Company tax reform faces pressure from Australia

The tax working group strongly advocates aligning the company, trust and top personal tax rates but accepts that international competitive pressure, especially from Australia, may mean that the company rate has to be lower than the other two.

Fundamental to the group's analysis and its conclusion that the current system is "broken" is the view the status quo relies too much on taxes which are most damaging to economic growth, namely those of corporate and personal income.

It notes that capital is more mobile than in the past and with the global trend towards lower corporate tax rates over the past 15 years, New Zealand's headline 30 per cent rate is above the average for small developed economies (26 per cent).

The Australian tax review's recommendations, both about corporate rates and imputation credits, could set the cat amongst the kiwi.

"One of the worst pieces of news we could receive would be that the Australians are going for a company rate of 25 per cent," PricewaterhouseCoopers chairman John Shewan said.

"But the Australians are due to have an election some time between April and June, so any changes arising from the review will not be before 2011 and may be quite a bit later than that. We don't need, and can't afford, to wait for that."

Nevertheless the temptation for the Government to keep some of its fiscal powder dry until it is clear what the Australians are doing will be strong.

NZX chief executive Mark Weldon said aligning the other rates at 33 per cent would leave a lot more options for the corporate rate.

Deloittes tax partner Mike Shaw estimates that if the alignment was 33 per cent for the top personal and trust rates and 30 per cent for the company rate the revenue cost would only be about $560 million. If the PIE rate were increased to 33 per cent (from 30 per cent now), the fiscal cost would be lower still.