Wednesday 8th February 2012 3 Comments
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Cutting the company tax rate isn’t a “silver bullet” that would stoke foreign investment in New Zealand, according to the Inland Revenue Department.
Commissioner Bob Russell told Parliament’s Finance and Expenditure Select Committee lowering the corporate tax rate is just one in a series of factors that will encourage international entities to park their funds in New Zealand. The nation’s distance from other markets means it doesn’t have to compete on tax in the same way countries of a similar size might have to.
“New Zealand is a small country quite remote from lots of places,” Russell said. “In a sense it’s not as important for us to be competing in lowering our rates progressively as it might be if you were a small European country with lots of other alternatives to service a market.”
The National Party-led administration cut the company tax rate to 28 percent in the 2010 Budget, something the tax department lobbied against, saying the misalignment with personal tax rates created a bias towards company structures and reintroduced “incoherence into the taxation of savings vehicles.” The Treasury was in favour of the rate cut, saying it would bolster corporate investment, including from offshore.
Struan Little, IRD’s deputy commissioner policy advice division, told the committee tax rates can affect the movement of capital across boundaries, but it “is not a silver bullet” and “a lot of other factors influence investment.”
Russell said because New Zealand’s a smaller country, larger companies tend to invest to target the local market, and isn’t necessarily linked to lower taxes.
In its briefing to the incoming minister, the IRD reported the government’s tax take as a ratio of gross domestic product fell 4 percentage points since 2007. Little told the select committee about 2.5 percentage points of that was due to government policy, with the remainder stemming from the country’s recession.
Last month, government financial statements showed its personal tax take continued to fall short of Treasury forecasts in the five months ended Nov. 30, though corporate tax revenue was ahead of expectations.
Russell told the committee the 17 percent increase in overdue Pay As You Earn tax was the department’s biggest debt collection concern, and is a priority for it to recover.
The rise in outstanding PAYE was a result from the recession as ailing businesses fail over the subsequent years, he said.
Russell said the department was working towards a leaner, more efficient model, with further cuts to its headcount likely, having already reduced staff numbers by 2,800 since 2008.
“We still have a very active change agenda underway, and that puts pressure on the organisation,” he said.
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