Tax alignment vital, forum says

New Zealand business leaders have laid down the gauntlet to governments on both sides of the Tasman saying they must move swiftly to remove serious taxation impediments to the development of a single economic market (SEM).

The business leaders - among 80 key players from politics, business, bureaucracy, academia and opinion formers at the Australia New Zealand Leadership Forum in Melbourne - believe mutual recognition of dividend imputation credits would be the biggest single unifying factor the governments could take to build support for the SEM.

Macquarie NZ chairman Jim McLay said taxation should be given the same priority as banking issues.

"If is if it is mishandled, it too could fester and contaminate the relationship."

PricewaterhouseCoopers chairman John Shewan, who prepared a working paper on the issue, said he was encouraged by the unambiguous view of business leaders from both sides of the Tasman that recognition of imputation credits was a critical element of a single economic market. The consensus is that political commitment to a SEM can be fulfilled only with action on this issue.

The current rules are a serious impediment to the free flow of capital between Australia and New Zealand.

Shewan's paper highlighted the need for a focus on:

* Mutual recognition of imputation/franking credits on a transtasman basis.

* Withholding taxes on dividends, interest and royalties.

Among other priority issues are transtasman tax rules governing: superannuation (tackled in part by Finance Minister Michael Cullen on Friday), employee share purchase schemes, dual residency of companies, GST on cross-border supplies and alignment of the approach for obtaining binding rulings.

Despite clear support from the business sector, the issue presents some complexities for the two Treasurers: Australia's Peter Costello and Cullen, who would have to confront a probable net loss to their respective tax takes if the two Governments move on the anomaly.

But an Australian senior official later indicated the issue could be discussed at an upcoming review of the nations' double taxation agreement.

Although there was a potential net loss other factors, such as the need for an efficient capital market across the Tasman, would play a role.

Forum co-chairs Kerry McDonald (NZ) and Margaret Jackson (Aust) emphasised the need to remove serious taxation system impediments to an efficient transtasman capital market in their joint forum statement.

McLay said present tax regimes could often lead to investment decisions being made not on the basis of efficient location and allocation but because of the distortionary effect of tax arrangements, particularly that of double taxation in what (we are told) should be a single market.

"I say to my Australian colleagues, if you are frustrated at the lack of progress on the important issue of banking regulation, Kiwis are equally frustrated at the fact we have pursued the tax issue for the best part of a decade and all we have to show is some small movement on triangulation, delivered two years ago.

" ... I fully understand why Treasuries are anxious to protect their revenue base, but businesses know, and governments need to understand, that they are doing this at the expense of efficient capital flows in what aspires to be a single economic market."