New Zealand has been ranked as the second most competitive country in the OECD for our income tax systems from a commercial viewpoint.
An American interest group called The Tax Foundation has developed an "International Tax Competitiveness Index" that measures the degree to which the 34 OECD countries’ tax systems promote competitiveness through low tax burdens on business investment and neutrality through a well-structured tax code.
The index considers more than forty variables across five categories: Corporate Taxes, Consumption Taxes, Property Taxes, Individual Taxes, and International Tax Rules.
The index attempts to display not only which countries provide the best tax environment for investment but also the best tax environment to start and grow a business.
Estonia was by far the "most competitive" and France the "least competitive" from a business and investment perspective in this 2014 assessment.
The USA is also low on this ranking at #32.
The competitiveness of a tax code is determined by several factors say the surveyers. The structure and rate of corporate taxes, property taxes, income taxes, cost recovery of business investment, and whether a country has a territorial system are some of the factors that determine whether a country’s tax code is competitive, they say.
New Zealand is being held up as a good example of the type of country that has been working to improve its tax competitiveness.
In a 2010 the New Zealand Treasury stated, "Global trends in corporate and personal taxes are making New Zealand’s system less internationally competitive."
In response to these global trends, New Zealand cut its top marginal income tax rate from 38% to 33%, shifted to a greater reliance on consumption taxes, and cut the corporate tax rate to 28% from 30%.
New Zealand added these changes to a tax system that already had multiple competitive features, including no inheritance tax, no general capital gains tax, and no payroll taxes.
Top-ten rankings for consumption, property and individual taxes areas pushed New Zealand to the #2 position.
| Overall | Overall | Corporate | Consumption | Property | Individual | Intl Tax | |
| Rank | Score | Tax | Tax | Tax | Tax | Rules | |
| rank | rank | rank | rank | rank | |||
| 1 | Estonia | 100.0 | 1 | 8 | 1 | 2 | 11 |
| 2 | New Zealand | 87.9 | 22 | 6 | 3 | 1 | 21 |
| 3 | Switzerland | 82.4 | 7 | 1 | 32 | 5 | 9 |
| 4 | Sweden | 79.7 | 3 | 12 | 6 | 21 | 7 |
| 5 | Australia | 78.4 | 24 | 7 | 4 | 8 | 22 |
| 6 | Luxembourg | 77.2 | 31 | 5 | 17 | 16 | 2 |
| 7 | Netherlands | 77.6 | 18 | 11 | 21 | 6 | 1 |
| 8 | Slovakia | 74.3 | 16 | 32 | 2 | 7 | 6 |
| 9 | Turkey | 70.4 | 10 | 26 | 8 | 4 | 19 |
| 10 | Slovenia | 69.8 | 4 | 25 | 16 | 11 | 13 |
| 11 | Finland | 67.3 | 9 | 15 | 9 | 23 | 18 |
| 12 | Austria | 67.2 | 17 | 22 | 18 | 22 | 4 |
| 13 | Korea | 66.7 | 13 | 3 | 24 | 10 | 30 |
| 14 | Norway | 66.7 | 20 | 23 | 14 | 13 | 12 |
| 15 | Ireland | 65.7 | 2 | 24 | 7 | 20 | 26 |
| 20 | Germany | 68.2 | 25 | 13 | 115 | 32 | 10 |
| 21 | UK | 62.2 | 21 | 19 | 29 | 18 | 5 |
| 24 | Canada | 56.1 | 19 | 10 | 23 | 24 | 27 |
| 25 | Japan | 54.8 | 34 | 2 | 26 | 25 | 25 |
| 31 | Italy | 47.2 | 23 | 20 | 33 | 33 | 15 |
| 32 | USA | 44.6 | 33 | 4 | 31 | 26 | 34 |
| 34 | France | 38.9 | 30 | 17 | 34 | 34 | 17 |
The International Tax Competitiveness Index seeks to measure the extent to which a country’s tax system adheres to two important principles of tax policy: competitiveness and neutrality.
A competitive tax code is a code that limits the taxation of businesses and investment. In today’s globalised world, capital is mobile. Businesses can choose to invest in any number of countries. This means that businesses will look for countries with lower tax rates on investments in order to maximise their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth.
However, low rates are not the only component of a good tax code; a tax code must also be neutral.
A neutral tax code is simply a tax code that seeks to raise the most revenue with the fewest economic distortions.
This means that it doesn’t favor consumption over saving, as happens with capital gains and dividends taxes, estate taxes, and high progressive income taxes.
This also means no targeted tax breaks for businesses for specific business activities.
Another important piece of neutrality is the proper definition of business income. For a business, profits are revenue minus costs. However, a country’s tax code may use a different definition. This is especially true with regard to capital investments. Most countries do not allow a business to account for the full cost of many investments they make, artificially driving up a business’s taxable income. This reduces the after-tax rate of return on investment, thus diminishing the incentive to invest. A neutral tax code would define business income the way that businesses see it: revenue minus costs.
A tax code that is competitive and neutral promotes sustainable economic growth and investment say the authors. In turn, this supposedly leads to more jobs, higher wages, more tax revenue, and a higher overall quality of life.
The authors concede that taxes are not all that matter. There are many factors unrelated to taxes which affect a country’s economic performance and business competitiveness. Nevertheless, taxes affect the health of a country’s economy.
In order to measure whether a country’s tax system is neutral and competitive, the ITCI looks at over 40 tax policy variables. These variables measure not only the specific burden of a tax, but also how a tax is structured. For instance, a 25% corporate tax that taxes true business income is much better than a 25% corporate tax that overstates a business’s income through lengthy depreciation schedules.
The overall index attempts to display not only which countries provide the best tax environment for investment, but also the best tax environment in which to start and grow a business.
25 Comments
There is no mention of hidden taxes!! While tax rates may have declined in most areas there has been a significant shift to other forms of revenue gathering which significantly add to business and personal costs in completing the necessary compliance work required.
If NZ had neutrality then it would tax all business types on an equal footing and the fact is that financial services are exempted from a consumption tax .
If anyone wanted to obtain a thorough an analysis on how competitive their countries tax system is then I would suggest that they also apply some common sense and look at at the number of days it takes on an annual basis that people must work to pay all taxes applied including the hidden taxes. It is currently around 6 months of working in NZ and similar in Australia.
It is my opinion that the tax environment in NZ is more favourable to International investors over local investors......all those Tax Treaties have many benefits to foreigner investors at the expense of citizen and resident tax payers.
Could you give a couple of examples of the kind of thing you mean by "hidden taxes"?
In fairness, the authors of this report won't have been able to see "hidden taxes" because they're - er - hidden. The same applies to the other countries they looked at, so including them might or might not have made a difference to New Zealand's relative ranking here.
Have you any reason to suppose that there are more of these "hidden taxes" in New Zealand than in the comparator countries?
acc, kiwisaver, rates, child support becoming compulsory for employers (the handling cost for setting it up and policing it), RUC, extra adds to the registration of motorvehicles, rising "recovery costs" for government services, reduction in government service availaility (longer wait lines as places like WINZ, IRD, & Dept for Courts reduce counter staff but put up prices, rise in duties and inspection fees) reduction in (free) advisory staff services in favour of pay&reject applications
which are the non-compulsory government charges?
Most "hidden taxes" are perfectly visible - some, like the time taken to master IRD and Employer law aren't visible, even though they are taxes.
Also like the extra time and advanced material required to get approval for higher detail and standard of compulsory documentation. How in the detail/documentation is is a small arugment that there is compensatory benefit in the form of better process and less likely of corrective expenses futher down the track. (the later in a projects life a correction is needed then the more expensive it is - corollary though, if the activation energy/cost is too high then the project may end up cot dead - as the ability to foresee everything is impossible and allowing for everything possible is too expensive.)
So most of the hidden taxes, and just compulsory passed on charges but they count as taxation, because they are extracted by legislation (backed by threat of State force), all the benefit goes to the State, and they no benefit to the payee and frequently cripple the business financially.)
These would all be perfectly relevant and legitimate points to include - if the subject matter was an international comparison of different countries' business environments. But that is not what this particular survey is about.
This is like responding to the contention "the All Blacks are a great rugby team", by pointing that this ignores the sporting records of the Black Caps, the All Whites and the Tall Blacks. Consideration of those teams would be highly relevant if the contention was that "New Zealand is a great sporting nation". But it's not relevant to the contention that was actually made.
As noted above, if consideration of the costs like those you describe was included for all countries, New Zealand might or might not do better than it does in a survey specifically focused on formal taxation. Do you have any reason to think that other countries do better than New Zealand does in terms of the non-tax costs, financial and other, that they impose on business?
No.
This is like you saying "The All Blacks are a great rugby team"
and me pointing out that they are contenders perhaps, but when was the last time they won a World Cup or other major competition? They no longer a "great team", they're a "good team".
You stated there were no hidden taxes, and challenged to list some.
So I listed some for you.
You claim they weren't "hidden" or "taxes", taking a rather poor grammatical position on what is clearly a contextual phrase. the phrase isn't "hidden" and "taxes" - any more than "All" means "every", and "Blacks" means "Negroes". the term is "hidden taxes" which refers to a large assortment of costs and "inflation by deletion" that are (a) compulsory, (b) extracted by threat, (c) to government or appointed authority, (d) (some contention*) of no benefit to the business/person and only benefit third parties.
* the contention is around things like subscription fees. Membership fees are non-governmental, so might not be a taxation, if used to pay rates then they're taxation by proxy; if used to provide membership services (eg list of members, signage) or group benefit (groundskeeping) then it's not taxation.
eg the rates paid by a sports club, do nothing for the members. often used for central admin of council, compliance, council wages, parks, signage in community, etc no benefit to club either. But you can't open the grounds without The Man taking his cut.
I didn't say there were no hidden taxes. I asked for some examples, as a way of better understanding what the argument was. I don't dispute the existence, or the cost, of any of the things you list.
What I am saying though, is that if you extend the definition of "taxes" to include everything that meets your criteria (a) to (d) in considering New Zealand's tax system - then you have to do so in considering other countries' tax systems as well.
That would be a perfectly legitimate and reasonable thing to do, and in fact various organisations have done it, but it would be a different exercise from the one that is reported here.
I do consider it in other countries tax systems. It's only the propoganda spinners like the people providing the figures above, that love to leave them out. (1) because many governments don't like to put them in a survey because it "frightens the fish", and (2) there are so many it's actually quite a large job.
So much easier just to trot out the overt tax number and tell people they should be lucky to get so much for so little (and any shortage in cash is their own poor spending habits).
There are so many actual hidden taxes, that quoting the overt tax as is done in the above propoganda is, is unethical.
And yes, you said there weren't hidden taxes. and to name them. hence the reply.
might not have been what you meant, but that's what you said.
I did not say there were no hidden taxes. I asked for examples of hidden taxes, so as to better understand the terms of debate. That is not remotely the same thing as saying there are none.
Your response made clear that you were defining "taxes" more broadly than did the authors of this survey. That is quite legitimate and reasonable. But if you are going to compare New Zealand with other countries and use a broad definition in assessing the NZ tax burden, then you must also take a broad definition in assessing other countries' tax burden. Otherwise it is not a fair comparison.
You say that you do consider all costs in other countries' tax systems. I am impressed - as you say, that is a huge job. Are you going to share the results of that consideration, and tell us how the full, broadly-defined tax burden in NZ compares to the full, broadly-defined tax burden in other countries?
Perhaps MdM you have to keep in mind the following part of the article
"International Tax Competitiveness Index" that measures the degree to which the 34 OECD countries’ tax systems promote competitiveness through low tax burdens on business investment and neutrality through a well-structured tax code"
This article is discussing tax burdons on business investment and neutrality.....taxes and hidden taxes add to inflation which increases the cost of all asset classes. Hidden taxes (costs) are very important for investors as they know these hidden costs drive the price upwards......and allow a premium to be made on the investment hence articles like this actually serve a different purpose than the one outlined.......low taxation when exiting the investment.......might be good for the investor but is it good for NZ to have asset prices driven higher by the hidden costs? And what happens when this sort of carry on occurs over long time frames.....land values escalate, house prices escalate, more locals get placed into lower income brackets etc.
If you were say Nike, would you invest in manufacturing plant in NZ or China? Obviously the answer would be China. However if you were a company or person who had cash only to invest would your answer be different and what would you buy if you were looking for a relatively safe investment?
HIdden taxes are everywhere and Cowboy has given you a few and here a few more.
Registering/licensing/certification/levies etc: a birth, a marriage, a divorce, a death, a passport, a gun, a dog, a food handler, a supply and serving alchohol, a LBP, scaffold, a drivers license, a duck shooting license, a fishing license, OCR is a tax, vehicles, RUC, WOF, approved handlers license for chemicals, NAIT costs, TB levies and other AHB costs. building consents.....the lists of costs are endless and not only is there the cost of the registering/licensing/levies that are attached to everything, there are the costs of maintaining the paper trail, ticking the correct boxes etc to keep those that administer the various systems happy.
Then there are parking fines, camera speeding fines, not wearing a seatbelt fine.....and any other instant type of fine that is really just another form of tax. IRD late filing penalities that have nothing to do with the tax component but only the paperwork side and this is even when their own website is down.
Then there are the other contractural costs that are compulsory like Worksafe policies and manuals, employment contracts, RMA Consents and and ongoing costs of conditions etc........There is a constantly changing business environment so the costs of maintaining the legal obligatory contracts are always increasing.
Everytime a Government or Government agency reforms any area there is a cost increase to the people. The basics to human life of food, housing, transport and safety are highly regulated which provides many areas for any Government and bureaucracy to add hidden costs which are really just a way of hiding rising taxes.
And in the United States, there are various Local and State regulations and taxations. Compliance cost in NZ can be a breeze by comparison. In terms of the cost of doing business, there are also various insurances needed for what you describe as the 'hidden' costs of ACC in order to have the insurance against random people suing you when that slip over at the entrance to your business. I'm with MdeM on this one- If you want to make an argument around the total cost of doing business yu are welcome to, but need to quantify the comparisons with other countries, just as the article quantified the comparison for the area it looked at (which does not claim to be measuring the total cost of doing business).
ACC was designed as a no fault scheme.......so if someone slipped over at entrane they would have cover. If you're in business and someone slips up and you haven't inducted them to your work place, placed a notice that there is/could be the potential to slip up then you could well be served with a notice from the powers who investigate. If you slip up in your own home these same rules do not apply........hardly equality is it?
If you are renovating your own home you don't have to comply with many of the same rules and regs that say a builder would have to comply with.
If you grow your own food for your own consumption you don't have to comply with the same rules as a business that grows for commercial purposes.
If you cook friends or family dinner you don't have to comply with the same rules as does the commercial operator.
If you want to supply and serve friends a drink in your house you don't have to have a liquor license.
You don't have to have a workplace policy for your home yet many accidents happen in the home.
I hope you're getting my drift.......as soon as it is a commercial operation you will need to pay the costs hence it is a tax by a different name.
I don't pay taxes or shop in other countries (except by Internet) so comparing to other countries is irrelevant.
It's like saying I can beat my partner 3 times a day and call it progress because my neighbour beats their partner 4 times. bad/poor practice is alway bad/poor practice. Trying to justify anything in the terms that you're doing bad but not as bad as someone else, is an admission of fault, not a justification of it.
I repeat - I do not dispute that these costs exist in New Zealand. But they are also present in other countries,as are other costs which New Zealand businesses don't face.
So it's not fair to add all these other costs into New Zealand's marking, and then compare that against the costs imposed only by (a fairly narrow definition of) formal taxation in other countries.
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