Inland Revenue consults on narrow bank tax tweaks; Nicola Willis tight-lipped on whether a more widespread tax grab is in the works

They include Australia and New Zealand Banking Group, Bank of China, China Construction Bank, Citibank, Commonwealth Bank of Australia, Industrial and Commercial Bank of China, JPMorgan Chase Bank, Kookmin Bank,The Bank of Tokyo-Mitsubishi, Cooperatieve Rabobank U.A., The Hongkong and Shanghai Banking Corporation and Westpac Banking Corporation.

Finance Minister Nicola Willis wouldn’t tell the Herald whether Inland Revenue’s proposals were the extent of the banking-related tax changes she was mulling.

She has received briefings on banking-related tax matters but has declined to make these public under the Official Information Act.

She said the Government hadn’t made any decisions on the matter and the work programme related to banks was ongoing.

Pushed on whether she was considering slapping big banks with a levy, similar to that in Australia, Willis said she wouldn’t play the “rule-in or rule-out game”.

As for the proposed changes definitely on the table, banks had until Tuesday to respond to Inland Revenue’s proposals. Its consultation followed one it did in September.

Inland Revenue explained the issue it was trying to address was: “Current tax rules do not require a foreign bank’s free capital (eg its share equity) to be allocated to its branch. This allows a branch to be allocated more debt on a proportional basis when compared with the entity it’s a part of, which increases its tax deductions.

“An entity can also fund its branch entirely with more expensive long-term debt, which also increases its tax deductions. As a result, a portion of profits generated in New Zealand can effectively be reported in an entity’s head office country.”

Inland Revenue proposed different solutions, noting the suggestions in its previous consultation received a mixed response from banks.

The background to this is that the Government is struggling to get the country’s books out of the red. Meanwhile banks’ profits keep climbing.

While Willis has cut taxes to try to stimulate growth, Treasury keeps warning strong growth alone won’t be enough to put the Crown’s finances on a more sustainable path forward, particularly as the population ages.

Confronted with the prospect of a tax hike, banks might argue they are already the largest taxpayers in New Zealand and additional costs they incur would be passed on to customers.

Former Finance Minister Grant Robertson looked into taxing banks’ “windfall” profits after the peak of the pandemic, but decided against it.

The Government and Reserve Bank did a lot to help banks during the Covid-19 pandemic, as they initially feared there would be a credit crunch.

The Crown partially underwrote a tiny portion of banks’ business lending, which is typically deemed riskier than mortgage lending. It also lent directly to businesses.

Meanwhile, banks benefited immensely from the Reserve Bank slashing the Official Cash Rate (OCR) to 0.25% and creating money via its Large-Scale Asset Purchase programme.

Record low interest rates, coupled with the temporary removal of loan-to-value ratio (LVR) restrictions, saw demand for mortgages shoot through the roof.

Banks also benefited from the Reserve Bank creating $19 billion and lending it to them throughout 2021 and 2022 at below-market rates via its Funding for Lending Programme.

Banks’ funding costs have normalised, as they’ve repaid the cheap loans.

While demand for mortgages dropped right off once the Reserve Bank moved to cool the overheated economy in the aftermath of the pandemic, it has since picked up again.

Banks have also started paying a new levy to fund a Depositor Compensation Scheme (largely designed under the previous Administration and stood up by this Government), aimed at making the financial system more resilient to shocks.

Moves made more recently to improve competition in the banking sector have had varying effects on banks.

The Reserve Bank’s December decision to ease its bank capital rules will benefit smaller banks in particular.

Meanwhile, the Government’s push to require banks to share their data with firms that offer banking-related services has imposed a cost on banks and could potentially water down their power in the market in the future.

Jenée Tibshraeny is the Herald‘s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.