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Discussion paper

Company tax and foreign investment in Australia

31 Jan 2017

The government’s 10-year company tax cut plan was announced in the May 2016 budget, but was always going to be difficult to sell as an urgently needed reform. Since then, the debate has effectively shown that there is nothing in it that would increase the incentive to invest. This reflects the role of dividend imputation which acts like a withholding tax for dividend recipients. That means that any cut in company tax would thereby reduce the amount withheld on behalf of dividend recipients and so increase the amount shareholders will have to ‘top up’ at tax time.

These arguments do not apply to foreigners who will unambiguously benefit from Australian company tax cuts. We contend that recognition of the role of foreign investors has caused the Treasurer to downplay any domestic considerations but instead concentrate on the role of foreign investment. Hence foreign investment is presented as a ‘must have’ and the company tax cuts become necessary to encourage foreign investment. Others such as former Prime Minister Paul Keating see it as ridiculous that Australia contemplates giving a large sum of money to foreigners.

The rest of this paper examines whether indeed a company tax cut is likely to boost foreign investment in Australia.

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