Govt extracts heavy tax toll on NZ firms -international survey

New Zealand medium-to-large businesses face the 11th heaviest tax toll out of 36 developed countries, according to a Canadian international survey.

The survey by the CD Howe Institute think tank looks beyond the official tax rate to what firms actually pay, taking into account such things as depreciation and sales tax.

It found that while New Zealand's corporate tax rate was 33 per cent the average effective rate was 29.3 per cent.

The country with the worst effective rate was China with 45.8 per cent, despite having only a 24 per cent corporate tax rate. This is mainly due to a 17 per cent value-added tax on purchases of machinery and equipment.

Canada comes in next worst at 39 per cent compared with its official tax rate of 34.3 per cent.

Lowest tax payers on the list are Singapore firms that face a corporate rate of 20 per cent and pay an effective rate of just 6.2 per cent.

One of the surprises was Sweden, whose government collects nearly 59 per cent of all revenue. However, it has a corporate rate of 28 per cent and an effective rate of only 12.1 per cent, sixth best in the study. It allows generous depreciation write-offs for capital investment.

Companies in the home of capitalism, the United States, do not fare well, having to cope with an official rate of 39.2 per cent and an effective rate of 37.7 per cent -- fourth worst and one ahead of Germany.

Australia comes in five places ahead of New Zealand with an official rate of 30 per cent and an effective rate of 24.1 per cent.

The authors also surveyed the total general government revenue collected including non-tax revenue as a proportion of the total economy. On this survey (using OECD 2003 figures), New Zealand came out 20th best out of 28 OECD countries at 41.2 per cent. Sweden topped the list in terms of collection (58.6 per cent) while Japan collected least at 30.3 per cent. Australia was sixth lowest at 37 per cent.

Authors, Duanjie Chen, Jack Mintz and Finn Poschmann argue that effective tax rates matter when it comes to attracting investment.

They state that while wise public spending can improve economic growth, taxes -- especially poorly structured ones -- tend to undermine growth and job creation.

They say taxes have are a significant influence on investment decisions by businesses and by their "conservative" estimate a percentage point increase in the effective tax rate causes capital investment to decline by half to 1.7 percentage points.

They cite empirical studies that show foreign investment is highly sensitive to tax rates -- a one per cent point increase in rates results in foreign direct investment declining by over 3 per cent.

In advising Canada to lower its corporate tax rate, the authors note other countries are not standing still, with Germany planning to lower its rate to 19 per cent from 25 per cent and the US planning to cut its rate by 3 percentage points by 2010.

One of the recommendations the authors make, is that depreciation rates be adjusted to reflect the true fall in the economic value and obsolescence of equipment such as computers.

They also argue that others should follow Australia's example to eliminate withholding taxes on dividends paid to foreign parent companies that own at least 80 per cent on a local subsidiary.

In general, while an economic case can be made for encouraging specific sectors and favoured activities such as research and development, "governments should review their tax credits and other special provisions with a view to reducing tax rates broadly rather than offering selective relief".

"A neutral business tax structure with low, internationally competitive tax rates could do much to unleash the Canadian tiger." they conclude.

- NZPA