Is our corporate tax rate too high?

In a recent interview, the Minister stated the NZ corporate tax rate is “reasonably high” compared with the rest of the world and considers the corporate tax rate needs to be “more competitive” to attract foreign investment.

Our corporate rate being “reasonably high” is a fair statement when compared to the global average of 23.9%. Consequently, our corporate tax take makes up a higher proportion of total revenue compared to the OECD average as well.

Tax is only one of a list of factors foreign businesses would consider before investing in NZ. The Minister appears confident that a lower tax rate could increase foreign investment and does not rule out a change in this year’s budget.

Examples such as Ireland or Singapore might suggest that a lower tax rate could lead to economic growth. However, these examples must be considered within the context of each country.

The last time the corporate tax rate was lowered was in 2010. This coincided with the increase of GST from 12.5% to 15%. It is unlikely that a reduction to the corporate tax rate alone will result in an immediate increase of foreign investment to NZ. Therefore, to retain the same or similar level of tax revenue in the short-term, collection will likely need to be increased in other areas i.e. - a further increase to GST.

While there is no promise of a corporate tax rate reduction it is an interesting possibility to consider. We should expect more information on the Government’s strategy to attract foreign investment leading up to this year’s budget.