International Fiscal Association, NZ Branch conference
Heritage Hotel, Queenstown
Thank you Casey and good morning everyone. I really appreciate the opportunity to speak with you again.
Today, I want to talk to you about the tax policy work programme
I’ll also share some thoughts on the progress of Inland Revenue’s business transformation.
But I expect you’re pretty keen to hear about the Government’s views on Tax Working Group’s final report, released just last week. So let’s start with that!
Tax Working Group’s final recommendations
I’m sure many have you have found some time to have a look at the Group’s final recommendations.
We appreciate the months of work the Working Group has put into examining our tax system and developing recommendations to improve it.
The report finds that the current broad-based low-rate system is clear and simple and does not need a major overhaul. However, it does point at some unfairness that could be addressed.
It deals with a number of complex issues in significant detail and we want to get our heads around it, and get some preliminary advice from officials, before we publish the Government’s response in early April.
We look forward to discussing the recommendations with our Coalition and Confidence and Supply partners as we work to find consensus on the best overall package.
So you’ll understand that I’m not able to use this forum to share any thoughts on the Group’s recommendations.
It’s important that Government takes due care when coming up with a considered response.
However, I can use this opportunity to remind you that at the time the Group released its interim report back in September, Minister Robertson and I wrote to the Group and asked that they consider an option that includes a revenue-neutral package.
In response, the TWG has presented some options so that any revenue from this would be offset by a tax reduction in another area, possibly by way of reducing income tax, as the Tax Working Group recommends.
I was pleased to see the Group take this on board and present some revenue neutral options for us to consider.
Tax Working Group – next steps
It’s important to note that the recommendations of the independent Tax Working Group are not binding on the Government.
The Government will need to review the report thoroughly and seek advice from Treasury and Inland Revenue before making any decisions.
But just be aware: there is a substantial process that includes Cabinet approval of any recommendations, let alone the legislative process framework before anything can be implemented.
The Government expects to release a full response in April 2019 following detailed discussions with officials and consultation between Government parties.
If the Government does decide to make changes to the tax system, these changes will be made by introducing legislation.
This means the changes will go through a full select committee process, where members of the public will have the opportunity to submit on and influence the shape of the Bill.
Any changes will not come into force before 1 April 2021, after the next election. This gives New Zealanders the chance to vote on any decisions made by the Government.
In a number of areas, the Government is already taking steps in the direction suggested by the Group, such as collecting GST on low value goods.
The Government will be listening to further feedback on the issues raised in the report.
The tax policy work programme
We’re staring down the barrel of another hefty work programme this year.
You will already be aware that fairness underpins this Government’s tax policy work programme, and we have in train a number of tools to achieve our desired fairness outcomes.
These include the Tax Working Group, the Welfare Expert Advisory Group, and a number of taxation bills currently in the House.
We also support the capability uplift Inland Revenue is driving through its business transformation programme which still has several years of changes to design and implement, which I’ll talk more about later.
Measures already taken
The Government has already taken a number of steps to support families, increase the fairness of the tax and transfer system, and ensure that all taxpayers pay their fair share of tax.
In late 2017, through the Families Package, the Government has provided targeted assistance for low and middle-income families with children through a suite of measures including Best Start, increased Paid parental leave and family tax credits.
In March last year we also extended the bright line test to five years in order to better ensure that speculators pay tax on the capital gains they make on their property investments.
Then in July, we enacted legislation to restrict the ability for multinationals to use base erosion and profit shifting (BEPS) tactics to reduce the tax they pay in New Zealand and globally.
In terms of what we’ve got on the boil, we’ve introduced legislation to ring-fence residential rental property losses. Currently, investors with loss-making rental properties can reduce tax on other income, which helps them outbid owner-occupiers for properties. Yet these investors often make tax-free capital gains when these properties are sold.
In conjunction with the extension to the bright-line test, ring-fencing losses from rental properties would level the playing field between property investors and home buyers.
The digital economy / international work
As announced recently, we’ll be putting more focus into international issues as the challenges facing the taxation of digital services ramp up at OECD.
There has been a lot of concern lately with the under-taxation of the digital economy. I share this concern.
The main issue is that the international income tax framework has not kept up with modern business practices, particularly digitalisation. Fixing this framework requires some level of international consensus.
Countries are trying to reach this agreement at the OECD. There are 2 measures being developed.
First, a measure to allocate more taxing rights to market countries. This would apply regardless of whether a multinational has a physical presence in the country. There are 3 options being considered for this:
- First, a limited option for digital services only, which is supported by the UK and Europe.
- Second, a broader option, focussing on “market intangibles” created in a country by multinationals, which is supported by the United States.
- Third, a new option focussing on the concept of a significant economic presence, which is supported by the G24 developing countries.
The second measure is a minimum tax on profits earned in low tax jurisdictions, which is supported by France and Germany.
The OECD is aiming for G20 approval of its preferred proposals in June 2019 and countries have committed to reaching a consensus by 2020. We are hopeful that this can be achieved, but there are no guarantees. There are still some countries that do not think any changes are necessary or want one kind of solution over another.
An increasing number of countries have decided not to wait for an OECD solution. They have adopted separate digital services tax, or DSTs, to tax the digital economy.
India moved first, with the UK, France, Spain, Italy, Korea and Austria also recently announcing or enacting them. The EU Commission has also proposed a DST for Europe, but it has not been able to achieve the support of all EU members yet. Australia also recently consulted on the possibility of introducing a DST.
A DST would be repealed when an international solution is found, and the countries adopting them are still committed to an international solution.
New Zealand wants to make sure digital companies pay a fair amount of tax here. We are participating in the OECD discussions, and we prefer an internationally agreed solution. However, we also need to consider the desirability of a DST if this cannot be achieved.
The discussion document we’ll release later this year will canvass all these issues and – importantly – will suggest how a Digital Services Tax is designed, should we need it. This is consistent with the Tax Working Group’s recommendation in this area.
Another area where I expect there will be a growing need to apply policy thinking and potential legislative change is around the environment.
In its report, the Tax working Group has noted that New Zealand makes relatively little use of environmental taxes relative to other countries, and believes that taxation could be used further to enhance environmental outcomes.
The Group has developed a policy framework for assessing when environmental taxes could be usefully applied.
The Government welcomes the development of this framework as a tool for delivering positive environmental and ecological outcomes for New Zealand.
The Government also welcomes the Group’s efforts to highlight specific areas where there is greater scope to use environmental taxes (subject to further design work).
The Tax Working group has also taken an interest into how charities are taxed.
I’ve always been hot on this. I my mind, ensuring the tax obligations of charities’ commercial interests are treated appropriately is really important to the overall integrity of the tax system.
Giving tax breaks to some commercial operators (who have a charitable owner) and not others potentially has a distortionary effect on the market that they operate in, in that privately-owned entities often compete in the same space.
The Tax Working Group also picked up on this in their report. They also note, however, that the underlying issue is the extent to which charitable entities are accumulating surpluses rather than distributing or applying those surpluses for the benefit of their charitable activities.
This is a nuanced issue that the Government will need to work through as it looks to ensure charities are treated appropriately.
You might have noted that the Department of Internal Affairs released a discussion document last week.
The document is looking to modernise the Charities Act to ensure it works effectively for charities and the public. The document can be found on the DIA website.
I encourage you to submit on this document before the closing date of 30 April 2019.
Research and Development tax credit
At the other end of the delivery spectrum for 2019 is the R&D tax credit, which is being discussed right now in select committee.
The Finance and Expenditure Committee is, as we speak, considering submissions made on the Government’s R&D proposal.
I won’t go into great lengths retelling the story of the R&D tax credit. You’ll already know that the Government considers boosting R&D to be critical to boosting productivity.
The details that we’ve landed on reflect extensive consultation with the business community.
I cannot thank enough those of you that have engaged with the government while these policy proposals have been developed.
Earlier and broader consultation with key stakeholders has resulted in better policy outcomes, and this is an approach we intend to refine and take forward with other new tax policy.
We’re well aware of the potential pitfalls of an R&D tax credit. We know there’s a risk of businesses pushing the boundaries of what expenditure can be claimed as R&D, so I’m expecting officials to develop robust rules about how it can be used.
When it comes to implementation of the R&D scheme, however, we can learn a lot from Australia’s experience.
The Australian R&D Tax Credit was reviewed in 2016 and found not to be performing well. This led, in their 2018 Budget, to a reduction in the generosity of the scheme plus increased audits from the Australian Tax Office, in order to reduce expenditure on the scheme.
The consequences of moving from an educative stance to more audits are now playing out and there has been a lot of high-profile media coverage. This has focused on some firms having to pay back millions of dollars of credits as a result of the ATO overturning up to 4 years of claims that have been paid out.
It has also emerged that some practitioners have had to abridge their R&D practice because the ATO consider its advice to clients has been too aggressive.
There are a couple of lessons for New Zealand from this:
- Frequent fine-tuning of a scheme is preferable to major changes, as the latter are unsettling and undermine business confidence. Within the NZ scheme, we have allowed for this through regular review and the ability to adjust the scheme via an Order in Council.
- Early decisions on whether a firm is undertaking R&D is better than audits and overturning previous decisions after credits have been paid out. Consequently, we have included the in-year approval process.
- Software is a challenging sector for distinguishing genuine R&D from non-R&D. The Schedules within the R&D Bill of ineligible activities include several software-related activities to provide clarity about what is and isn’t eligible.
- Most evident though, is the importance of getting the practical details right from the start. This is an opportunity NZ has as it learns from other countries’ experiences.
Stewardship of the tax system
I also recognise that stewardship of the tax system is critical and this includes ensuring sufficient maintenance and remedial work is carried out. While we have continued undertaking maintenance initiatives, I recognise that we have probably undertaken less in this space given the prioritisation of new government tax policy and social policy work.
This is an area that I am keen to prioritise. Despite the business of the tax policy work programme, we need to leave space to do the much needed repairs and maintenance.
As well as the usual remedial fixes that address anomalies in current tax legislation, there will be items of more significance.
These include improvements to the treatment of Fringe Benefit Tax, closing a loophole on GST paid by non-profits on the sale of assets, and extending the roll-over relief for revenue account property affected by the 2010–11 Canterbury earthquakes.
Running in parallel with the tax policy work programme, is Inland Revenue’s Business Transformation.
This is a huge programme of work that the Government is investing heavily in. I’m expecting three major outcomes to be delivered by 2021:
- Firstly, increasing voluntary compliance by having a simpler tax system, which I expect will in turn reduce compliance costs for customers, particularly businesses and employers.
- Secondly, making it easier and more efficient for Government to introduce policy change.
- And lastly, having a more versatile tax system that can adapt better to changing ways of working and different sources of revenue
As Minister for Small Business I am especially keen to see Inland Revenue’s tax processes align better with business practices, to minimise the effort involved of all parties in meeting their tax obligations.
This Government firmly believes that managing tax obligations should be a by-product of normal processes, and not a process in itself.
Within the tax and business communities there is some understandable nervousness around Inland Revenue’s ability to deliver on such a massive programme, without sustaining disruption to its core operations.
I share some of that concern. The releases to date have not been without their challenges.
I know Naomi and her team have learnt a lot from previous stages in the transformation and I’ve been impressed with how Inland Revenue has put these lessons into practice.
Naomi assures me that Inland Revenue is in a strong position to implement the upcoming changes and support its customers (New Zealand’s taxpayers) through the transition.
We need to be realistic though. Given the scale of the changes that are being introduced this year some disruption is to be expected
But rest assured, the transformation programme will deliver long-term benefits for all New Zealanders – individuals, business and intermediaries alike – and future-proof our tax system for generations to come.
Release 3 of IR’s Business Transformation
This year, Inland Revenue will implement the next phase of its improvements designed to make tax easier and more certain.
These improvements will build on recent changes for businesses and tax agents and will focus on simplifying income tax, particularly for individuals.
This phase is inarguably the biggest and most complex in Inland Revenue’s transformation to date. It will change the way that every New Zealander interacts with the tax system.
In preparation for this release, Parliament is considering or has already passed legislation that will mean that from April this year:
- approximately three million people will have a simplified end-of-year process for income tax;
- all of New Zealand’s 200,000 employers will need to file PAYE information about their employees each payday; and
- the filing of investment income information will become more regular – on a voluntary basis from April 2019, before becoming mandatory in April 2020.
Taxpayers and businesses will be able to see – and, where necessary, file – for all tax types online and see more information more clearly.
We acknowledge the level of change for corporate taxpayers – including the fact that some businesses will need to make changes to their own systems and processes – but are confident in the long-term benefits of the transformation more broadly.
The benefits to the economy are undeniable.
- Firstly, Inland Revenue will receive more timely and accurate information, which they can then use to better calculate customers' tax and entitlements.
- And secondly, businesses, tax agents and other intermediaries will benefit from a more integrated tax system that saves them time and relieves some of the compliance burden.
Let’s not understate this. Inland Revenue will be using more data in a smarter way, to ensure all New Zealanders meet their tax obligations as quick and painlessly as possible, whilst ensuring they receive the entitlements they’re eligible for.
I’ll be the first to say that the transformation journey is not an easy one – nor could it ever be given the scale of the changes we’re implementing.
Inland Revenue is about halfway through the transformation journey, and I’m pleased with what has been achieved so far, and have confidence in what will be achieved next.
The programme of transformation will continue through until 2021, at which point all New Zealanders – individuals, families, businesses and tax intermediaries alike – will see and experience a very different Inland Revenue.
And importantly for Government, we will be in a better position to introduce policy changes quickly and efficiently – allowing us to better respond to an ever-changing global environment and economy.
So 2019 is a year of delivery for this Government, and the tax space is very much at the forefront of that as we look to make the tax system fairer, and simpler for all businesses and taxpayers.
I look forward to working with you on these changes. Your input into all these changes is highly valued both in the policy development stage and at select committee. Your input makes the policies better. So thank you for all your efforts on all the policies.