Tax incentives: ideas on what comes next

Press, 25 June 1983, Page 21

Tax incentives: ideas on what comes next

A Department of Trade and Industry discussion paper on changes to the most important export incentive scheme—the export performance taxation incentive — is now being circulated to export producers. The 1982 Budget said that New Zealand export incentives had to conform with the GATT code on subsidies and countervailing duties, and that major changes needed to be made. The 1983 Budget is expected to give a lead to exporters on replacements for the export performance tax incentive and the export market development taxation incentive, both due to expire in March, 1985. Submissions on changes were called for after the 1982 Budget. About 50 organisations responded. The discussion paper summarises and groups ideas for replacements and modifications, and gives pros and cons. Further response is invited. The paper lists the major justifications for export incentives, in descending importance, as an offset to high costs caused by import licence and tariff protection; an offset to excessive internal costs; and need for help in marketing and research. The paper considers suggestions within these three categories under the following headings:— • Reform of protection: The paper said that a tax on imports (or any form of

From BRIAR WHITEHEAD in Wellington

import restriction) became, through costs and prices, a tax on exports. If export assistance were to be significantly reduced, without reducing profits, reductions in protection would also be necessary. • Exchange rate adjustment:Principal proposals were for a substantial devaluation, a two-tier rate or a foreign exchange surcharge. Devaluation would not remove the bias against exporting, but would only make exporting and import substitution more profitable. Differential exchange rates for various products were rigidly controlled under GATT, and a foreign-exchange surcharge would increase the bias against exporting by acting as a tariff. • Retention of modified export performance tax incentive scheme. Many exporters saw the present scheme as the best available compensation for protection. But without protection reform large disparities in assistance would remain, the paper said. A better approach would be — to reduce directly high costs caused by protection. A twotier incentive scheme under which exports to Australia would not qualify, would not adequately compensate exporters for high costs caused by protection. ® Reduced taxes on business, income: Simple tax relief would fail to favour exports in particular. Full or part remission of taxes

on export income was not permitted by GATT, and was one of the reasons why the export performance tax incentive was unacceptable. Variations such as an investment allowance with a banding similar to the incentive, or credit at a sliding scale of interest, again related to the banding, would be seen as a ruse to evade GATT obligations. Such schemes would not be neutral because they would depend on capital intensity (investment allowances) or capital and debt structure and types of goods exported (subsidised credit). Wide disparities in assistance between exporters would result. Variations on a scheme put up by the Manufacturers’ Federation had been widely promoted through the manufacturing sector, the paper said, but they suffered from a number of significant weaknesses. The variations centred on a tax credit determined by the proportion of domestic value added to all goods, which, if exported now, would qualify for the export performance tax incentive. The credit would be paid whether the goods were exported or consumed domestically, and would be based on a weighted sum of a firm’s outputs. The proposal was claimed to conform with GATT and with CER, would give the same rate of incentive to both the earning and saving

of foreign exchange, and would encourage growth. The two variants on the proposal drew these comments. @ Average levels of protection would be raised, and the Government was committed to lowering levels. ® A tax credit based on domestic value added would bias assistance towards high local content whether or not it was an efficient use of resources. © Because nominal assistance to exports would remain comparable to the export tax incentive while assistance to import substitutes was raised, exports would be disadvantaged. © To the extent that the tax credit gave any net preference to exports it would not conform with CER or GATT. © The Government would subsidise domestic consumption of export goods. ® The net cost to the Government would be well above the costs of the present export performance tax incentive. © Investment allowances and accelerated depreciations. Investment allowances would encourage investment in capital goods partly at the expense of labour, would distort decisions about which capital goods to buy, and would encourage investment in capital-intensive industries. Adjustments to the tax system and lowering of inflation were preferable to both.