Monday, August 13, 2012

You want to cut the company tax rate? It'll cost you bigtime

That's what the Treasurer's Business Tax Working Group concluded...

...which, as it happens is NOT what was previewed in The Australian on Thursday.

Never mind.

Here's my preview from this morning:


As the business tax working group sees it

. Cutting the corporate tax rate is expensive, up to $2 billion per percentage point

. Axing accelerated depreciation concessions would save just over $1 billion

. Axing R&D tax concessions would also save just over $1 billion

. But there are good reasons to keep some R&D tax concession

. Also in the spotlight are thin capitalisation rules, primary producer tax concessions and film tax incentives

. Giving firms an allowance for corporate equity as proposed by the Treasurer would be too difficult without lifting the 30 per cent tax rate

Set up amid optimism about finding ways to cut Australia’s 30 per cent corporate tax rate almost a year ago the Treasurer’s business tax working group will report this week the task is harder than it seems.

Contrary to some newspaper reports, the discussion paper to be released early in the week will contain no recommendations.

Nor will it identify a target rate of company tax the government should aim for.

At the heart of the paper prepared by panel of business, union and academics chaired by former KPMG partner Chris Jordan is a brutal equation - for every 1 percentage point the government cuts the corporate tax rate, it loses the best part of $2 billion. Although some of those losses would be recouped over time by greater foreign investment, for a corporate tax cut to be “revenue neutral” as demanded by the Treasurer in his terms of reference it would have to be funded by big cuts in corporate tax breaks.

The two biggest tax breaks identified by the working group are those relating to accelerated depreciation and research and development. If eliminated each would buy just over $1 billion of room to cut the corporate tax rate, not enough by itself to cut it one complete percentage point.

Cutting R&D tax concessions is particularly difficult because there are good public policy reasons to encourage research and development. The discussion paper explores the possibility of eliminating the concessions and funding R&D directly from the public purse or cutting the the size of the concession.

The group is unsympathetic to accelerated depreciation rules, finding the instant write-offs for explorers particularly hard to justify given the working life of mines...

Other concessions attracting the group’s attention apply to primary producers, multinationals taking advantage of thin capitalisation rules, and film finance.

The group is using as reference points the 1999 Ralph Review of business taxation commissioned by then Treasurer Peter Costello and the Treasury’s Tax Expenditure Statements released at the end of each year.

The expenditure statement acts as a sort of ‘shopping list’ of concessions that could be used to pay for a lower corporate tax rate, listing 113 business tax breaks estimated to cost a total $7.3 billion in 2011-12. Many of these tax breaks are both small and popular, meaning tackling them would involve a disproportionate amount of political pain given the savings on offer.

Treasurer Wayne Swan’s terms of reference require “off-setting budget savings,” denying the group the opportunity to argue that over time a cut in the 30 per cent company tax rate would be partly self-funding as investment was drawn to Australia.

The terms of reference have also effectively ruled out the introduction of a so-called Allowance for Corporate Equity that offered a tax deduction for a normal return on equity, cutting the tax rate faced by most firms to zero. It could only be funded by a much higher headline rate of tax on high profit firms in sectors such as mining and finance sectors. An appendix to this week’s discussion paper expresses little enthusiasm for the idea pointing to practical problems and saying it would have to be part of a much broader reform of the tax system.

The working group is due to deliver its final report in December.

In today's Sydney Morning Herald and Age

Find the report itself at: Business Tax Working Group website

Discussion Paper August 2012

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