Labour is proposing a temporary quick fix to the problems surrounding the underpayment of provisional tax, Deloitte Dunedin tax partner Steve Thompson says.
"The solution offered by Labour is merely a temporary quick fix and doesn't address the major inequities that exist with the use of money interest [UOMI] regime.
"While businesses will happily take what is on offer, it would be more useful if a permanent and targeted solution was on offer," he said.
Buried in Labour's economic policy, released on Tuesday by Finance Minister Michael Cullen, was a sentence which said Labour would, between January 15, 2009, and May 2010, reduce the use of money interest paid for the underpayment of provisional tax to the same level as that paid for the overpayment of the tax.
"But the Commissioner of Inland Revenue will have the discretion to increase the use of money interest rate back to the normal level if he is satisfied that there has been a deliberate attempt to underpay tax," Dr Cullen said.
Mr Thompson said the use of money interest was payable at the "extremely punitive rate" of 14.24% on underpayments, but in the event of an overpayment, interest would be 6.66%.
The proposal was to drop the underpayment rate to 6.66%, a substantial reduction of 53% but not targeted.
"It may incentivise people to underpay tax - essentially using Inland Revenue as a bank due to its very favourable lending rates, hence the commissioner's discretion when it will not apply ."
That would be hard for the commissioner to deal with, he said.
Regardless of the "generosity" of the rate, the UOMI had been a major sore point for business.
It was not only difficult to accurately forecast provisional tax in the current economic climate, but accounting rules could introduce major volatility throughout the year.
"If a taxpayer has been in a tax dispute with Inland Revenue, upon final resolution UOMI should be charged at a reduced rate, such as the official cash rate.
"This will encourage IRD to settle disputes in a more timely fashion and, more importantly, ensure businesses aren't left financially devastated from a multi-year UOMI calculation at the high rates," Mr Thompson said.
