Briefing for the Incoming Minister of Revenue - 2005 - Part 2
Key themes in future work
Base maintenance and remedial legislation will always be key features of the tax policy work programme.
In addition, a key theme over the next three years should be to consider measures to make the personal income tax system more robust. This could involve tax rate changes or strengthening anti-avoidance measures aimed at countering income splitting and tax sheltering - or a combination of the two. An important goal is to ensure that as much as possible of a person's tax liability is independent of how he or she structures the vehicle through which income is earned.
A second key theme is to increase the robustness of our tax rules on foreign investment in New Zealand. This theme stems from the importance of company tax as a revenue source for New Zealand. There are strong international pressures on the company tax base, and any major reduction in this base is likely to place upward pressure on other tax rates. One way of increasing robustness is to lower the company tax rate; another is to step up measures that counter tax avoidance and international arbitrage by companies operating in New Zealand.
When New Zealand introduced its full imputation system, in 1989, it decided that it would not provide imputation credits to foreign investors. The aim was to tax profits earned by foreign-owned firms that are sourced within New Zealand.
At present, however, some strong pressures are tending to erode source-basis taxation when companies are wholly or partly foreign owned. These include:
- streaming of imputation credits which would normally be received by foreign residents back to New Zealand residents and
- diversion of New Zealand profits to foreign countries and then streaming them back to foreign parties without full New Zealand tax being paid, as a result of our conduit or dividend withholding payment provisions.
Australia is a very important foreign investor into New Zealand, and when Australian firms invest into New Zealand through branches or subsidiaries the Australian full imputation system provides incentives for profits to be streamed to Australia to avoid New Zealand tax.
The incoming government will also need to consider other important international issues. For example, concerns have been expressed that New Zealand's relatively high rates of withholding tax on dividends, interest and royalties can provide an impediment to international investment. Australia has raised the issue of withholding tax in relation to our double tax agreement, to which we need to respond by the end of the year. There can be reasons to be cautious about reducing rates of withholding taxes. Withholding taxes on interest and royalties can be important in helping sustain source basis taxation, which is especially important if New Zealand wants to maintain a significant company tax base.
In our view, progressing both these international taxation concerns and measures to make the personal tax rate system more robust are key priorities for the next three years.
Continues in "Administration of tax and social support programmes"
Date published: 15 Nov 2005
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