Tax cuts for leaving us

Last night the Taxation International Taxation, Life Insurance and Remedial Matters Bill came before the house for its first reading.

This is a 445 page tome of mind numbing discussion about various matters tax related including rights of non disclosure, joint ventures, and portfolio investment entity rules.

But, what it also contains is an exemption for ‘active’ income earned offshore by a company that has a New Zealand resident with a controlling interest but which operates off shore.

Currently this income is taxed. What it means is that companies that choose to manufacture offshore get a tax cut.

The really bizarre part of the bill is that a company manufacturing in New Zealand will still be taxed, so will be at a tax disadvantage to companies that choose to shift production offshore.

Treasury thinks this is a good idea because it will foster “economic transformation”, competitiveness, and be compatible with other countries, especially Australia.

In other words it specifically encourages firms to move their manufacturing base offshore. The underlying assumption is that we should not even bother manufacturing here in New Zealand because we can’t compete.

Contrast this with the reality. Manufacturing is worth 15% of GDP and 16% of full time workforce (240,000 jobs). It equates to 63% of exports and $70 billion in total sales.

Speaking in opposition to the bill last night Sue Bradford noted in Parliament:

What the Government is proposing will give Icebreaker a tax cut for making lovely outdoor wear  in China, but not Earth Sea Sky making lovely outdoor wear in Christchurch.  Norsewear, that former iconic brand,  will reap a financial benefit for having taken its jobs to Asia, while Swazi, staunchly staying local, will miss out.

This bill will give tax cuts to large firms that send fish to China for filleting and packing, but not to small fishermen who process locally, and who create environmental and social benefits by not carting fish back and forth across the planet.

This bill would give Fisher and Paykel a tax cut for the whitewear it makes in Mexico but not for the whitewear it makes in Auckland.

Manufacturing is a major provider not just of employment but of full time employment including many highly paid skilled jobs and major contributor to our economy.  It is bizarre that the government should be creating a tax structure that deliberately encourages companies to send their manufacturing base offshore.

7 Comments Posted

  1. Sam Buchanan Says:
    July 25th, 2008 at 9:43 am

    > (there’s a study for an FTA with India commencing as well)

    India’s a democracy, with a free press. I had almost forgotten you can have a free trade agreement with a country like that.

  2. I was kind of stunned to find that despite the shortage of doctors, the China-NZ FTA had a specific clause allowing NZ doctors to relocate to China.

    …and if China isn’t cheap enough for manufacturers, the upcoming Free Trade Agreement with Burma et al will provide an even more ‘cost effective’ place to relocate our jobs to (there’s a study for an FTA with India commencing as well).

  3. “Workers there who earn $5.00 per hour are earning above the national average wage,”

    To put it mildly – a couple of years ago this was the wage rate in the garment industry:

    “But unions say the 45 dollar-a-month wage of an average factory worker in Sri Lanka is not enough, and it should be higher. ”

    “The apparel forum violates the internationally accepted wage rate of two dollars per day or 6000 rupees per month,? Anton Marcus, Joint Secretary Free Trade Zone and General Services Employees Union, claimed.

  4. Surely now that interest rates are in the beginnings of a lowering cycle due to economic weakness, the dollar will likely fall to a more reasonable level, which will make exporters more viable, tax breaks or not.

    Although imports like petrol will skyrocket… Swings and roundabouts!

  5. But all that manufacturing pollution goes away!

    It is VERY easy to build a garment factory in Sri Lanka (for example). The land is cheap, construction costs affordable, machinery the same as it’s all imported. There are fewer restrictions on zoning, etc., as the local view is to have the work-place close to the workers. The NIMBY population is small, and overwhelmed by the ‘gizagoodjob’ population.

    Workers there who earn $5.00 per hour are earning above the national average wage, and very happy to have achieved a quality and standard of life that their parents couldn’t aspire to.

    Why would a sensible businessman go through the agony of “NZ MADE” against the benefits of Sri Lanka? This tax-break is T I N Y compared to the true off-shore value received and benefits donated.

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