Address to IFA Annual Conference, QueenstownRevenue
Thank you for inviting me to open your conference once again.
Following last year’s General Election I am pleased to have retained the Revenue portfolio. Actually rightly or wrongly, I asked to be able to retain it - and I look forward to working with you once again as Minister of Revenue.
The relationship that exists between IRD and the tax advisory profession is mature and one we need to continue to cultivate.
Today I want to talk about the tax policy work programme which I have agreed upon with the Minister of Finance, and ensuring the soundness of our tax system is very much the basis of that work programme.
Tax is a necessary part of a well-functioning economy.
In New Zealand, where we have a high rate of voluntary compliance, I would suggest that whilst many people are not thrilled to be paying tax, they see that it is necessary to fund public services.
But even the most efficient tax system imposes costs to society over and above the tax revenue raised. Economists refer to these as “deadweight costs”.
A good tax system seeks to minimise those costs and this is where it becomes interesting.
First, and most obviously, there are the costs to taxpayers in complying with the tax system.
While there is evidence to suggest that compliance costs in New Zealand are relatively low, compliance costs for SMEs alone have been estimated at around $2.5 billion in 2009 which was more than 1% of GDP.
Compliance costs in the United States have been estimated at about 10% of total tax collections.
If the same were true in New Zealand, this would convert to 3-4% of GDP.
There are also costs to the Government in administering the tax system. The Government is obliged to be accountable and to use taxpayer funds prudently.
The public service must be efficient and it must be careful in its use of taxpayer dollars.
Probably at least as important as administration and compliance put together are distortionary costs arising because of ways that taxes can bias individuals and firms to do things that would not be sensible in the absence of taxes.
For example, they can bias firms to invest or individuals to save in less productive ways. They can discourage individuals from working harder, undertaking training or accepting risk.
It’s important to keep all of these costs to a minimum while ensuring that taxes are fair and seen to be fair.
Fairness is not a matter of cutting those who are successful down to size. We want the best and most innovative ideas and businesses to thrive in New Zealand and provide productive jobs for its citizens.
But at the same time we want everyone to do their fair share to fund the public services that New Zealanders expect and to look after the genuinely disadvantaged.
The Government does not have a blank cheque to fund tax reform.
Tax changes which are intended to increase economic efficiency reduce compliance costs or increase fairness but have a revenue cost must be seen in the same light as expenditure proposals.
And any tax changes that reduce revenue have to be prioritised along with increases in other areas such as health and roads.
Taking this all into consideration, therefore, tax policy presents challenges and designing and formulating a tax policy work programme is a careful art.
The cornerstone of New Zealand’s tax policy settings is the extraordinary degree of cooperation in creating them.
That our tax system is a good one is testament to professionals such as yourselves who devote much time and energy to questions of tax policy.
Your work is appreciated and recognised.
A 2014 study by the Tax Foundation in Washington DC found NZ to have the second most competitive tax system in the OECD. This is an extremely positive finding, which demonstrates that our tax system remains taxpayer and business friendly.
And the Deloitte 2014 Tax Complexity Survey found that most respondents rated NZ’s policies as straightforward, consistent and predictable compared with other countries in the region.
These are important measures for a tax system.
New Zealand enjoys a very high level of public engagement with our tax policy consultation and this results in tax legislation which is generally workable and fit for purpose.
Coherent settings assist in consultation between Inland Revenue and taxpayers and also help the courts to decide on what is and is not tax avoidance.
The fundamentals of the system therefore are good and I don’t see any need for large scale changes.
The main focus, as always, is on ensuring we have a tax system which runs efficiently in order to pay for the things that our citizens demand and should reasonably expect the Government to deliver.
There are ultimately trade-offs that a Government must make in deciding on what can and what should be done.
The big picture is about more than tax, and the objective is for the best policy outcome.
That could be the modernisation of Inland Revenue’s administration of the tax system or rolling out ultra-fast broadband.
In a post-recession world where the threat of offshore economic turmoil remains ever-present, there is an increased need for prudence and for paying our own way.
Tax policy can have substantial and wide-ranging effects on the economy, and when done well, has an important role to play especially by encouraging productivity and growth and making sure that taxes don’t get in the way of investment flowing to where it’s most valuable.
So it’s important that the tax programme meshes with the major economic challenges that New Zealand faces.
New Zealand has performed well throughout the Global Financial Crisis and has had strong growth compared with other OECD countries. Naturally the Government would like to see this relatively strong growth continue.
The Government also sees a strong value in returning to surplus and over time reducing net debt.
We continue to live in a fiscally constrained environment so tax reform will need to be carefully weighed up on its merits.
Meanwhile, the modern economy, especially the digital economy, creates opportunities and challenges and we need to rise to embrace these and drive improvements in the tax system.
Our tax system will need to be able to take all this in its stride and help future governments in meeting the fiscal demands of these challenges.
All of that is by way of introduction to my topic for today: the tax policy work programme.
The tax policy work programme
The Government's tax policy work programme is usually developed at the beginning of the electoral cycle and then reviewed and updated half-way through.
New and updated work programmes are made public, for purposes of transparency and to ensure there are as few "surprises" as possible.
That is all part of our generic tax policy process.
The work programme that I am announcing today continues the focus on three important themes.
- to further improve and enhance tax and social policy within our broad-base, low rate (BBLR) framework,
- BEPS and international tax reform, and
- Inland Revenue’s transformation programme.
Let’s start with BBLR.
New Zealand is well served by its broad-base, low rate approach to tax policy. This minimises the costs of raising taxes and makes things as fair as possible.
It also provides a robust revenue base which has helped New Zealand weather the storm of the GFC because through it all, we managed to maintain Government revenue to fund services without excessive borrowing.
BBLR will also help us to return to surplus.
Our three main tax bases: personal income, corporate income and consumption are a stable basis for revenue. By consistently ensuring that these tax bases are applied fairly and as evenly as possible, we have managed to avoid hiking tax rates — in fact we’ve cut rates and in the case of gift duty and cheque duty, even repealed taxes.
However, our focus on BBLR means that there is always work to do to ensure that the bases are applied fairly and that the rules are working as intended.
A good example is a review of the tax rules for closely held companies. This follows from the creation of "look-through companies" and the abolition of "loss-attributing qualifying companies".
For a tax system founded on voluntary compliance, simplification is always an important focus but for this review, we want to make sure that the rules for look through companies are working effectively without undue compliance costs.
This work is consistent with the objective of simplifying requirements and reducing compliance costs for small and medium businesses and a consultation document is scheduled for release in the first half of the year.
Work is also progressing on the interaction of loss grouping and imputation credits and a review of abusive tax positions to protect BBLR.
The Government must continue to protect our tax base and apply our broad-base, low rate framework. We are exploring whether there are sensible policy measures which would raise additional revenue.
I was very pleased to see the officials’ issues paper on related parties debt remission released recently. While significant further work is necessary, this is an important step forward.
International and BEPS
The second major area of work is international tax and BEPS.
There has been substantial international concern over large multinationals exploiting the differences between tax jurisdictions in order to pay the least amount of tax or no tax at all.
In New Zealand, work in this area has been ongoing with the result that we have some of the best anti-BEPS rules in the OECD.
At the same time, the Government is conscious of the fine balancing act required to ensure that overseas investors continue to see New Zealand as a good place to do business.
It is critical that the tax system does not stand in the way of businesses growing and thriving in New Zealand. But part of being a good place to do business means ensuring that our tax rules are fair — for everyone.
Countering BEPS will help to level the playing field and will also help maintain confidence and belief in the tax system.
We will therefore continue to work with the OECD and the G20, and there are plans to consult on both hybrids and entities and interest limitation rules after the OECD has released its BEPS action plan this year.
Whilst there is much to be gained by working closely with the OECD, multinationals must be clear that the New Zealand government expects them to pay their fair share of tax if they want to benefit from BBLR. Other aspects of our domestic law not covered by BEPS can also be improved. This includes strengthening our NRWT rules for related party debt.
The vexed issue of purchasing of offshore services and intangibles, as well as low value goods and digital downloads, is an important one.
We are heavily involved with the OECD process to develop rules to tax consumption fairly. This is an issue that hits at the very heart of our own BBLR system. GST on these goods and services must be fair to consumers, retailers, and all taxpayers. After all, under BBLR where tax is not paid by one group it must be made up for by another.
The OECD is making progress in this area, however a number of tax jurisdictions have implemented policy to address offshore purchasing and digital downloads. Early indications are that these measures are having their desired effect. I have therefore instructed officials to report to me in the short term on these developments and their suitability for implementing as part of the New Zealand tax system.
It’s a matter of importance to many countries and we are thinking through what this means for New Zealand.
I’d like to turn now to the third area of the policy work programme.
Modernising tax admin
Thus far I’ve spoken about tax policy changes. I think it’s fair to say that New Zealand’s tax policy settings are as good as if not better than most of our international counterparts.
Now we need to turn our attention to the tax administration.
The world we live in today is much more connected. Everything is done online, and it’s much faster.
The advent of the internet has seen people doing a lot of their business for themselves.
For instance, where once you went to a travel agent to arrange your travel, it’s quite common now for people to go online and find a deal.
The internet has given people the desire to self-manage their affairs. It is up to service providers to give people the ability to do so.
And this should apply to interaction with the tax system. It’s a reasonable enough expectation for taxpayers to be able to conduct their tax affairs online too.
It’s not about replacing an old computer system. It is about bringing our tax administration into the 21st century to reflect changes in technology and to meet customer expectations.
With future fiscal pressures, there will inevitably be pressures for new taxes or higher tax rates to help bridge fiscal gap.
Rather than rushing to do so, it’s critical to ensure that we are doing everything feasible to ensure the highest possible levels of compliance with existing tax rules.
A big part is making it easier for individuals and businesses to comply and to reduce the costs of tax across the economy.
We want a system which helps those who want to comply. But equally it is essential that the system is effective in making it difficult not to comply.
If the public wants to self-manage their affairs, that’s a good thing, because it frees up Inland Revenue staff to be used in ways which create most value for money, which is in line with the Government’s objectives for the public service as a whole.
A key issue is ensuring that Inland Revenue collects relevant and useful information in a form it can use cheaply and effectively.
I’ve already mentioned the policy objective of reducing the overall costs of taxation as much as possible, and it’s no different for this modernisation programme.
A number of policy changes will first need to happen, and policy work supporting the modernisation of tax administration forms a significant part of the next 18 month tax policy work programme.
The work will cover questions about simplifying and rationalising PAYE and a wider use of digital services.
One of the first ideas intended to be released for full consultation addresses the monthly chore of providing PAYE information to the IRD.
That’s currently done using an Employer Monthly Schedule, but it could be hugely simplified by making this part of the normal day-to-day processes rather than a stand-alone tax process through a two-way transfer of information between the business’s own accounting systems and Inland Revenue.
The pay-off would be reduced compliance costs for most businesses and a generally simplified tax system.
We know that withholding taxes, if designed correctly and taking into account compliance costs, are an efficient mechanism for collecting taxes and we will look at whether the use of withholding taxes should be expanded.
Also under the spotlight will be provisional tax, a perennial bug bear for many businesses, small and medium ones in particular.
But it’s not all about business — there will be proposals for simplifying the tax rules for individuals and the rules around social policies administered through the tax system such as Working for Families and Child Support.
It’s the biggest change we’ve contemplated to tax administration in New Zealand and it’s important that the public is consulted. Beginning in the next few weeks, you’ll be seeing a series of policy consultation documents.
The very first consultation document I intend to release on the topic, sets out the initial thinking about the future of our tax administration system and seeks feedback from the public on whether this policy vision is heading in the right direction.
The private sector has identified speed and certainty as important features for the tax system.
It will be crucial in consultation to work through how these private sector priorities will best be delivered.
It is important to find meaningful ways to reduce the time businesses spend on tax, particularly for SME’s many of whom have limited resources and capability when it comes to tax.
We need your ideas and suggestions because the objectives of this modernisation programme are in line with your own and we do not hold a monopoly on good ideas for transforming the tax administration.
We need to step back and reconsider areas where businesses have specific concerns, such as provisional tax.
Looking at these areas will challenge many of our pre-conceived notions of how tax should operate but we have to be up for those challenges.
If we don’t then we are only going to achieve minor improvements rather than the kind of gains that really pay off.
The work programme I have announced today is comprehensive and ambitious and will deliver big gains for New Zealand.
It includes putting in place the foundations of fundamental changes to how the tax system is administered. That by itself would be a heavy workload, but the important work of ensuring that the tax system works as intended must continue.
In addition to this, we must always remember our place in the world and the global context and tackling the BEPS problem is a priority.
In addition to the work I have sketched out today, we also need to monitor developments in the rest of the world and be mindful of the implications for the New Zealand economy.
In particular we have to follow the Australian White paper on taxation and consider whether any suggestions for reform in Australia should cause us to re-examine our tax settings.
The huge advantage that New Zealand has over most other countries is cooperation and consultation and the willingness of different groups in society to work together to achieve the best outcomes.
In working through changes I once more look to you for your help and cooperation.
I wish you all the best for a successful conference.