28 Jan, 2020 | The Week in Tax
- What will be the big tax issues over the next decade?
- Inland Revenue cracks down on Student Loan debtors
- Is CGT really dead?
Transcript
This decade is only a few weeks old, but I consider the likely major tax themes for the years ahead are already becoming very clear. Over the holidays, the news has been dominated by the apocalyptic visions of the Australian bushfires, and our thoughts and condolences go out to everyone affected by those fires particularly the families of those who’ve lost their lives.
Leaving aside the politics of climate change, which seem particularly toxic in Australia, New Zealand has signed up to reduce its emissions by 2050 and last year, the Zero Carbon Act became law. And in my view, over the next decade, the role of environmental taxes as one of the tools in meeting our emissions targets will become ever more important. So that is the first big theme I think we can see emerging.
Yesterday, the French government agreed to suspend collection of its digital services taxed until the end of the year.
Now, this was done in order to avoid increased tariffs with the United States government. You may recall that last year when France introduced its digital services tax America retaliated with tariffs. Now, in return for the French suspending collection, the US has now agreed to continue participating in the OECD talks aimed at achieving a generally agreed reform of the international tax system.
Therefore, the second and fairly obvious continuing theme for the next decade will be the issue of reform of international taxation, particularly for how it affects the tech giants such as Amazon, Google and Facebook. This is something that they hope to resolve this year, but I anticipate it could take longer than that. But whatever is determined it’s going to change the shape of international tax for years to come.
The third theme is wealth inequality. This has been talked about for some time. And what I think you will see coming forward is a question of how we address that. Wealth disparities have been reportedly rising over the past decade or so and various taxes are being mooted as a means of addressing that matter.
Housing affordability is one of those issues where wealth inequality plays out. And earlier this week, the annual Demographia report on housing affordability said that New Zealand’s eight major markets were completely unaffordable.
So, addressing housing affordability is one part of the equation which ties in with wealth inequality. And we’ll see across the coming decade stumbling attempts to try and address the issues coming from that. That’s a global trend as well.
Last week the news emerged that Inland Revenue had arrested a person at the border in relation to owing student debt. A woman had just returned to the country to visit a sick mother and she was arrested at Auckland Airport while about to fly to the United States. This is part of a law change that was made in 2014, which gave Inland Revenue the powers to arrest student loan defaulters leaving the country.
There are about 100,000 borrowers living offshore, and many of these have overdue debt. Actually, some of the numbers related to student loan debt are quite astonishing. There’s more than $16 billion dollars of total debt due and more than 700,000 currently have outstanding debt with 100,000 having overdue debt. And many of those are overseas and apparently outside the reach of Inland Revenue. So, it’s not surprising. Inland Revenue has given itself powers to arrest people. It does shake the tree quite dramatically and has produced some results.
Although it’s a very dramatic move the number of people that have been arrested for this has been actually quite low. It was three in 2016, one in 2017, two in both of 2018 and 2019 and one so far this year.
Now, this is a bit of an intergenerational matter because older people will take the view “Pay your debts” or “We’ve paid our student loans, so why shouldn’t you?”. And one response will be “You didn’t have student debt” and generally the issue dissolves into name-calling on both sides.
But leaving that aside, there are two things that concern me about this. Firstly, I think it’s another example where the current approach to penalties and interest just doesn’t work. If you’re going to charge penalties and interest, you’d hope that that actually does encourage payment. But apparently it doesn’t seem to do that.
The top 10 outstanding borrowers collectively owe $4.28 million dollars, at which point they’re going to give up. This is what I see in our business. They just simply going to give up. It then moves from being their problem to being our collective problem, because that’s now a debt that’s probably irrecoverable.
Secondly, why don’t we see people being arrested at the border for outstanding PAYE and GST? Time and again, I encounter situations where businesses have not paid their PAYE. In some cases, deliberately not doing so and filtering the cash away for their own purposes. Yes, Inland Revenue catches up with them eventually, and in some cases those people go to jail.
But I can’t help but think why don’t we have such a draconian policy towards arresting people who owe PAYE and GST? Particularly in the case of PAYE because that affects the livelihoods of many people. It’s not just a case of a debt between and individual student loan debtor and the Government. In the case of someone who’s defaulting on their PAYE and maybe also on the employer KiwiSaver contributions, their employees are missing out.
So, it seems to me that if we’re going to have such a dramatically fierce tool, which admittedly, is not used extensively, why are we not applying it more often to debts where arguably the social impact is greater?
And finally, I recently raised the question about whether, in fact, capital gains tax was killed off as supposedly happened last year when the Government did not follow through on the Tax Working Group’s recommendation for a general capital gains tax.
In my article, I took the view that the issue isn’t going to go away, in part because it’s tied into the wealth and housing affordability issues that I mentioned earlier. Also, what we’re seeing is that Inland Revenue will be applying the existing rules, which are often open to interpretation about intent, much more stringently.
And I’ve already come across examples where Inland Revenue is seeking to tax transactions which would have been subject to the bright line test if the bright line test had been in place at the time of those transactions.
Now Inland Revenue has been through their Property Compliance Programme, looking at this issue for almost 10 years now. But what was interesting to note about this particular set of transactions is that many of them date back to beyond what we call the time bar limit, usually for four or five years. And in fact, one of them was a 2012 transaction. So, it’s nearly eight years old now.
What seems to be happening is two things. Firstly, Inland Revenue is applying its enhanced capability through its Business Transformation program to review transactions. But secondly, and this is a critical point if you do not include a source of income in your tax return, which you should have included, then the time bar rules don’t apply.
Generally speaking, Inland Revenue can’t go back more than four or five years after a tax return has been filed, unless there’s been fraud or willful evasion. But if the income is never included in the first place, then it can go back as far as it likes. And Inland Revenue is now making use of this tool.
So what that means is that for all those people out there who may have had a quick turnaround on a property transaction, for whatever reason, you may find that even though you think that may be beyond the time limit for Inland Revenue to look at it, don’t make that assumption. They have more tools in there to do so now. And they’re now very keen to apply those tools to investigate older transactions. So, I expect to see quite a few more cases involving transactions eight, ten years, maybe even older as the as the Inland Revenue decides to crack down on this whole question of property transactions.
Next week, picking up the theme of the big tax issues for the coming decade, I’ll be joined by 2019 Tax Policy Charitable Trust Scholarship runner up John Lohrentz. We will be discussing his fascinating proposal for a progressive tax on bio-genomic methane emissions in the agricultural sector. We’ll also be discussing the future role of environmental taxes.
21 Jan, 2020 | Tax News
ANALYSIS: Who killed the capital gains tax proposal and why? What did that decision cost us? And is it really dead or just resting?
Tax is inherently political, so when looking at who killed the capital gains tax (CGT), the answer is straightforward: it was New Zealand First in the Beehive with its veto. Firmly slapping down Simon Bridges’ attempts to claim credit for the decision, Winston Peters declared: “We’ve heard, listened, and acted: No Capital Gains Tax.”
Curiously, one of Peters’ justifications for NZ First’s veto was that a CGT would unfairly penalise those who had been “forced” to invest in property following the stock market crash in 1987. It’s worth remembering that even if a CGT had been introduced those historic gains would not have been taxed. (This crucial fact was often rather conveniently overlooked during the debate.)
New Zealand First’s decision had the backing of a number of transparently self-interested groups such as the NZ Property Investors Federation but also many smaller businesses who were concerned about the potential impact.
The wider business concerns were a reason why three members of the Tax Working Group (TWG) — Joanne Hodge, Kirk Hope and Robin Oliver — disagreed with the group’s recommendation of a comprehensive CGT. The three considered any potential benefits would be outweighed by increased efficiency, compliance and administrative costs.
However, the TWG was unanimous that there was a “clear case” for greater taxation of residential rental investment properties.
Robin Oliver, a former Inland Revenue deputy commissioner, presented some interesting insights into the failure of the CGT when he and fellow TWG member Geof Nightingale spoke at the Chartered Accountants Australia & New Zealand (Caanz) tax conference last November.
Oliver commented on the visible lack of political support for a CGT, which was in marked contrast to how Roger Douglas and Trevor de Cleene had promoted the introduction of a goods and services tax (GST) in 1985.
Oliver also noted the proposed design was probably too uncompromisingly pure. In his view the politics were always going to be difficult and compromises would be needed to cross those hurdles.
Incorporating some form of inflation adjustment was another potential compromise. This is common in jurisdictions with a CGT. Australia, Canada, South Africa and the United States all do not tax the full amount of a gain. Instead, the gross gain is reduced by between 40 per cent and 50 per cent, with the net amount then taxed as if it was income.
The United Kingdom does tax the full amount of the gain but applies a different tax rate linked to the taxpayer’s total income. Interestingly, that tax rate can be higher if the gain relates to property.
Neither of these compromises were ever floated and so the CGT was effectively left to wither and die.
WHAT WAS THE COST?
What did the decision to shelve the CGT cost? For starters, the TWG modelled four revenue-neutral scenarios for redistributing the $8.3 billion a CGT was projected to raise over the first five years.
All four scenarios included personal income tax reductions of at least $3.8b over the five-year period, with the most generous scenario suggesting income tax reductions of $6.8b.
For many people, the decision not to adopt a general CGT meant they lose out on lower income taxes. However, a cynic might say that for residential rental investment property owners the continuing benefit of untaxed gains far outweighs any such benefit.
The decision not to adopt a general CGT does nothing to break New Zealand’s long-running pattern of over-investment in residential property.
The decision also does nothing to break New Zealand’s long-running pattern of over-investment in residential property, which means little real progress can be made on addressing housing affordability. There is therefore likely to be an ongoing cost for those Millennials and Generation Zers wanting to own their own property.
There’s a wider concern that funds which could be used for productive investment will be increasingly diverted into residential property, particularly in the wake of the increased capital holding requirements for banks.
DING DONG THE WITCH IS DEAD – OR IS IT?
New Zealand therefore remains an outlier in world tax terms in not having a generally applicable CGT. But it is not as if no capital gains are currently taxed. The tax system has nearly 30 separate provisions taxing some form of capital gain.
This includes a general provision which will tax any gains made from disposals of personal property if the property was acquired “for the purpose of disposing of it”. Critics of a CGT also ignored that it would have brought a certainty of treatment to all transactions.
In the absence of that certainty, taxpayers cannot always be certain that a property sale will be non-taxable. Tighter enforcement of the existing rules by Inland Revenue is very likely.
As a sign of this, I have recently become aware Inland Revenue is reviewing property transactions from as far back as 2012. Although these disposals pre-date the introduction of the bright-line test in October 2015, it appears they would have been taxable if the test had existed at the time of sale. The spectre of CGT therefore remains.
Robin Oliver concluded his comments at the Caanz tax conference by noting that although he remained opposed to a general CGT, he did not consider the present under-taxation of residential rental investment properties was sustainable in the long run.
Nightingale supported that assessment. Both were undecided as to whether a CGT was the best means of addressing the issue of under-taxation. An alternative might be to apply the deemed return approach used to tax overseas shares in the foreign investment fund regime.
It’s therefore wise to assume that CGT is not dead but merely resting. My expectation is that the debate will emerge in force towards the end of this decade as the rising cost of superannuation and health costs for the elderly puts increasing pressure on government finances.
By then inter-generational frustration with housing affordability may mean voters are ready to back change. We shall see.
This article was first published on Stuff.
16 Jan, 2020 | Tax News
Uber stands as a poster child for the tech industry’s aggressive, and at worst frankly immoral business activities. It’s also the exemplar of why we cooperated in that loss of control.
Like other tech companies Uber established a network of subsidiaries in tax havens as part of its tax planning. But as the decade wore on initiatives such as the OECD’s Base Erosion and Profit Shifting (BEPS) and exchange of information work started to undermine the effectiveness of Uber’s tax structure.
In early 2019 Uber decided to fine-tune its tax planning by moving a subsidiary previously located in Bermuda to the Netherlands. This was in part in preparation for its initial public offering, but also in response to European moves cracking down on aggressive tax planning involving tax havens. As a result of the move, Uber reportedly created a US$6.1 billion Dutch tax deduction which it will be able to offset against future profits.
Uber’s transaction provoked questions in the Dutch parliament, prompting the state secretary of finance, Menno Snel (the equivalent of New Zealand’s revenue minister, Stuart Nash), to deny ever meeting any Uber representatives about the matter. Snel found out that Uber’s promises of jobs (it now has over a thousand employees in its Amsterdam office) come at a political cost.
Uber responded that it was “committed to openness and transparency with tax authorities around the world” and “faithful to both the letter and intent of the laws in the many jurisdictions where we operate.” Uber’s comments echo those of so many tech companies when challenged about their tax planning.
It will be no surprise to readers of Super Pumped: The Battle for Uber that Uber’s tax planning pushes the rules to breaking point. It’s the primary reason I refuse to use Uber.
I’m not alone in my distaste for such tax practices. New Zealand’s 2019 Tax Working Group in its final report commented: “The group has received many submissions about international taxation and the tax practices of multinational companies and digital firms. It is clear from the submissions that many people feel a deep sense of unfairness about the way in which the tax system deals with these firms. This is a worrying phenomenon: perceptions of unfairness have the potential to erode public support for the tax system as a whole.”
Although it’s easy to point the finger at Uber’s behaviour, at the same time it also illustrates how, despite apparently widespread public disdain for the aggressive tax planning activities of the tech sector, people continue to use their services.
For users the convenience and lower prices Uber offers outweigh any moral indignation about its tax and business practices. This is also true of other tech giants such as Apple, Amazon, Facebook and Google whose services and products are used by billions of people even as they facilitate live-streaming of mass-murder or pile up billions of dollars in tax havens. In effect, we love the sin but hate the sinner.
Exactly how much these tax practices cost New Zealanders isn’t clear. There is little public information available about the scale of the tech companies’ activities in this country let alone details of how much income tax they pay. Google, which has recently adopted “country-by-country” reporting as a means of giving more transparency to its results, did file financial statements for the year ended 31 December 2018. These show its income tax liability for the year was $398,341. (Intriguingly, the financials show the GST payable as of 31 December 2018 was $6,252,847 and that it owed over $81 million to an unnamed related party. I’ll leave you to guess where that might be located.)
By contrast, the last filed financial statements for the New Zealand subsidiaries of Facebook and Uber were for the year ended 31 December 2014. They, along with Mastercard and Visa, take advantage of Companies Office reporting requirements which only require overseas-owned subsidiaries to file financial statements if either their assets exceed $20 million or their total revenue is more than $10 million. Under the business model these companies appear to be using, the New Zealand subsidiary is usually paid a fee for “marketing” services provided to its parents. Unsurprisingly, these fees appear to be below the threshold for reporting.
The ability for the likes of Uber and Facebook to structure their affairs to minimise scrutiny is a direct result of a policy choice to put ease of business and lower compliance costs ahead of transparency. Apart from tax and a lack of transparency there are other downstream effects of that choice, namely a growing suspicion that New Zealand is a bit of an easy mark for money-launderers.
Even if the various OECD initiatives bear fruit and an international agreement is reached about the taxation of the digital economy, that will inevitably involve each government accepting a partial surrender of its sovereign taxing rights. This is particularly true of New Zealand because of our small size.
There’s a scene near the end of Danny Boyle’s Shallow Grave when Christopher Eccleston (an accountant) berates his flatmates Kerry Fox (New Zealand connection!) and Ewan McGregor (handsome journalist) for spending some of their ill-gotten gains. He warns them “That’s what you paid for it. We don’t know how much it cost.”
Similarly, although we pay little or nothing for Facebook, Google, Uber, Netflix and their ilk, the full cost to our society of a lower corporate tax take, oligopolistic business practices, a hollowed-out local media, toxic social media and the rise of fake news is still not clear.
Addressing the aggressive tax and oligopolistic practices of the tech companies requires addressing a complex set of linkages: Reversing the trend of the past 40 years towards looser regulation of businesses; determining an acceptable set of rules for international taxation which recognises the vast and relatively sudden economic changes brought by the arrival of the digital economy; and recognising our complicity in enabling this state of affairs. Over the coming decade who will demonstrate the courage to take on this challenge?
This article was first published on The Spinoff
