KEY POINTS:
Budget 08 was the people's Budget.
It was focused on personal tax relief. Budget 07 was the business Budget with the crescendo being the reduction of the corporate tax rate to 30 per cent, the research and development regime and the positive aspects of the international regime.
But what's missing in both Budgets is the vision to do something different to keep businesses here.
Those businesses require foreign capital, measures to ensure that this foreign capital can coexist with domestic investors, and finally, initiatives to attract new businesses and people here. Why, because such measures are building blocks to providing comparable opportunities and wages as in Australia.
The personal tax debate is overpowering at the moment. It pales into relative insignificance when the context of opportunities and real wages are overlaid into the debate. So what can be done from a tax perspective?
1. Recognise that we can actually influence corporate behaviour rather than just observe it. If everything is left to a competitive market and we play with a straight bat, we will lose every time. Every other jurisdiction "cheats" - they play to win. Capital and labour has never been as mobile.
2. Set a clear destination of tax reform - it won't be able to be done in one or two Budgets.
3. Remove the current tax inefficiencies faced by foreign shareholders to enable them to coexist with NZ portfolio investors. A form of limited refundability of imputation credits would do it. Current tax rules scream out for foreign investors to buy 100 per cent of a business to integrate their tax bases. The change would result in greater tax revenues.
4. Introduce the active income exemption with appropriate base maintenance rules but retain the grey list (not just Australia) and don't apply the interest allocation rules to NZ headquartered organisations.
5. Targeted tax relief for new foreign direct investment into NZ that attracts capital and labour and that does not appreciably compete with domestic businesses.
6. Mutual recognition of imputation credits and franking credits or some variant that enables NZ investors to better participate in equity markets as part of long-term savings.
7. An appropriate tax regime for non-resident investors in Portfolio Investment Entities (PIEs). Tax their non-NZ-sourced income at nil, NZ-sourced income at 30 per cent, interest at the approved issuer levy 2 per cent rate and exempt dividends if they are fully imputed. Allow NZ fund managers to target foreign investors.
8. Extend the new migrant tax exemption from four years to 10 or more. Help our corporates attract talent, provide a greater incentive for New Zealanders to return home and enable wealthy people to be based here rather than making visits and carefully managing their ties without fear that their global structures would fall foul of our unique tax rules.
12. Deal with black hole expenditure. It was the third highest issue out of the 2006 Business Tax Review (behind corporate tax rate and R&D).
* Thomas Pippos is managing tax partner at Deloitte.
