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The idea
by an independent tax review of a special 18 cents in the dollar tax rate for
foreign investors - compared with the standard 33c company rate - stood to
boost economic growth and was worth exploring, Finance Minister Michael Cullen
said. "We probably have one of the most level playing fields in the world, but every other country is determined to play less fairly than we are," he said, responding to the final report of a review team chaired by accountants Arthur Andersen managing partner Rob McLeod. "We'll be getting officials to do further work on it and I certainly don't rule it out." But Dr Cullen rejected the suggested scrapping of the top 39c personal tax rate and reducing the number of personal tax rates from four to two (18c for annual income up to $29,500 and then 33c). "It seems hard to justify shifting the tax away from high income earners and toward middle income earners." The most pressing issue was ensuring New Zealand's international tax rules were competitive with other countries, many of which had differential rates to attract foreigners. "If we don't go down that road, then we have to go down a similar road of removing the perverse signals from the current system," Dr Cullen said. The review team outlines two options for New Zealand to "stand out from the crowd" in attracting foreign investment: one would tax new or existing companies at 18c to the extent that they are foreign owned (at a cost of $460 million a year), and the other would restrict favourable tax treatment to foreign investment in new activities only (costing $50 million). Dr Cullen favoured restricting the lower tax to new investments, mainly because of the significant cost of the broader option. But he accepted that the concessionary tax rate could not be much above 18 cents if New Zealand was serious about competing for investment. Concessionary treatment for foreign investors would be a significant shift in tax policy, which has comprehensively taxed both foreign investment in New Zealand and overseas investment by New Zealanders. The review, which cost $985,000, says New Zealand has to ensure its tax treatment of inward and outward investment is competitive. "Higher New Zealand taxes will mean non-residents will require a higher before-tax rate of return from their New Zealand investments," the review says. "By driving up the required return from investment, New Zealand taxes raise the cost of capital to New Zealand businesses and lower the amount of investment." The review suggests capping the tax imposed on any individual at $1 million a year – 27 Kiwis pay more than $1 million a year in tax. But this found little favour with Dr Cullen. Overhauling the complex and unpopular international tax rules in a bid to compete with other countries for investment was one of the few recommendations he supported. The review team dropped its controversial idea of taxing equity in owner-occupied homes. Mr McLeod says: "It met with such widespread opposition that no government is likely to implement it in the near future. We do not see any mileage in advancing the idea any further." Dr Cullen rejected scrapping excise on alcohol, tobacco, gaming and petrol and replacing them with higher gst across the board, as suggested by the review. That would have forced gst to about 16 per cent to recoup the $2.8 billion lost.
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Reprinted from NZ InfoTech |