Tax policy signals work in progress

In a speech to the International Fiscal Association on March 16, Revenue Minister Peter Dunne announced the government’s tax policy priorities for 2012-13.

The tax focus for the next 12 to 18 months would be on improving the coherence, efficiency, sustainability and fairness of the existing tax system rather than on any radical changes to the tax base and/or tax rates.

The tax priorities are aligned to the government’s wider economic priorities to manage its finances, build a more competitive and productive economy, deliver better public services and rebuild Canterbury.

The tax policy work programme also contains initiatives to support Inland Revenue Department’s (IRD) business transformation process, such as better information sharing, and the government’s welfare reforms to deliver better public services.

The rebuild of Christchurch is also a priority.

The release of the tax policy is a welcome window into government’s tax priorities and challenges over the coming months.

Overall, there is nothing new in terms of tax policy initiatives, with a number of the work programme items (including the mixed-use assets changes, the dividend and imputation reviews, and the active income exemption for branches) already well signalled.

Achieving surplus

The emphasis is on maintaining the tax revenue base (crucial to achieving the government’s surplus target) and incremental rather than radical tax reform.

“A good tax policy programme does not set out to change the world. Instead, it focuses on doing what a tax system does best and aims to improve that system,” Mr Peter Dunne said.

This is consistent with the Government’s wider focus on getting efficiency gains from the public sector. Given the importance of revenue collection to achieving the government’s economic objectives, the effort is to remove obstacles to IRD performing its core function as efficiently as possible (most notably IT constraints). Current tax policy settings, it would appear, are considered broadly right.

That is not to say that there will be nothing happening on the tax policy front.

We welcome the government reaffirming its commitment to mutual recognition.

However, we believe that business support on both sides of the Tasman will be crucial in getting resolution on this issue.

KPMG also welcomes the proposed extension of the active income exemption in the international tax rules, to foreign branches (and active financial institutions), and we are hopeful of progress on imputation refundability/streaming and black hole expenditure issues.

In relation to the latter, this remains a significant area of concern for business, with limited success to date.

The impediment

The constraint on all this is the government’s fiscal position.

Any positive tax changes, including from the review of the savings tax rules, must be self-funding. This leads to the less welcome news. For businesses, this will be further review of thin capitalisation limits given the last such review in 2010, resulted in the maximum New Zealand debt percentage, for interest deductibility, falling from 75% to 60%

The fiscal trade-offs will therefore need careful consideration.

Also of interest is the minister’s comment that “now is probably not the time to be moving the line on tax avoidance.”

This appears to be supportive of recent Court decisions.

However, we take the calls for the review of the avoidance rules as a request for more clarity rather than a call to shift the boundary.

Paul Dunne and John Cantin are Tax Partners at KPMG based respectively in Auckland and Wellington.

Editor’s Note: KPMG New Zealand is the Sponsor of the ‘Business Excellence in ICT Category of the Indian Newslink Indian Business Awards 2012.

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