Germans have 'write' idea for business tax, says Key

John Key

Allowing businesses to write off all of the cost of plant and machinery as soon as they buy it, rather than depreciating it over years, works in Germany and should be considered here, says National's finance spokesman, John Key.

He offered a list of proposals designed to give the economy more of a jolt than the "decaffeinated" business tax review discussion document at the launch of the Herald's Mood of the Boardroom survey in Auckland yesterday.

He said the immediate write-off of plant and machinery capital expenditure would be expensive at first, but the money would be clawed back later because of the absence of depreciation charges.

The Irish approach of offering a low tax rate to greenfield foreign investment in selected high-growth sectors, or the Singaporean and British practice of a lower rate for the first few years of a new business, should also be looked at.

Finance Minister Michael Cullen said some of the items on Key's list, such as reviewing the non-resident withholding tax on interest, dividends and royalties, were already on the Government's tax policy work programme.

Much of the rest would make little difference or would dangerously erode the tax base.

"What I got from the survey is that while people want everything - who doesn't, that's life - business people are pragmatic.

"Part of that pragmatism is a recognition that the economy does not benefit from endless cycles of fiscal restraint and loosening, driven by ideology on the one hand and public pressure for quality public services on the other."

The premise of the business tax review was that those parts of the system where there was a demonstrable link to increased productivity and economic growth should be changed.

"We do have to get the best bang for our buck in terms of encouraging investment where we need it most, namely research and development, workplace skills and export development," Cullen said.

Key said the review was a half-hearted exercise in fulfilling a coalition promise to United Future.

It should have included a strategy for future changes to the company, personal and trust rates, and the trade-off between aligning those rates versus deeper cuts to any one of them.

There could be a case for aligning the middle rate of the personal tax scale with the company and trustee rates - if there were a lot fewer people in the higher brackets.

Cullen said cutting the corporate tax rate was "certainly on the agenda but it is only one of a range of measures".

He noted that two-thirds of the survey's respondents said if company tax were cut they would increase pay rates and dividends, which would see the benefits flow to employees and shareholders rather than into investment that would boost productivity.


THE KEY POINTS

* A 100 per cent write-off for all plant and equipment purchases.

* A 100 per cent write-off for all R&D spending.

* Changing the controlled foreign company regime to distinguish between active and passive investments in foreign countries.

* Changes to tax of foreign investment, especially non-resident withholding taxes on interest, dividends and royalties.

* A differential rate for new businesses.

* Extending the four-year exemption for foreign income of migrants.

* Adoption of an Irish-type approach where a low rate is applied to new operations in high-growth sectors.

* Mutual recognition of imputation credits with Australia.

* Reducing compliance costs and the administration of the Tax Act.