Submission to Inland Revenue Department
on the Business Tax Review 2006
7 September 2006
Introduction
Finsec is the union representing workers in the New Zealand finance sector. Finsec represents 6,500 workers in banks, insurance and finance companies. Members have a broad interest in New Zealand's financial and economic and social wellbeing.
This submission is drawn from our experience working with most of New Zealand's largest banks. We do not believe that lessening the tax take, either through tax credits, changing the tax rate or reducing compliance costs will benefit New Zealand. Finsec opposes reducing New Zealand's overall business tax take, and thus limiting public money that could otherwise be invested in the country's wellbeing such as through spending on health, education and social welfare.
Large banks do not need to pay less tax
Finsec notes that the goal of the Business Tax Review is to 'provide better incentives for productivity gains and improve competitiveness with Australia'. The companies that we interact with most often are Australian and we are concerned that any tax incentives that are provided to these companies would, in the long term, be at the expense of social investment in the wellbeing of the New Zealand workers in those companies, along with their families and fellow citizens.
There is no evidence that these companies, the Australian owned banks, need to improve their productivity or their competitiveness. They are already highly profitable and competitive.
In the consolidated accounts of New Zealand's four large banks of strategic importance, profits for the six months to 31 March 2006 were:
- $520 million (ANZ National)
- $333 million (Westpac)
- $322 million (ASB)
- $270 million (BNZ)
This equals a combined total of $1.445 billion, which is $103 million more than the profit the same banks made in the same market in the same six month period a year earlier; an increase of 7.7%.
This huge profitability, and this increase in profitability is not a 'one off'.
Over the last decade these banks have increased their net profit after tax from $1.031 billion (1995 net profits after tax for ANZ, National, Countrywide, ASB, BNZ, Trustbank and Westpac) to $2.259 billion (2005 net profits after tax for ANZ National, ASB, BNZ and Westpac). This is an increase of 119% during the same period that inflation increased by only 22% and GNP increased by 69%.
The current tax environment is clearly not inhibiting the ability of these companies to do their business. There is no evidence that they are not productive or competitive enough.
Tax cuts would benefit the wrong group
Banks have not been simply lucky. Their operating expenses as a percentage of operating income has fallen dramatically over the same period:
Operating expenses:operating income |
|
1995 |
2005 |
71% ANZ |
48% ANZ National |
66% National |
|
67% Countrywide |
|
66% ASB |
45% ASB |
62% BNZ |
49% BNZ |
58% Westpac |
40% Westpac |
67% Trustbank |
|
And similarly their operating income per average employee has increased significantly over the same period
Operating income/average employee ($) |
|
1995 |
2005 |
152,000 ANZ |
300,000 ANZ National |
168,000 National |
|
162,000 Countrywide |
|
146,000 ASB |
293,000 ASB |
163,000 BNZ |
308,000 BNZ |
194,000 Westpac |
333,000 Westpac |
128,000 Trustbank |
|
We do not believe that this economic model of increasing profit through reducing costs and investment should be 'rewarded' through a reduction in taxes. We believe that, based on banks' past and current approaches, the only people to benefit from giving these companies a tax cut would be shareholders and company directors who predominantly domicile outside of New Zealand rather than New Zealand tax payers.
Consideration also needs to be give to the impact of tax reductions on the balance of payments. Whilst we do not have specific details it is fair to assume that large foreign owned companies returning significant profits to either their parent company or off shore shareholders plays a part in the New Zealand's current account deficit. Given the size of the banks' profits any further reduction in their tax may add to this problem. Please note our recommendation at the end of this submission in relation to this issue.
Good Tax Design
Finsec believes that reducing the tax burden on these overseas owned companies would not meet the principles of good tax design:
It will not result in a fairer distribution of the tax burden - instead it will remove the burden from many of the companies most able to meet it.
It will not improve efficiency, as these companies are already highly efficient - often at the expense of their own workers.
It will undermine the government's ability to fund important social and economic programmes from its reduced tax take.
The Business Tax Review discussion document notes that finance companies are among those most likely to benefit from a reduction in the company tax rate. This seems ironic when the vast majority of the New Zealand's finance sector is foreign owned, and in particular Australian, owned. The discussion document identifies Australia as the country with which we are aiming to become more competitive, but some of the companies that will benefit most from a reduction in tax rates will be Australian rather than New Zealand ones.
The discussion document goes on to say that 'the impact of company rate reductions on productivity will depend on how companies in these sectors [e.g. finance] respond: for example, whether they choose to innovate and invest more in New Zealand.' So, it is acknowledged that at least some of the gains from a reduction in business tax rates will only benefit productivity if businesses choose to reinvest in appropriate ways rather than take this windfall as additional profit.
This seems unlikely given the large banks' recent approach to tax in New Zealand. Associate Professor of Accounting at Sydney University, Sue Newberry, reported last year that BNZ's tax expense as a percentage of its profit over the years 1999-2005 was only 24% compared with the company tax rate of 33%. Westpac's tax expense as a percentage of its profit over the years 1999-2005 may have been as low as 15%. The IRD has been chasing the BNZ and Westpac as well as ANZ National for 'lost' tax following an industry wide review of structured finance transactions that the banks all engaged in. Newberry notes that while BNZ and Westpac are no longer involved in those particular structured finance transactions, Westpac in particular is developing other structured financial arrangements that need monitoring.
The money that these banks did not pay in taxes between 1999 and 2005 is money that could have been legitimately spent on New Zealand citizens. Finsec believes that these companies have not demonstrated a sustained commitment to the wellbeing of New Zealand's economy that might warrant a change in their current tax rate.
Conclusion
- We believe that the Business Tax Review should not recommend the reduction of the government's tax take through tax credits, changing the tax rate or reducing compliance costs.
- Finsec also believes that if a choice is to be made between the maintenance and improvement of the economic and social wellbeing of New Zealanders, as delivered through high quality tax-funded social services such as health and education; or allowing foreign owned companies tax reductions that simply increases the returns for overseas shareholders then the choice must favour New Zealanders' wellbeing .
Recommendations
- That an analysis of the impact of Australian owned banks returning profits or other money to either their parent company or foreign shareholders be undertaken, with a particular view to the impact of these banks on the balance of payments.
- That a detailed modelling of the impact of the options contained in the review be applied to the major foreign owned banks. This should look at how much less tax the banks will have to pay and what proportion of the total decrease in company tax this makes up.
