INTOUCH : Joanna Doolan on a Taxing Issue for Exporters

Calls to increase exports and become value-added nation have, to date, had hollow ring to them. The reality is our draconian international tax rules, when compared to our closest neighbour Australia, act as an impediment to being internationally competitive.
Put simply, if you decide to set up manufacturing plant in China to export to your customers, securing tax holiday is of no benefit as this income will be swept up into New Zealand’s tax net. If you were based in Australia, you would not be taxed. And an extra 33 percent tax cost, compared to zero, is enough to really mess up your ability to be competitive.
However late last year the Government release some proposals for change. These are contained in document entitled “New Zealand’s International Tax Review: direction for change.” If adopted, they will break us out of rut we have been stuck in since the 1980s – one characterised by purist tax thinking that ignores the economic reality of operating in global market.
This long-awaited move will help level the playing field for local businesses. Companies may now be able to consider bright new future where we are able to compete with Australia and make economic decisions that are not tax-driven.
The proposal involves introducing new active/passive distinction: ie, active offshore income would be exempt and passive income, like interest, dividends, royalties and rents, would be taxed.
While this sounds relatively simple – it’s not unlike looking at an iceberg and thinking what you see above the waterline is all there is. Below the surface are some concepts likely to be perceived as hazardous to business.
These include the removal of the existing ‘grey list’ exemption for controlled foreign companies which, to date, have enjoyed tax-free status. Australia, Canada, Germany, Japan, Norway, Spain, the United Kingdom, and the United States are on this list.
Added areas of complexity include rules for how interest deductions are to be allowed, along with the claiming of foreign tax credits. And sting in the tail is the proposal to move the onus of proof for transfer pricing to the taxpayer. Transfer pricing is combination of an art and science at the best of times, especially in small market like New Zealand.
Then we have the definition of what is active and what is passive income. Two suggestions are included in the document. The first is to determine this on company basis; the other on transactional basis.
A company basis could be preferable as this would enable companies to structure their businesses by separating passive and active income. While this seems simple enough, it does raise further questions – like, what happens to gains from commodities trading or foreign currency gains where these are connected to your active manufacturing business?
The risk of all these changes, particularly for small and medium businesses, is they suddenly find themselves drowning in an added compliance burden. Getting good balance between minimising complexity and the compliance burden and not decimating our domestic tax base is titanic.
History has few lessons to teach us about icebergs and the Titanic. We can learn from others who have adopted similar rules.
Allocate some time to reading the 74-page document. It is available on the IRD’s website www.taxpolicy.ird.govt.nz Submissions are due 16 February 2007 and the Government expects to be in position to make decisions by the middle of 2007.
Getting these measures right could well be more critical to our future than reducing the corporate tax rate – though the preference would be to do both.
After all, both reducing the corporate tax rate and bringing in internationally competitive tax rules do not actually catapult us ahead of our competitors – they simply put us on level playing field.

•Joanna Doolan is tax director with Ernst & Young. The views expressed are her own and do not necessarily represent those of Ernst & Young. [email protected]

Visited 7 times, 1 visit(s) today
Close Search Window