Service graphic_corporate tax_1_RGBEastern Europe and emerging economies offer most generous tax regimes for highest earners.

New Zealand has one of the lowest tax burdens for high earners of any major economy, according to a new study by UHY, the international accountancy network.

New Zealand has the 8th lightest tax burden out of 25 countries, ranked by UHY according to how much tax and social security it takes from its highest earners’ wages (on a salary of US$1.5m – see table below).

UHY notes that New Zealand is making itself more attractive to high earners than neighbouring Australia, which levies 46% in tax on a salary of US$1.5m, compared to New Zealand’s 32.6%. However, UHY also notes that New Zealand does not have a compulsory retirement savings scheme and individuals do not make social security contributions other than as part of normal Income Tax and ACC levies. Instead, individuals have the choice not to participate in KiwiSaver or choose to contribute 3%, 4% or 8% of their gross earnings. The data used in this survey assumes that the individual has chosen not to participate in KiwiSaver, even though there are significant incentives for participation. Furthermore, retirees’ are also entitled to a state-funded pension and any savings amassed through KiwiSaver are intended to supplement the pension.

UHY studied tax data in 25 countries across its international network. The study captured the ‘take home pay’ for low, middle and high income workers taking into account personal taxes and social security contributions. High earners were defined as workers earning US$1,500,000 per annum. The calculations are based on a single, unmarried taxpayer with no children.

However, UHY found that New Zealand offers slightly less competitive taxation for low earners, imposing the 13th highest tax burden on lower earners, with a tax take of 15.7% compared to a global average of 17.8%.  Lower earners were defined as workers earning US$25,000.

_1DC1180Jim Martin (pictured right), Head of Tax at Haines Norton (Auckland) Ltd, member of UHY comments: “New Zealand’s low tax burden for high earners is a real selling point in terms of attracting and retaining high earners and internationally mobile entrepreneurs. It is not just individuals who look at personal taxes when deciding where to locate. Corporates also look for jurisdictions with competitive income taxes. Corporates know it will be much harder to attract senior executives to work for them if they are based in high tax jurisdictions. However, before New Zealand can really take advantage of this we would need to reduce the risk to large businesses of internet failure.  This risk is (in part) addressed in other parts of the world by having more than one international data cable.  New Zealand currently only has the Southern Cross Cable.  If another cable were added, this may also serve to help reduce the cost of data transmission, which is currently high compared to the rest of the world.”

“As the global economy recovers and the war for talent heats up the tax rate payable by high earners may become more of an issue. New Zealand’s low personal tax rate for high earners could become an increasingly important competitive advantage.”

“Governments always face very difficult choices over tax. Many countries are trying to keep their deficits under control whilst being expected to improve public services. Achieving a healthy fiscal position is difficult without raising taxes, but higher taxes will reduce competitiveness and are likely to act as a drag on economic growth.”

For high earners the difference in the amount of tax collected between the highest taxing country – Belgium – and the lowest taxing (excluding Dubai) – Russia – is US$610,359, which means that a person earning US$1,500,000 per annum in Belgium would pay over four times as much tax and social security as the equivalent person in Russia.

Western countries move to reduce taxes for top earners

UHY notes that while top earning Western European taxpayers are still losing by comparison with peers globally, several countries (Italy and the UK) have dramatically reduced or withdrawn top rate tax bands imposed following the financial crisis.

For example, in 2014, a taxpayer earning US$1.5m in the UK was US$63,601 better off than two years ago, following the abolition of the 50p tax rate last year.

The USA also substantially reduced the amount of tax it took from top earners, lowering the tax take from an income of US$1.5 million to 42.57% of earnings from 43.28% – saving high earners US$10,656.

In contrast, a taxpayer earning US$1.5m in France would be US$44,646 worse off after tax than in 2012, after President Hollande introduced a new tax bracket of 45% for people earning more than €150,000. However, President Hollande’s plans to impose a 75% supertax on incomes of over EUR1 million were met with resistance and were instead replaced with a temporary additional tax to be paid by employers on salaries above EUR 1 million.

Ladislav Hornan, Chairman of UHY, comments: “The message that high taxes on top earners are uncompetitive has made some impact in Western Europe, and governments have taken steps to reduce the rates on top earners.”

“However, the gap between how heavily you are taxed in Western Europe compared to other developed economies remains striking, especially at the US$250,000 level.  That’s a typical income for a successful engineer, marketeer or head of IT.”

“As the global economy improves and new job opportunities open up, Western European governments need to be aware of the risk of a brain drain of skilled professionals.”

*Western European economies in the study are; France, UK, Italy, Austria, Spain, Ireland, the Netherlands, Denmark and Belgium.

Tax Table 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Minus figures indicate a decrease in tax home pay.
**Denotes countries where the change in tax home pay in USD is a result of exchange rate fluctuations and not due to a change in tax.

Tax Table 2
If you would like to discuss the information in this article please contact UHY Haines Norton’s Head of Tax, Jim Martin, at jmartin@uhyhn.co.nz or phone (09) 839-0241.