The Green Party quotes Margaret Thatcher with approval
The Australian Tax Office’s latest corporate tax transparency report
The latest from the OECD on the carbon pricing of greenhouse gas emissions
Last week, the Green Party released a discussion document on what it’s called an excess profits tax. This is part of its “commitment to a progressive and fair taxation system.” What it is saying is that an excess profits tax or windfall tax is required to level the playing field so that, “big businesses are not able to profit to excess when so many people are struggling”.
The proposal comes on the back of data showing that in the 2021 financial year, corporate profits reached $103 billion, up $24.5 billion on the previous year. And you’ll recall that the corporate tax take for the year to June 2022 was almost $20 billion. The Green Party are saying we’ve got several matters going on at the moment. It believes there are excess profits being earned at a time of hardship. There’s also a need to address the impact of the unprecedented transfer of wealth that happened in response to the COVID 19 pandemic.
The discussion document points out that windfall taxes are common in other countries. It notes that the EU is implementing an excess profit tax in the energy sector. Spain has an excess profit tax on the energy sector and banks. Interestingly, the paper then uses the example of Britain under Margaret Thatcher in 1981, when the Conservative government introduced a windfall tax on banks. This was raised the equivalent of about £3 billion in today’s money and represented about a fifth of the profits banks were pocketing at the time.
That obviously attracted quite a lot of controversy back in 1981. The 1981 British budget is one of the most controversial I can recall in my time. But Thatcher was unrepentant about what she did. In her memoirs The Downing Street Years, she responded
“Naturally, the banks strongly opposed this, but the fact remained that they had made their large profits as a result of our policy of high interest rates rather than because of increased efficiency or better service to the customer.”
So, I guess we live in strange times when the Green Party is quoting Margaret Thatcher with approval, but that is a fair point. And bear in mind ANZ reported a net profit of $2 billion for the first time.
So, windfall taxes are not uncommon elsewhere in the world. They are uncommon under the New Zealand tax framework and haven’t really been used for a very long time. They were used during both world wars but apparently, they weren’t entirely successful.
It’s good to get this discussion going because sometimes I feel that the tax debate in New Zealand is very narrowly circumscribed. We’re living in unusual times so is a windfall tax something that could be done? Even if it was, in my view it would have to be a one-off, such taxes shouldn’t be part of the regular tax take. Incidentally, this is a point I’ve seen discussed elsewhere notably in Ireland following the release of a report about its tax system.
The Green’s proposal suggests a windfall tax could have some retrospective effect. This would be highly unpopular and rightly so, for companies, because it would mean there’s no certainty around their planning. Companies might budget for a 28% tax rate but then suddenly find that in fact it’s been increased to 33%. So businesses would find that hard to deal with, but if they knew there was a possibility it would be interesting to see how pricing might play out.
Overall it’s good to see this discussion going on and no doubt it’ll attract a lot of controversy and you can make your own submission on the idea to the Greens. Next year is an election year so who knows what’s going to happen afterwards? But as I said, windfall taxes are used elsewhere in the world. And if they were good enough for Margaret Thatcher, well, who knows?
Aussie ‘transparency’
Moving on, over in Australia, the Australian Tax Office, (the ATO) has just published its eighth annual report on corporate tax transparency. What this does is look at the amount of tax paid by large corporates for the year to June 2021. According to the report, the over A$68 billion paid during that year by large corporates is the highest since reporting started. It’s up A$11 billion or 19.8% on the previous, COVID-19 affected year. Apparently, rising commodity prices were a key driver for the increase in corporate tax.
The report notes that Australia has some of the highest levels of tax compliance of large businesses in the world, with 93% of tax paid voluntarily. This rises to 96% after the ATO has asked a few questions.
The ATO has been running what it calls the Tax Avoidance Taskforce for some time. According to the report since 2016, the ATO has raised tax liabilities of $29 billion and Tax Avoidance Taskforce funding being responsible for $17.2 billion of that amount. (It’s worth remembering “raised liabilities” doesn’t necessarily mean that they’ve been collected). In last week’s Australian Budget there’s an extra $200 million per annum to help expand the focus of the Tax Avoidance Taskforce. This brings the total funding for the Tax Avoidance Taskforce to A$1.1 billion over the next four years.
Now, this report covered 2,468 corporate entities, more than half of which were foreign owned with income of A$100 Million or more. 529 or about 20% were Australian owned private companies with an income of $200 million or more, which is an indication of the size and scale of the Australian economy. Interestingly, there’s a note that the percentage of entities which pay no income tax was 32%.
It’s interesting to see what other jurisdictions do with their tax data. I feel Inland Revenue should do a lot more in this space with the data it receives, but it’s very reluctant to do so at this point. It’s currently not part of its brief, but such a report and other statistics gives us a better understanding of the scale of the economy and what’s happening in it. I would like to see Inland Revenue produce something similar.
Energy, taxation and carbon pricing
Finally, this week, overnight the OECD released its latest report on pricing greenhouse gas emissions. This looks at how carbon prices, energy prices and subsidies have evolved between 2018 and 2021. This is part of a database the OECD is developing to track what’s happening on energy, taxation and carbon pricing.
This report covers 71 countries (including New Zealand) which together account for approximately 80% of global greenhouse gas emissions and energy use. There’s a summary report by country as well. Overall, more than 40% of greenhouse gas emissions in 2021 were covered by carbon prices and that’s up from 32% in 2018. And the average carbon price from emissions trading system schemes and carbon taxes more than doubled to reach €4 per tonne of CO2 equivalent.
And obviously the report goes into what’s happening across the across the globe. There’s been a rise in the amount of greenhouse gas emissions now covered, and that is as a result of the introduction or extension of explicit carbon pricing mechanisms notably in Canada, China and Germany.
What’s termed carbon net prices are rising further in 2021 as have permit prices under emission trading schemes. There’s steady changes in carbon taxes, with new carbon taxes introduced, together with increases in carbon tax rates or the phasing out of carbon tax exemptions.
As for New Zealand, 44.1% of all greenhouse gas emissions are now subject to a positive ‘Net Effective Carbon Rate’ which has not changed since 2018. The report also notes that fuel excise taxes, which are described as an implicit form of carbon pricing cover 23.8% of emissions. Again, that’s unchanged since 2018. So, looking at this, we appear to be stalling a bit on this and I do wonder whether next year’s report might show that because of the cut in fuel excise duty, we’ve gone backwards. However, other countries have also been cutting fuel taxes because of the high inflation in the wake of the war in Ukraine.
Although the level of coverage of greenhouse gases covered by carbon pricing hasn’t changed since 2018, the average carbon price has risen. For example, fuel excise taxes in 2021 amount to €19.73 per tonne of CO2 equivalent. That’s up by +9.4% relative to 2018, which is probably below inflation, though. However, once adjusted for inflation the average Net Effective Carbon Rate on greenhouse gas emissions has increased by +39% since 2018
There’s a lot to consider in this report, more than I’ve had a chance to go through right now. But again, it reflects a constant theme of this podcast about the increasing role of environmental taxation and the scope for opportunities in this space.
What we do with those funds is the other side of the equation. It’s one thing to say we need more taxation. What isn’t always debates is what we do with those taxes. I’ll repeat my longstanding view that funds coming out of environmental taxation in the form of new taxes or the existing emission trading scheme should be used to mitigate the impact of climate change.
There was a report earlier this week identifying 44 communities in great risk of environment impact from climate change which are unprepared for the flood risk. No doubt they will be looking for assistance. In the meantime, Nick Smith, Nelson’s new mayor (and former Environment Minister) has requested government assistance with dealing with the impact of the recent flooding. No doubt there will be plenty more to come on this topic.
Inland Revenue’s new approach to tax investigations
Waste disposal levy good example of an environmental tax
How being six minutes late could cost the ATO almost $100 million
Transcript
This week, more highlights from the Chartered Accountants of Australia New Zealand Annual Tax Conference, are the proposed waste levy increases a good behavioural tax and how being six minutes late could cost the Australian Tax Office nearly 100 million dollars.
CAANZ Annual Tax Conference
Last week, I was at the Chartered Accountants of Australia New Zealand Annual Tax Conference. We heard a number of papers from Inland Revenue, including from the commissioner herself. But the one I want to focus on is on their investigations and what is the future of investigations going forward now. This was chaired by Scott Mason of Findex and Tony Morris of Inland Revenue.
Scott began by pointing out something we had noticed over the past few months – that Inland Revenue had not appeared to be very active in the investigation field and certainly wasn’t being very visible. And he raised the point that in such an environment, voluntary compliance falls and “industry practices” emerge where advisers respond to non-activity from Inland Revenue by thinking that keeping quiet is actually a valid strategy.
Tony Morris responded by acknowledging that that was an issue, but in fact, Internal Revenue after the business transformation restructure was now moving forward again. It had much more data available and understood that data better. For example, he noted that there was now potential to get the EFTPOS data for a particular industry. And then from there calculate what should be the potential cash sales for a business in that industry. The analytics were now available to determine more quickly if there were issues around non reported cash sales.
That’s something I’ve mentioned in the past. Now Inland Revenue will in some cases physically visit a business to see what’s actually going on behind the counter. So a question was then put to Tony – why not release some of this data to tax agents? This is an approach I favour. Tony replied that this can be a two-edged sword. Obviously, tax agents need to use that information proactively. But clients may not want you to know that they’re not doing that well, or that their positions are now in jeopardy, because they have been quietly salting away piles of cash unnoticed, such as the baker who got put away for nearly five years this week. He was jailed after failing to declare some six and a half million dollars in cash sales.
So Inland Revenue obviously wants to clamp down on such behaviour and identify much more quickly what’s going on. But the converse of releasing data to tax agents is that there is a risk that something might be seen as a benchmark. Therefore rather perversely it might encourage behaviour if people say “Well, if that’s the benchmark, we’ve got a bit of leeway to quietly salt away some cash”.
I think in the end the answer to this question of the cash economy is going to be what I talked about last week – the Swedish example – of fiscal control units, a centralised approach that’s already happening.
Australia and New Zealand are slightly behind the eight ball on that area of progress. But it is a matter where we could see change similar to changes we’re seeing in the rest of the world. And I would expect that Inland Revenue, with its enhanced capabilities, may decide that’s an area where it wants to move forward into.
Nudge letters
What Tony Morris talked about was Inland Revenue has developed a policy of what they call sending out “nudge” letters, which are to encourage behaviour in the right place. And these are sometimes often sent to a wide number of clients. The problem is that while that might be encouraging better behaviour at a macro level, it does cause some confusion at the micro level for individual clients who think they are already compliant. So why are they receiving notes about compliance with the automatic exchange of information, for example?
But he also revealed one or two interesting snippets. Particularly one which I think people who file their own tax returns ought to be aware of. If you’re filing your own tax return online Inland Revenue can see how you progress that filing. They will note if you are amending the expenses – this is one thing they watch very carefully. Tony Morris gave the example of someone who amended the expenses that they were claiming in their tax returns 80 times. He also noted that more often than not, early filings before the normal due dates are more likely in Inland Revenue’s experience to be fraudulent.
But he also talked about how Inland Revenue could perhaps use social media to put a message across in a very specific way. We do know Inland Revenue watches social media closely. For example, Inland Revenue might notice that a client is putting his boat into the water at Whangamata on Sunday. So the question that they might put through myIR is “how is your FBT return going?” Because FBT on twin cab utes is one of the great under-reported and probably undeclared sources of income that it might want to have a look at.
That was all very, very interesting. It gave an insight into where Inland Revenue is at, where it thinks it’s going to go, particular areas of interest to it and how it approaches these issues at a tactical level. The ability to watch what goes on in a tax return I think is fascinating and should serve as a warning for people. And how it also might possibly make more use of watching social media to then make quiet “nudges” to make sure people are compliant. Tony also made a note that the initiatives on the property area have seen the strike rate gone up astronomically since they started really looking into this area in the wake of the introduction of the Brightline test in October 2015. So that was an absolutely fascinating session from Scott and Tony.
Behavioural taxes
Another highlight of the conference was a debate about whether behavioural taxes were a good thing to have. The team arguing against included Barry Hollow of Inland Revenue. As he said, he found himself in a very unusual position for a tax policy person arguing against such taxes. His extremely witty yet insightful and funny speech carried the day and the motion was defeated. The government wasn’t listening, though, because this week it released proposals for increasing the waste disposal levy.
Now, this has caused a bit of controversy. But it is something to think about. And a point raised by the Tax Working Group is whether such a tax is a behavioural tax or just a tax grab, increasing the tax base. But the idea is to recycle funds raised. For example, half the revenue would go to councils to fund resource recovery and other waste related infrastructure. And then the remaining money would go to the Waste Minimisation Fund, which provides grants for waste reduction.
And to repeat a point I made earlier at the time of the launch of the Tax Working Group, Sir Michael Cullen talked about recycling the revenue from environmental taxes to help people transition to a lower carbon economy. Or in this case, a lower waste economy, because the amount of waste per capita New Zealand produces is extraordinary. There’s also the fact this waste disposal levy is a very good example of a behavioural tax which works.
The Tax Working Group cited the example of the U.K. They raised their waste levy tax rate from £10 pounds a tonne in 1996 to £80 a tonne by 2016. But over the same period of time, the annual waste in landfills fell from 50 million tonnes a year to 10 million tonnes a year.
So, you saw the tax increases achieving the desired result of lower waste And that’s something I think we really need to think about going forward. The reflex “All taxes bad, no tax is good” approach is understandable in political terms.
But you’ve got to look beyond the politics of this. If this tax is being recycled to reduce waste and we’re moving away from the use and disposal economy to reach “the circular economy” as it is called, then encouraging that is something we all need to be on board with. Because our environment in New Zealand is our key selling point. You know Stephen Colbert on The Late Show. He’s showing off the beauties of New Zealandand we have $46 billion of agricultural exports. They’re all dependent on our natural environment. So protecting them and making sure we make the best use of it and keep it free of pollution so we are green and clean is something we should all be behind.
The ATO stubs its toe
Finally from the “So you think you’re having a bad day” files, the Australian Tax Office has been forced to ask the Federal Court, the highest court in Australia, for special permission to appeal a decision it lost in the High Court, involving a A$92 million tax bill against mining giant Glencore. This is quite a significant transfer pricing case, by the way. And apparently the reason why the ATO had to find a special motion was it was six minutes late in meeting a critical filing deadline last month.
Now, schadenfreude aside, the case is a good, if extreme, reminder of the critical importance of filing tax returns and elections on time. Inland Revenue is reasonably flexible about late filed tax returns and can be persuaded to waive penalties in many cases. However, it is typically inflexible about other deadlines, such as those involving the disputes process, Notices of Proposed Adjustment, Notices of Response and elections to join the look through company regime. Ask any tax agent and I’m pretty sure we’ve all had situations where we’ve encountered delay in filing for the look through company or its predecessor, the qualifying companies.
These are really, really important and the big lesson is be aware of the timing of your elections and don’t leave it to the last minute. Otherwise, you too could be tripping up over a significant tax bill, although maybe not to the tune of 100 million dollars.
Next week, I’ll be joined by Chris Cunniffe of Tax Management New Zealand. We’ll be discussing the role of tax pooling and also the results of TMNZ’s recent survey of tax agents. Inland Revenue might not like that one too much.
