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Reserve Bank, Business Council clash on tax rates

October 19, 2017

Reserve Bank, Business Council clash on tax rates

Glenda Korporaal, The Australian, 18 October 2017

Reserve Bank assistant governor Luci Ellis has challenged the Business Council of Australia’s argument about the importance of cutting the corporate tax rate in attracting foreign investment.

Ms Ellis said the corporate tax rate in Australia was “irrelevant” for domestic investors because of our system of dividend imputation.

She said if Australia could not attract foreign capital with its current tax and regulatory environment, the exchange rate would fall, and make Australia more competitive.

Business Council of Australia chief executive Jennifer Westacott told the Citi Australia and New Zealand Investment Conference today that funds would flow from Australia to the US if President Donald Trump succeeded in his plan to cut the US corporate tax rate.

She said it was important for Australia to continue to cut its corporate tax rate to make it competitive with the rest of the world and continue to attract foreign investment.

“Business investment in Australia is now at the lowest it has been as a share of the economy since 1994, off the back of the last recession,” she said.

Ms Ellis said the tax rate was one of many variables considered by foreign companies in investing in Australia.

She said Australia had seen a strong wave of investment in mining because of the mining boom of the last decade.

She said foreign companies invested in Australia because we had LNG, iron ore, coal and now lithium.

“We have had a strong phase of about 10 years of incredibly strong mining investment,” she said.

“Guess what? Multinational resource companies are not going to make that investment in a country which doesn’t have those resources just because they have a lower tax rate.

“They will invest where the LNG and the iron ore and the coal and the lithium actually are.

“The real reason we attract foreign capital rather than rely on foreign capital is precisely because we have these resources. They are available and they aren’t going anywhere.”

She said non-mining investment in Australia was already starting to pick up, as was demonstrated in the June national accounts figure.

Ms Ellis said Australia’s dividend imputation system meant that the corporate tax rate was only an issue for foreign investors.

“One of the differences between Australia and many other economies is that we have dividend imputation.

“From the perspective of the domestic investor, the corporate tax rate was irrelevant.

“It doesn’t matter because you get it back through dividend imputation.

“It only matters if you are a foreign investor making the choice to invest in Australia versus another economy.”

Ms Ellis said when foreign companies made decisions on where to invest they considered many variables including the tax rate, the business environment, the rule of law, the educational base of the country “and where the resources are”.

“The reason we have a low share of business investment relative to the recent past is because we had a mining investment boom and that mining investment boom is almost over.

“I am not sure I buy the idea that we have a great drought of non-mining business investment happening.”

But Ms Westacott said that the corporate tax rate was an important factor for global companies considering where to make their next investment.

“We are kidding ourselves to think that we are the only place in the world with LNG, with iron ore, with coal, and we are the only stable place to do business.

“It is simply not true. If you are in a globally competitive environment, and you are a global board making a major investment, the tax rate matters.”

She said Australia’s corporate tax rate of 30 per cent had been set years ago to keep the country in like with the OECD average.

But she said OECD countries were now cutting their tax rates and the world was watching President Trump’s plans to cut the tax rate in the US, which was already generating a lot of business optimism in the US.