Report to the Treasurer and Minister of revenue - by a committee of experts on tax complianceBill Birch Treasurer
Report to the Treasurer and Minister of revenue
By a committee of experts on tax compliance
THE COMMITTEE'S GUIDELINES
Guidelines to interpreting the terms of reference of the committee of ex-perts:
The committee should take into account the following guidelines in its deliberations:
The committee's work should be consistent with the general direction of the government's tax policy as set out in the government's revenue strategy and in the Coalition Agreement.
The overall aim of the committee is to consider future policy issues for promoting better compliance by taxpayers with their tax obliga-tions.
The committee's terms of reference are broad. However, the com-mittee should consider itself bound as follows in implementing the terms of reference:
- it is not to consider the government's general tax policy (that is, tax base and rates), except in so far as it impacts on compliance; and
- it is not to consider the recommendations of the Commission of Inquiry into Certain Matters Relating to Taxation.
The committee's focus should be on legislation. Given the limited time the committee has to consider the terms of reference, it should not focus on major organisational issues, or on the details of Inland Revenue's administration. However, administration may be considered insofar as the committee may recommend a change to legislation that would assist Inland Revenue in administering the tax laws.
Any recommendations which the committee makes and the Government wishes to pursue will be subject to the generic tax policy process.
SPECIFIC GUIDELINES INTERPRETING THE TERMS OF REFERENCE
The committee is to consider and make recommendations on:
1. Tax compliance costs, including how tax laws may be simplified and made more coherent and understandable while ensuring an appropriate balance between the levels of complexity, fairness, accuracy and eco-nomic efficiency.
The committee should comment on the extent to which the rewrite and simplification projects are achieving this term of reference.
Comment The Income Tax Act is being rewritten to strengthen the logical and conceptual structure of the Act and to express the law in plain lan-guage in order to minimise compliance and other costs resulting from the way the Act is structured and expressed. Reducing ambiguity in the Act is also intended to improve compliance and enforcement.
Are there changes to the Rewrite project which would enable it to better achieve the Term of Reference? In particular, is the rewritten Act:
with an appropriate level of detail; and
expressed in plain language
the complexity of the policy expressed in the Act; and
the ability of taxpayers to exploit lack of detail.
Simplification and compliance costs
The simplification and self-assessment projects aim to reduce com-pliance costs.
The tax system imposes compliance costs by:
requiring business taxpayers to understand their obligations, which results from:
- reading and understanding: the Income Tax Act,
relevant regulations, determinations, and tax treaties, and case law, - or employing professional advisers for this;
requiring taxpayers to gather information necessary to determine their tax liabilities and fulfil reporting obligations;
requiring taxpayers to calculate their income tax liabilities;
requiring taxpayers to report information to Inland Revenue (for example, file tax returns);
requiring persons to report information (to Inland Revenue and others) and make payments on behalf of others (for example, PAYE, RWT and NRWT);
requiring taxpayers to retain information; and
requiring taxpayers to assist Inland Revenue in audits and other administrative matters.
Are there changes to the simplification project that would enable it to better achieve the term of reference? For example:
Can income tax calculation methods be modified to be simpler, while preserving the policy of how taxable income is intended to be determined?
Can reporting and record retention requirements be simplified while preserving the interests of having an effective tax admini-stration?
2. How to make the tax system more robust against avoidance and eva-sion (identifying and bearing in mind the underlying causes of such ac-tivity), with particular regard to:
a. The use of tax-driven structures lacking business reality
This term of reference refers to transactions using structures (entities and arrangements) which lack business reality (which do little eco-nomic activity other than facilitate a transaction which has the effect of reducing tax liabilities, or earning income in a way which attracts no or little tax).
The income tax system has boundaries, that is, distinctions between items of income or expenditure that are taxable/exempt or deducti-ble/non-deductible, depending on how they are classified. These boundaries normally result from policy decisions, for example:
it is government policy that capital gains are generally not taxed but income generally is taxed;
expenditure incurred for private or domestic purposes is non-deductible; and
foreign-sourced income is treated differently from domestic-sourced income, because of international obligations (to provide foreign tax credits), and practical difficulties in measuring and taxing foreign-sourced income (for example, income earned through foreign entities).
While there are policy rationales for each of these boundaries, they are often exploitable in that taxpayers can reclassify income or ex-penditure into categories that give a more favourable tax result. This can be done by structuring their affairs to achieve a more favourable tax result, or exploiting boundaries in a way that amounts to tax avoidance.
How significant is this issue?
Given the government's general tax policy (that is, tax base and rates), how do current tax boundaries affect the risks of taxpayers using tax-driven structures lacking business reality?
What are examples of structures that have been used for tax avoid-ance?
b. Abuse or complicity by tax advisers
c. Standards of conduct for tax advisers
Professional advisers on tax matters are usually lawyers or account-ants belonging to their respective professional bodies. These bodies have ethical standards which must be complied with. The bodies are empowered to sanction members that violate the standards, including suspension or expulsion from the bodies.
In addition to the ethical standards of the professional bodies, the le-gal system imposes constraints on the activities of advisers. If a tax-payer engages in activity that is considered tax evasion, criminal principles of extended responsibility (such as conspiracy and acces-sory) could potentially apply to advisers who advised or assisted the taxpayer in the activity. If a taxpayer suffers monetary loss from en-gaging in tax avoidance (for example, the taxpayer is subject to tax avoidance penalties), the taxpayer may have the right to seek com-pensation from the adviser under civil law standards of professional responsibility (eg, if a taxpayer was not advised that a transaction was tax avoidance and was potentially subject to penalties). The legal structure imposes a discipline on the activities of tax advisers.
The recent changes to the compliance and penalties regime establish a crime of aiding and abetting principal tax offences.
The government considered the role of tax advisers in the review of taxpayer compliance, standards and penalties in 1995. It decided to introduce an offence in the Tax Administration Act 1994 of aiding and abetting another person to commit a criminal offence, but not to proceed with proposals to:
clarify in legislation the right of taxpayers to sue advisers or limit advisers' ability to contract out of liability if they have been negli-gent; or
introduce an offence of aiding and abetting the putting into place a (non-criminal) abusive avoidance arrangement.
Are professional advisers in general behaving according to appro-priate ethical standards?
What should the ethical standards for tax advisers be?
Do the professional bodies have appropriate ethical standards for advisers?
Are there appropriate sanctions for breach of ethical standards and are these enforced? What role should civil and criminal law have in maintaining ethical standards for professional advisers? Con-sider the new offences of aiding and abetting tax offences which resulted from the review of taxpayer compliance, standards and penalties.
Does the committee have any recommendations to make on stan-dards of conduct for tax advisers resulting from the review of tax-payer compliance, standards and penalties in 1995?
d. Concealment and other tax related offences, and the possibility of con-fiscating concealed profits
Does failure to disclose information currently unduly hinder the Commissioner from accurately determining an assessment?
How much should taxpayers be required to disclose? What objec-tive standards can define this?
Is the current law on concealment and tax-related offences appro-priate?
e. The lack of prosecutions to prevent harmful tax practices and schemes
Are the information disclosure rules for cooperation with audits adequate?
Are changes desirable to laws to enable the Inland Revenue De-partment to access information kept in offshore companies, par-ticularly in countries with secrecy laws?
Are law changes desirable to improve the extent to which harmful practices are prosecuted?
Is judicial review being abused by taxpayers and, if so, what leg-islative changes are desirable to prevent such abuse.
f. The adequacy of the current penalties regime, including criminal penal-ties
The penalties regime has been substantially changed under the com-pliance and penalties legislation. This will add new penalties to en-force the higher standards of compliance needed for a self-assessment tax system. These include:
penalties for errors arising for lack of reasonable care;
penalties for taking legal positions that constitute an unacceptable interpretation;
penalties for engaging in 'abusive tax avoidance';
penalties for evasion; and
criminal penalties for tax evasion.
There are also penalties for 'knowledge' offences (such as wilfully not paying withheld PAYE); and knowingly failing to comply with information reporting requirements.
These new penalties are intended to act as incentives for taxpayers to accurately determine their tax liabilities under a self-assessment sys-tem, and to provide the Commissioner with sufficient information
to enforce the tax law.
Are the new penalties sufficient to discourage taxpayers from en-gaging in tax avoidance and tax evasion?
g. How to achieve disclosure of tax schemes affecting the instance of tax payable by greater than $100,000
This is a specific proposal which the committee is being asked to consider.
What are the current disclosure requirements? How does disclo-sure fit into the current filing rules and the move towards self-assessment?
Is requiring such disclosure desirable?
If desirable, how would you define a 'scheme' that can be isolated so it can be determined that it has a tax impact of more than $100,000?
How much disclosure of the scheme would be required?
h. The possibility of treating the failure to disclose (or falsification of ma-terial facts) by a person experienced in tax matters as a serious criminal offence, and establishing it as punishable by a maximum penalty of 10 years imprisonment where more than $5 million in tax revenue is involved
The recent changes to the compliance and penalties regime includes criminal offences for not disclosing information required to be dis-closed, and for tax evasion. These offences currently carry penalties of up to five years imprisonment.
Is a change in the law along these lines necessary and desirable?
If yes, is a 10-year imprisonment period appropriate given that tax evasion carries a penalty of up to five years imprisonment? What other offences carry penalties of 10 years' imprisonment?
What level of disclosure would be required? Should the standard disclosure (ie, filling out the questions on the tax return) or a greater level of disclosure be required?
How would a person experienced in tax matters be defined?
i. The possibility of recovering from large-scale, tax evasion schemes (say $100,000 and over) and those who aid them, profits attributable to the use of unpaid tax (unjust enrichment)
Recent changes to the compliance and penalties regime provide that late payments of tax attributable to earlier income years carry interest from the original due date of the tax, even if the tax was not assessed until later.
Is a change in the law along these lines necessary and desirable?
j. The internationalisation of the economy, including electronic commerce and how the taxation collection base can be maintained
The growing use of electronic communications (the internet) provides a new means of transacting cross-border commerce (for example, a consumer in New Zealand ordering via a computer in New Zealand goods that are sent to the consumer from offshore). This use raises a number of tax policy issues, for example:
What is the source of the income?
Does the supplier have a taxable presence (fixed establishment) in New Zealand?
How does this effect current laws on the income tax source rules and GST rules?
What is the significance of internet commerce for tax policy, now and in the next few years?
Are there changes to GST rules or the income tax source rules that are necessary and desirable?