a New Zealand company that in turn has an investment in an Australian company. If the Australian invested directly in the Australian company they would get tax credits but because of the interposed New Zealand company they do not.

This restriction reduces transtasman investment and causes companies such as Lion Nathan to move out of New Zealand when the value of their offshore investments starts to exceed the value of their New Zealand investments. Only through migrating to Australia can the benefits of tax credits flow through to their Australian shareholders, who represent a large source of equity investors.

New Zealand is in a position, in conjunction with Australia, to improve its attractiveness to foreign investors and domestic multinationals. To do this it must allow the New Zealand investors in a foreign company investing in New Zealand to obtain the benefit of New Zealand tax paid. It should also encourage Australia to allow Australian tax credits to flow out to Australian investors even where there is an interposed New Zealand company.

There is no time for half-measures. In five years there may not be enough corporates left in New Zealand to worry about without strong and decisive action now.

Corporates leaving New Zealand have dire consequences in terms of the revenue and wealth generated, the taxes paid to the government, the retention of skilled New Zealanders and the investment returns to New Zealand investors.

Whatever the potential fiscal cost of triangular taxation, it will be worth it over the longer term.

Greg Cole is a tax partner at Deloitte

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