U.S. INQUIRY RESULT AWAITED ANXIOUSLY N.Z. companies are reaping huge windfalls in ‘tax credits’

Press, 3 September 1980, Page 21

U.S. INQUIRY RESULT AWAITED ANXIOUSLY N.Z. companies are reaping huge windfalls in ‘tax credits’

By

GARRY ARTHUR

New Zealand exporters are holding their breath while the United States Government inquires into a complaint about a Palmerston North' firm’s success in exporting animal ear tags. American competitors claim that this success is due to Government export incentives, and that these amount to i an export subsidy. ■ - * If the decision goes against the New Zealand exporter, trade barriers could result, with serious implications for other exporters who are being encouraged by» generous export incentives to make the United States a “target market." While New Zealand is not alone ■ in/ aiding exports, such incentives have been outlawed. by a subsidies code , in the revised General Agreement

on Tariffs and Trade (G.A.T.T.) signed in Geneva last' year. New Zealand did not sign the code, and the United States Wants it to do so.

However, it is not only our trading partners and competitors which object to the Government’s export incentive scheme. Some New Zealand economists and politicians also want to see export incentives scrapped — but for different reasons. The Governmentwill not divulge how much; of the taxpayers’ money it gives to exporters by way of incentives ’ each year. “The figure is just not available,” says Mr Graham Fox, the Department of Trade and Industry’s director of export incentives. “Treasury have the figures but they are confidential. The Government have some idea.”, So how can we measure the success of the scheme? By the increase in manufactured exports, Mr Fox says. His department’s annual report shows that manufactured exports and forest products exports (which both attract export incentives) grew by 5229.9 million from 1978 to 1979 — a- 26 per cent increase. But at what cost? Mr Roger Douglas, the Oppo-

sitipn’s former shadow minister of transport, (who opposes export incentives ’ and import controls), estimates that export. incentives cost the taxpayer $2OO million a year. (The latest figure available from the Statist-

ics Department is $9l million for the 1976 tax year.) If Mr Douglas is right, then New Zealanders paid exporters $2OO million out of taxes so that they could earn a net increase of just under $3O million. Alex Harvey Industries (A.H.L) is one big company which has caught on to the windfall tax credits that can be “earned” through vigorous exporting. Last year, A.H.I. had to find $2.2 million to pay its company tax. This financial year, A.H.I. received, a cheque for $1.6 million from Inland Revenue.

This was not like the wage-earner’s rebate of tax overpaid; it was a kind of bonus for doing well.

A.HJ. had boosted its exports by $l3 million, and financial com-, mentators have noted that it seems to have been the availability of tax credits that made them do it. A.H.l.’s $2.6 million gain in profits was all due to taxation. Without ' tax credits, profit would have been down by 9.7 per cent. . , .;■■■

Roger Douglas estimates that another of New Zealand’s biggest conglomerates— Fletchers —

benefited by $l5 million in export incentives last year. His prediction for the new aluminium smelter for the South Island, in which Fletchers will be a partner, is that the proposed $267 million, worth, of sheet aluminium manufactured by the company will be rewarded by $24.3 million a year in export incentives. Another of New Zealand’s biggest companies — Tasman Pulp and Paper — made a net profit of $27.7 million this financial ■year, but far from paying any tax, it had a whopping $10.7 million in export incentive credits. It did almost as well in 1979 — $7.7 million from Inland Revenue. The Christchurch-based P.D.L. Industries boosted its exports by 43 per cent in the last year, with very satisfying results for the - .'shareholders. ’.‘Through tax incentives our tax on . profits has been reduced from a normal ' 45c to 22c,” says the annual re 3 port. The group; received $285,532 in export tax incentive credits, as well as other tax benefits for regional effort. Even Air New Zealand has been helped by tax credits. As services qualify for export incentives as well as goods, Air New Zealand was paid nearly $7.5 million in tax credits for the last financial year, helping to off-set its $26 million loss.Mr Fox, of. Trade and Industry, is aware of the bad impression created by “plus” tax payments to exporting companies, but he says that the companies must have some monetary gain if they are to be encouraged. “This is what it’s all about,” he says. “It looks worse than it is — people don’t look at the gain in

exports.” He points- also to the “flow-on” benefit to the whole economy of the extra overseas exchange earned. With companies . being exempted from taxes through the incentive scheme and other favours, the burden of taxation has shifted in no uncertain terms to the workers. In 1968 individuals .paid 65.84 per cent of all income tax, . while companies paid 34.16 per cent. By last year the individuals’ share had risen to 87.49 per cent and'the companies’ share had-dropped to 12.51 per cent.' Even so, some companies are still not satisfied. Sir Robertson Stewart, P.D.L.’s chairman, says in his annual report that the Government should go further and remove tax on dividends for “selected companies” to / attract more investment capital, . especially to exporting companies. Roger Douglas is one of many who object to the unfairness of. the tax incentive scheme. “The average worker is paying 50c tax in the dollar, and the companies are paying nothing,” he says. “It’s one of the reasons that

we’ve got poor productivity and poor work attitudes.”

A report commissioned by the Planning Council also condemned the system. Dr Peter Lloyd, research fellow at the Australian National University, said in his report that import licensing and

export incentives should both be scrapped over the next three to five years to enable New Zealand to trade more competitively oh international markets. Professor .Richard Manning, of Canterbury University’s economics department, says there is no denying that . the incentives have had the ef- . feet of encouraging exports, but he is not sure that the balance of payments has been improved. The scheme was “dreamed up” by Treasury to overcome difficulties created by import controls and an overvalued exchange rate, but this was / crazy — the answer was to do something about those specific problems, not to add on something else. “I guess they don’t want to lose some political credits from people who might vote for them,” he ventures. He blames import controls for putting up New Zealand manufacturers’

costs so that. they cannot compete and they cannot export. “Export incentives are alleged to off-set that, but in practice, they ensure that a componentmaker would rather export than sell in New Zealand. So the New , Zealand purchaser has got to pay more than overseas buyers

for New Zealand-made products, thus inflating his costs. “New Zealand-made batteries, for example, retail here for, $B3, but must be retailing at less than $5O in the United States to compete with other batteries. Where does the difference go? Some of it is sales tax,, but that can’t be more than $l6 and is probably about $l2. “Paper sacks are another example. The Diary Board can buy New Zealand bags cheaper in Singapore than in New Zealand, and has been forced to move overseas. This is a clear example of what export incentives are going to do to employment in New Zealand. ‘ They are shifting New : Zealand companies off- -. shore.”

He knows of one of New Zealand’s biggest electrical retailing firmswhich will take up virtually any product — electrical or not — and export it to qualify for the export incentive. “They are paying .virtually zilch company tax,” he says.

While some firms are benefiting from export incentives; some of their client firms in New Zealand are. being positively harmed, because the New Zealand price is being put up, Professor Manning says. •

Mosgiel woollen . mills produced a fine example of the Alice-in-Wonderland kind of thing which can arise. Mosgiel exported yarn to Australia with the help of export incentive, and the Australians knit-

ted it up into socks which they exported back to New Zealand with the help of their own export incentives. Thanks to export incentives on both sides of the Tasman, the socks made by Mosgiel itself for the New Zealand market could not compete with those coming in from. Australia, made from its own yarn.

Professor Manning blames the Treasury’s “inadequate training in economics” for the export incentive scheme’s failings. “The question is ‘How

many dollars worth of New Zealand resources are we paying to get sb many dollars of ■ foreign exchange?’ I think a dollar of New Zealand resources is bringing in considerably less than a $1 in. exchange.” .

He says export incentives are raising New Zealand production costsand therefore, making it more difficult to export other New Zealand commodities. ‘

Export incentives should be scrapped, together with import controls. “The incentives . infringe agreements on international trade/’ he says, “and can result in other countries imposing --.levies. This threatens a heck of a lot of New Zealand trade.” It is the unfairness of

the incentive system that disturbs another Canterbury University economist, Mr Wolf Rosenberg, recently retired. A longtime opponent of the Governme n t ’ s export-led growth policies, Mr Roserberg is not opposed to export incentives, but he is critical of the way they work. . • . . ..

• “The incentive scheme has created a situation where New Zealand’s biggest companies pay no tax at all. They are making no contribution to the social fabric of New Zealand — health, education, reading, railways, all these things .that they also rely on. It’s a shocking state of affairs.”,. /-./. . . Unlike ■ Professor Manning, he does not believe that the abolition of both

export incentives- and-, import controls, together with devaluation, would improve the balance of payments. ~“ft won't' work," he says, “because exchange rates are not determined by international trade. They are determined by international finance. We have no power over our exchange rate. To deal with exports and imports you have to build an exchange rate that is not dependent on international movement.

“The exchange rate does have an effect on the amount' of imports and ’ exports, so we have to balance our accounts by all sorts of controls, I say we should have selective controls on imports so that they cost less than we earn from exports, but this must be .assisted by the price mechanism.

“Since the official exchange rate can’t do that, we have to have an artificial exchange rate. Export incentives do that — it’s a form of devaluation, and to some extent it is better than ordinary devaluation because it does not affect import costs.” ■ He would prefer to see some sort of pool account built up by a levy on manufacturers, and used to support export prices — just as has been done with meat and dairy products.

Incentive figures are confidential

‘Shifting N.Z. companies off-shore’