GST plans strike discordant note

By BRIAN FALLOW

Deputy Prime Minister Michael Cullen, who is keen on fostering investment and growth, needs to talk sternly to Revenue Minister Michael Cullen about some of the counter-productive proposals emerging from tax officials.

One is the proposal to add to transaction costs in New Zealand's stockmarket by bringing brokers' fees within the GST net.

Another would reduce investors' returns by applying GST to fund managers' fees.

Yet another is the rejection of a lower tax rate on new inbound foreign direct investment, as recommended by the McLeod tax review last year.

To be fair, Cullen has said he is not yet convinced by officials' advice on that question, which is why it has been made public and submissions invited on it. And the proposal to narrow the financial services exemption from GST to catch brokerage and other third-party fees is only at the "idea-being-floated, what-do-you-think?" stage.

But they strike a discordant note amid the usual chorus of calls to lift New Zealand's growth rate.

As a tax on consumption, GST does not and should not apply to savings, which represent a decision to defer consumption.

The rationale for the longstanding exemption of financial services from the tax is the difficulty of measuring them for GST purposes.

Banks can make their money either from fees or from interest margins. Tax their fees and they would be likely to switch to fatter margins instead.

But it occurs to the Inland Revenue that the fees charged by such intermediaries as sharebrokers and fund managers should present fewer measurement problems. Other services are taxed, why not these?

In principle, the fewer holes there are, the broader the tax base is and the lower tax rates can be. The fewer distortions the tax system creates, the lower the deadweight costs that all taxes impose.

But the Investment Savings and Insurance Association points out that the tax treatment of savings vehicles is already riddled with anomalies.

This would add to them, because superannuation and life insurance products would remain exempt from GST, while unit trusts and group investments would be caught.

New Zealand's savings rate already ranks near the bottom of the OECD league table, says ISIA chairman Simon Swanson.

Tax is a large part of the reason, and this would only make things worse.

A back-of-the-envelope calculation is that about $200 million of fees a year would fall within the tax net, yielding $25 million in tax.

In the case of brokerage, the tax base and revenue gain would be similar.

Meanwhile, the extent of New Zealand's reliance on foreigners' savings is evident in statistics released yesterday on the international investment position.

Foreign investors' claims on the New Zealand economy, both equity and debt, exceed New Zealanders' investment abroad by just under $100 billion, or about $25,000 for every man, woman and child.

On the taxation of inward foreign direct investment, the tax review chaired by Rob McLeod suggested cutting the statutory company tax rate on new investment to 18 per cent, in order for New Zealand to "stand out from the crowd" competing for that investment.

But IRD and Treasury officials say the boundary between new and existing foreign direct investment would be difficult to draw and would erode over time, increasing the fiscal cost from around $50 million a year to $500 million.

In the case of countries responsible for nearly half of existing foreign direct investment, the tax concession would be largely wasted because it would be counteracted by a lower offsetting tax credit at home.

In any case, they argue, foreign direct investment is relatively insensitive to tax. "Other, non-tax factors including improved access to overseas markets, the physical, regulatory and political infrastructure, the cost of labour and natural resources are equally if not more important."