The potential tax implications of the Climate Change Commission’s draft advice.

  • A look at the potential tax implications of the Climate Change Commission’s first draft advice to the Government
  • The latest from the OECD on international tax
  • A look at what a recent slew of reports and documents say about the state of Inland Revenue and its priorities


Last Sunday, the Climate Change Commission released its draft advice for consultation. The draft advice has already stirred up a great deal of controversy and discussion about the suggested objectives for the country and how they are to be met.

On tax, the Commission’s Necessary Action 3 recommended accelerating light electric vehicle (EV) uptake.  As part of this it suggested the Government –

“Evaluate how to use the tax system to incentivise EV uptake and discourage the purchase and continued operation of internal combustion engine vehicles.”

I’ve covered this elsewhere and my suggestion is that Inland Revenue needs to look at greater enforcement of the fringe benefit tax rules, maybe including an exemption for electric vehicles and looking also at the application of FBT to parking.

What else did the Commission discuss on the taxation side? Well, it noted that the climate transition will impact government taxation and spending and that the Government needs to plan for this. It noted that fuel excise duties, the revenue comes from that which is spent on land transport, will change and probably decline. It also noted that reducing oil and gas production will result in less tax revenue and also affect the balance of exports because of the reduction in oil exports.

On the other hand, the emissions trading scheme will generate income from the sale of emissions units. Obviously the amount raised will depend on the volume of units and the market price for years, but at current estimates are that it could equate to about $3.1 billion over the next five years.

Now, what the Commission has suggested is that maybe these funds could be recycled back into climate change projects. And that’s something I would agree with. In my piece on the Commission’s draft report I suggested that increased FBT take should be recycled into funding a vehicle purchase scheme.

So I think one of the things that comes out of the Commission’s draft report is that its recommended changes are  going to affect the country and the community greatly, and we need to mitigate for that. And if funds are being raised from environmental taxation, my view is they need to be recycled into the economy to mitigate the impact of change.

That, by the way, was also the view of Sir Michael Cullen when he presented the Tax Working Group’s report, which covered environmental taxation, but its interesting observations on that were completely lost in all the hoo-ha over capital gains tax. As the Commission notes, one of the key objectives going forward is a

“process for factoring distributional impacts into climate policy and designing social, economic and tax policy in a way that minimises or mitigates the negative impacts.”

There’s going to be a very interesting debate on this issue which will continue for quite some time. But we are at a point where we’re going to need to take quick action, I believe, which come with consequences. We need to mitigate those consequences as far as possible.

Late last week, the OECD held its 11th meeting of the OECD/2020 inclusive framework on base erosion and profit shifting (BEPS). This is the international project on reforming international taxation.

The (virtual) meeting included a last address from the outgoing Secretary-General of the OECD, Angel Gurría. He talked about what has happened over his 15-year term as Secretary-General. As he said when he took the helm in 2006 –

“tax avoidance and evasion were running rampant. Urgent action was needed, and the aftermath of the global financial crisis presented the opportunity to crack down on these nefarious practices backed by the newly established G20.”

The Secretary-General then ran through the latest developments noting that 107 billion euros of additional tax revenue has been identified as a result of the initiatives such as the Common Reporting Standard and the Automatic Exchange of Information. There have been over 36,000 exchanges of tax rulings between jurisdictions and over 84 million financial accounts have been identified and exchanged in 2019, with a total value of around 10 trillion euros.

He also made a very important point that in a globalised world, tax cooperation is the only way to protect tax sovereignty. That was true at the start of his term in 2006 and remains the case now.  Without such cooperation each country’s domestic tax policies are at risk. The latest state of play is a reflection of this where if an international solution is not found by the middle of the year, over 40 countries, including New Zealand, are considering or will move ahead with a unilateral digital services tax.

The solution to this is the so-called Pillar One and Pillar Two proposals. Now, these are progressing, and an encouraging fact is that the new United States Secretary of the Treasury, Janet Yellen, as part of her confirmation hearings stated the United States is –

“committed to the cooperative multilateral effort to address base erosion and profit shifting through the OECD/G20 process, and to working to resolve the digital taxation disputes in that context.”

So that’s extremely encouraging.

The Secretary-General also picked up the Climate Change Commission’s draft report, that carbon pricing is an issue that needs to be addressed. As Mr Gurría noted across the OECD 70% of energy related CO2 emissions from advanced and emerging economies are entirely untaxed. And so, as he put it, “putting a big fat price on carbon is one of the most effective ways to tackle climate change by creating incentives to reduce emissions.”

Now, the Climate Change Commission’s recommendations and the ongoing OECD BEPS Initiative are just two of the major policy issues on which Inland Revenue will be needing to provide policy advice and ultimately implementation. Although the Treasury provides advice to the Ministers of Finance and Revenue on tax policy, Inland Revenue is the main tax policy adviser to the Government. That’s actually quite unusual by world standards, where more often it is the Treasury Department that drives tax policy advice.

So where is Inland Revenue at in terms of where it thinks tax policy is going? Well, as part of its general processes it prepares a briefing to each incoming Minister of Revenue. And the briefing Inland Revenue provided to the new Minister of Revenue, David Parker has now been released.

Inland Revenue, in conjunction with Treasury, will develop a tax policy work programme, which is then signed off by the Ministers of Finance and Revenue.  These programmes will show what the priorities are and the expected policy focus over the next 18 months.

Now, obviously, Covid-19 will have some impact on the programme. The five top policy issues that Inland Revenue have identified as key priorities are rebuilding the economy, issues related to misalignment of the top personal tax rate, the role of environmental taxes and what an environmental tax framework should look like, improving data analytics, and international tax settings.

And the briefing then goes on to set out significant current policy issues, most of which reflect these policy priorities.  There is a specific item on taxing the digital economy which notes –

“Ministers will need to make a decision about the suitability of any OECD multilateral solution for New Zealand and whether to progress a unilateral digital services tax.”

But as often is the way it’s what’s not actually said in a document that makes it interesting. Briefings to Incoming Ministers are usually frank in giving an overview of where the department is at, what the main policy issues are as it sees it, and how it proposes that it should deal with the issues. But not everything is revealed.

And there are one or two interesting redactions in here, one of which appears to relate to some form of investigation into taxation of wealth.  At a guess this is identifying the wealthy in the group, usually defined as those with more than $50 million dollars in assets, their tax behaviours, how much tax they pay and what are they doing to mitigate tax.

Interestingly, by the way, the tax concessions charities and not for profits get is going to be reviewed to “ensure they operate coherently and fairly and to ensure the integrity of the tax system is protected.”  As the Tax Working Group noted, it received a number of submissions complaining about tax preference treatment of charities.

The Briefing also talks about Inland Revenue’s Business Transformation project, described as “complex, high-risk and fiscally significant (costing $1.8 billion)” in the separate briefing provided by the Treasury to the Minister of Revenue.

And there are some more very interesting redactions in here relating to funding of the Inland Revenue including references to other reports which have not been provided and which I have therefore requested under the Official Information Act.

What some of these redactions to an issue that in my view the Minister of Revenue and the Commissioner of Inland Revenue, Naomi Ferguson, need to address,  is the poor state of morale.

Inland Revenue’s 2020 Annual Report, released just before Christmas, at the same time as the Briefing to Incoming Minister, puts its staff engagement at a shocking 25%. And it has been bumping around at the 25 to 29% for several years now. And that’s an impact of Business Transformation, which has shaken up the workforce in Inland Revenue quite substantially. In the year to June 2016, the headcount of Inland Revenue was 5,789. As of 30 June 2020, that has fallen to 4,831.

So a substantial amount of change has gone on in the department which doesn’t appear to have been welcomed or met with enthusiasm.  It has certainly had a dramatic impact on the Inland Revenue staff engagement and morale. Whatever you might think about Inland Revenue and its activities, poor staff engagement is not good for tax payers at large.

It should be said that remarkably and consistently Inland Revenue staff in their direct interactions with tax agents like myself and the general public continue to be highly professional, well-mannered and and responsive to our needs. But clearly behind the scenes, there is stuff going on that needs to be fixed and that should be a priority for the Minister of Revenue and the Commissioner of Inland Revenue.

There’s also ongoing controversy around exactly what savings are going to be achieved from Business Transformation. The scale of the Business Transformation project means the Cabinet gets regular updates on progress. So next week I’m going to take a closer look at a couple of the documents that have also been released in relation to Business Transformation.  These report on how it’s progressing relative to what was expected and what changes and additional funding, if any, may be required.

Well, that’s it for today. I’m Terry Baucher and you can find my podcast on website or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Until next week, Ka kite āno.

Climate Change Commission’s draft report

Climate Change Commission’s draft report

Terry Baucher looks at some of the taxation ramifications from the Climate Change Commission’s draft report

The Climate Change Commission released its draft advice for consultation on 31st January. What of note did it have to say about the role of taxation?

The Commission’s Necessary Action 3 recommended accelerating light electric vehicle (EV) uptake.  As part of this it suggested the Government:

Evaluate how to use the tax system to incentivise EV uptake and discourage the purchase and continued operation of ICE [internal combustion engine] vehicles.

As the Commission is no doubt aware taxes can have significant behavioural changes very quickly as the following example of the changes in the United Kingdom’s Landfill Tax illustrates.

Between its introduction in 1996 and 2016 the rate of Landfill Tax was increased from just under £10 a tonne in 1996 to nearly £90 a tonne by 2016. Over that 20-year period the annual amount of waste landfill fell from 50 million tonnes to 10 million tonnes.

So what tax changes could be used to incentivise change?

The available evidence indicates that the present fringe benefit tax (FBT) rules are unintentionally environmentally harmful. A NZ Transport Agency report in 2012 examining the impact of company cars found they were heavier with higher engine ratings than cars registered privately. The availability of employer-provided parking encouraged longer commutes from more dispersed, automobile-dependent locations than would otherwise occur.  Under present rules employer-provided parking is largely exempt from FBT.

The trend for larger, heavier vehicles has accelerated since 2012 with a greater preference for vehicles such as SUVs and utes. Last year 77% of all new passenger vehicle registrations were SUVs and utes.

A by-product of the trend for purchasing of twin-cab utes appears to be widespread non-compliance with the existing FBT rules. This is in part because of an incorrect perception that such vehicles automatically qualify for the “work-related vehicle” exemption from FBT. The combination of greater numbers of such vehicles and apparent under-enforcement of the FBT regime[1] exacerbates the trend for indirectly environmentally harmful practices identified by the NZTA in 2012.

Inland Revenue should therefore immediately increase its enforcement of the FBT rules relating to twin-cab utes. These changes should be allied with the adoption of the approach in Ireland and the United Kingdom where FBT is greater on higher emission vehicles. I consider these emission-based FBT rules can be adopted relatively quickly, and it ought to be possible to have these in place by 31st March 2023.

As an interim measure to encourage greater take up of EVs the Government could consider exempting EVs from FBT until the new emission-based FBT rules are in place.  In Ireland, EVs with an original market value below €50,000 are presently exempt from FBT. The threshold here could be $50,000.

Additional FBT related measures include increasing the application of FBT on the provision of carparks to employees and not taxing the provision of public transport to employees. This reverses the present treatment and fits better with a policy of decarbonisation without impacting an employer’s ability to provide such benefits.

Taxing the provision of employer-provided carparks could raise significant funds. The 2012 NZTA report estimated the annual value of free parking in Auckland to be $2,725. With at least 24,000 employer owned car parks in the city this amounted to a tax-free benefit of $65 million per annum. FBT is generally charged at 49% of the value of the benefit so the potential FBT payable could be between $75 and $100 million per annum.

The suggested FBT changes should change behaviour, but as the Commission also pointed out we need to reduce emissions. We have one of the oldest vehicle fleets in the OECD and it is getting older. The average age of light vehicles in Aotearoa New Zealand increased from 11.8 years to 14.4 years between 2000 and 2017.[2] Compounding this issue, the turnover of the vehicle fleet is slow, on average vehicles are scrapped after 19 years (compared with about 14 years in the United Kingdom). 

Furthermore, we are one of only three countries in the OECD without fuel efficiency standards. As a result the light vehicles entering Aotearoa New Zealand are more emissions-intensive than in most other developed countries. For example, across the top-selling 17 new light vehicle models, the most efficient variants available here have, on average, 21% higher emissions than their comparable variants in the United Kingdom. They are also less fuel efficient, burning more fuel and therefore generating higher emissions. The Ministry of Transport estimated if cars entering Aotearoa New Zealand were as fuel efficient as those entering the European Union, drivers would pay on average $794 less per year at the pump.

The Commission is concerned about the impact of its proposals on low-income families, who could be asked to bear a disproportionate part of the costs of change. For this reason, I suggest the funds raised from the FBT changes should be first applied to a vehicle exchange programme. This would remove older higher-emitting vehicles (say ten or more years old) by subsidising purchase of newer vehicles (maybe from car rental companies with excess stock).

If it seems counter-intuitive to subsidise “old carbon” technologies there are three short-term benefits to consider: newer cars generally have lower emissions, are more fuel efficient and are safer, indirectly helping reduce the road toll. This scheme also supports the most vulnerable families who cannot rely on public transport and are most likely have older, less fuel-efficient vehicles. Furthermore, funds involved would go further than if applied in directly subsidising the purchase of electric vehicles.

I also suggest the buy-back scheme is targeted at lower-income families and should therefore be means-tested.  A starting threshold might be the Working for Families tax credits threshold of $42,700 above which abatement applies. This threshold could be increased if the vehicle is more than, say, 15 years old with accelerated rates applying if the car is more than 19 years old (i.e. older than the life expectancy of the average car in Aotearoa New Zealand).

The Commission has opened the debate on our transition to a greener, low-emissions economy. Tax will have a major role in that as Pascal Saint-Amans, the Director of the OECD’s Centre for Tax Policy and Administration acknowledged last year when he suggested that when responding to the impact of Covid-19.

Governments should seize the opportunity to build a greener, more inclusive and more resilient economy. Rather than simply returning to business as usual, the goal should be to “build back better” and address some of the structural weaknesses that the crisis has laid bare.

A central priority should be to accelerate environmental tax reform. Today, taxes on polluting fuels are nowhere near the levels needed to encourage a shift towards clean energy. Seventy percent of energy-related CO2 emissions from advanced and emerging economies are entirely untaxed and some of the most polluting fuels remain among the least taxed (OECD, 2019). Adjusting taxes, along with state subsidies and investment, will be unavoidable to curb carbon emissions.

The 2019 Tax Working Group (the TWG) chaired by Sir Michael Cullen undertook a review of environmental taxation and made several significant recommendations in its final report.

Unfortunately, the backlash against the TWG’s proposed capital gains tax meant that its commentary and proposals on environmental taxation were overlooked.

Nevertheless, the TWG’s groundwork in this area now needs to be built on. It’s therefore interesting to note that in its briefing to the new Minister of Revenue David Parker Inland Revenue noted one of its top tax policy priorities was “the role of environmental taxes and what an environmental tax framework should look like.”

Given that David Parker is also the Minister for the Environment I suggest Inland Revenue might be accelerating its work in this field, if the goals suggested by the Climate Change Commission are to be met. Watch this space.

[1] FBT is tied to employment. Over the 10 years to 30th June 2020 the amount of PAYE collected by Inland Revenue rose by almost 66% from $20.5 billion to $34 billion. However, over the same period the amount of FBT paid rose 28% from $462 million to $593 million. This gap suggests some level of under-reporting and enforcement.

[2] By comparison in the United States in 2016 it was 11.6 years for cars and light trucks and 10.1 years for all vehicles in Australia for the same year and 7.4 years for passenger cars in Europe in 2014 (Ministry of Transport data)