18 Jul, 2022 | The Week in Tax
- Using tax law against gangs
- OECD tax coordination on MNCs
- Ireland’s tax risks
Transcript
Last Saturday, the ACT party leader David Seymour appeared on Newshub Nation and suggested that Inland Revenue be used to deal with the gangs.
He believed the powers currently being used by Inland Revenue as part of its high wealth individual research project could equally be applied to deal with the gangs. It did make for some entertaining viewing, as interviewer Rebecca Wright was more than a little incredulous at the suggestion that gang members wearing patches would happily submit to filling out questionnaires. On the other hand, the notorious mobster Al Capone, was ultimately jailed for tax evasion so the use of Inland Revenue against organised crime is not that unreasonable a suggestion.
Mr. Seymour does seem to have misunderstood the nature of the powers currently being used by Inland Revenue as part of its high wealth individual research project. Those powers have been deliberately limited so that the information gathered is solely for research purchase purposes. They are therefore more prescribed than the general powers available to Inland Revenue. I also think Mr. Seymour was overstating how much of a sanction non-compliance with the high worth individual research project would be.
Now Inland Revenue does indeed have some extensive powers of information request and where appropriate, search and seizure. And if you want an example of how it can apply those rules that can be found in the case of Tauber v Commissioner Inland Revenue.
In this case, Inland Revenue was investigating a former accountant who it believed was suppressing income. After its initial information requests were not satisfactorily answered in its view, Inland Revenue then decided to use the powers available to it under Section 16 of the Tax Administration Act. It carried out simultaneous search and seizure operations at six separate locations, including a boat shed.
Mr Tauber responded by making an application for judicial review, claiming that the various Section 16 warrants were too widely drawn and not specific enough. The application also questioned whether the searches were necessary for carrying out the Commissioner’s functions and if the searches were carried out in an unreasonable manner. Unfortunately for Mr Tauber and the other claimants the courts upheld Inland Revenue’s use of its powers.
The case illustrates the extensive powers available to Inland Revenue. However, what it also illustrates is that applying those powers is a very intensive operation requiring a considerable number of resources. If you’re raiding six properties simultaneously with teams of investigators, you’re talking about an operation which may have involved somewhere between 40 and 50 people. Now if you think about dealing with gang members Inland Revenue would also want to be raiding several premises simultaneously. Therefore, that would require considerable resources from it and no doubt police officers to be available in case matters escalated.
It’s therefore questionable whether Inland Revenue would actually have the resources to carry out major investigations into gangs. And although tax evasion is a criminal offence, Inland Revenue would probably be of the view that the powers available to police and other authorities under the anti-money laundering legislation, which have been strengthened this week, mean those agencies are more appropriately deployed to deal with organised crime.
This isn’t to say that Inland Revenue wouldn’t pass up the opportunity to investigate tax evasion involving gangs if it felt considerable sums were involved. But as the Tauber case shows, using its full range of investigatory powers requires considerable resources, which ultimately, I think, Inland Revenue might feel better used elsewhere. In other words, “Nice idea, but yeah nah.”
Update on OECD tax reform
Moving on, the OECD delivered its latest update on the status of the international tax reform agreement to G20 finance ministers and central bank governors a couple of weeks ago. This included a progress report on the status of Pillar One, which is the proposal to ensure that market jurisdictions can tax profits from some of the largest multinational enterprises.
The OECD Secretary-General presented a comprehensive draft of what these proposed technical model rules will be for Pillar One. These are now going to go out for public consultation between now and mid-August. The intention then is to finalise a new Multilateral Convention by mid-2023 for entry into force in 2024.
In addition to updating the status of the Multilateral Convention to implement Pillar One, the Secretary-General’s Tax Report also gave an update on how an implementation of the OECD transparency agenda (the Common Reporting Standards on The Automatic Exchange of Information). And the latest update is that information on at least 111 million financial accounts worldwide covering total assets of nearly €11 trillion was exchanged automatically between tax administrations in 2021. And later this year, the OECD will finalise a new crypto-assets reporting framework, which will be included as part of the Common Reporting Standards. So things are moving ahead even if they’re going more slowly than people had expected.
In relation to the Pillar Two work, which introduces a 15% global minimum global minimum corporate tax rate, the technical work on that is largely complete and an implementation framework is to be released later this year to facilitate the implementation and coordination between tax administrations and taxpayers. All G7 countries, the European Union and several other G20 countries, along with several other economies, have scheduled plans to introduce the global minimum tax rules. New Zealand hasn’t reached that stage but consultation on the matter has just ended, so we may see something later this year.
IRELAND’S TAX RISKS
Now one of the ideas behind the Pillar Two global minimum corporate tax rate is to try and stop tax competition driving corporate tax rates lower. Now, one of the poster child’s for lower corporate tax rates is Ireland. And last week I mentioned Ireland’s strong GDP per capita growth in recent years. This appears in part to be a by-product of multinational and multinational investment in Ireland, attracted by Ireland’s low corporate tax rate of 12.5%.
Now tax is always full of unintended consequences and this week the Irish Finance Ministry highlighted a potentially huge downside of this policy for Ireland.
Apparently just ten multinational firms pay over half of Ireland’s corporate tax receipts. These are expected to be between €18 and €19 billion this year, up from an estimated €16.9 billion forecast just three months ago. And by the way, that’s nearly a five-fold increase in the last decade.
Now, on the face of it that all sounds good. But John McCarthy, the Irish finance ministry’s economist, warned that the fact that just ten multinational firms pay more than half of honest corporate tax, represents “an incredible level of vulnerability” for the Irish economy, as a shock, which impacted on the multinational sector would have severe fiscal implications for Ireland. I understand something like one in nine Irish employees are employed by multinationals such as Facebook, Google and Pfizer. Therefore, the fallout from a shock in this sector could be huge for Ireland.
Mr. McCarthy told reporters the level of concentration in such a small number of firms is something he has never seen in any other economy. He was therefore more worried about the overreliance on these types of firms than the impact of the global overhaul of corporate tax regimes could have on Ireland’s position as a hub for multinational investment. Ireland power. The same report estimates that Ireland’s tax take would be affected negatively by about €2 billion over the medium term.
Irish Finance Minister Paschal Donohoe then chipped in saying he has long shared the concerns McCarthy outlined. He said the best way to manage the risk was to return to the pre-pandemic position where corporate tax receipts are not used to fund permanent spending. This seems an incredible admission that a low corporate tax rate is actually not sustainable over the long term. So that’s something to pause to think about when you hear talk about corporate tax cuts.
By the way, these concerns of the Irish finance minister and the Finance Ministry might explain why Ireland didn’t oppose the proposed 15% global minimum tax rate. I suspect that on the quiet this represents an opportunity for Ireland to raise its corporate tax rate without too much fuss. It would be interesting to know the level of concentration here in New Zealand. I guess the big four Australian banks and the New Zealand Superannuation Fund would represent at least 20% of the corporate income tax take.
IRD BACK LIQUIDATING DEFAULTERS
Moving on, a quick follow up from last week’s items about Inland Revenue’s enforcement and collection activity increasing. As of 30th June 2021, 140,000 taxpayers had arrangements with Inland Revenue covering $3.7 billion of tax. Now, Inland Revenue would be keen to ensure those numbers don’t continue to grow. Historically, what it’s done is taken strong enforcement action including initiating liquidations. Apparently about 70% of all high court liquidations were initiated by Inland Revenue. However, during the pandemic, as part of its more sympathetic response, that number fell to just under 30%.
However, I’ve been informed that since April that there’s been a huge escalation in Inland Revenue activity in the High Court and liquidation proceedings. So that’s the clearest sign of Inland Revenue’s increased focus on debt collection and a clear warning to all those out there that if you if you’re in trouble you need to front up and try and make arrangements with the Inland Revenue before they take it further to the liquidator.
AWARDS FINALISTS
And finally, this week, the Tax Policy Charitable Trust has just announced its four finalists in this year’s Tax Policy Scholarship competition.
This competition is designed to support tax policy, research and thinking. Entrance is limited to those under the age of 35, and the intention is that people are asked to give ideas of proposals for reforms to our current tax system, to address potential weaknesses and unintended consequences of existing laws. Now there are three topics in this year’s competition: environmental taxation, tax, administration generally, or the powers granted to the Commissioner of Inland Revenue and to investigate for research policy purposes. (These are the powers that Mr. Seymour was referring to in his interview about tackling the gangs).
The four finalists are Daniel Doughty, a senior consultant with EY in Wellington. He’s proposing a small business consolidated reporting regime to simplify tax reporting for small companies. I think this is an excellent suggestion, so look forward to finding more about this. Our tax system expects a lot of administration from small businesses without really trying to adjust the compliance burden to help them with those processes.
The second finalist is Mitchell Fraser, a tax solicitor with Mayne Wetherell in Auckland. Mitchell is worried that the new powers granted to Inland Revenue for tax policy purposes may have unintended consequences. He’s suggesting alternative means to collect the information that’s wanted, including through Statistics New Zealand.
The third finalist is Vivien Lei, a group tax advisor with Fisher Paykel Healthcare. Vivien has got another interesting proposal to change New Zealand’s environmental practises by introducing an impact weighted tax regime. Under this model, organisations will be taxed on a net positive or negative impact on the environment. Now this is an area I’m very interested in and previous readers or listeners of the podcast will know that John Lohrentz, one of the runners up in the last competition, proposed a progressive tax on bio genetic biogenic and methane emissions in the agriculture sector. It’s therefore good to see there’s plenty of focus on this area.
And finally, there’s Jordan Yates, a senior tax consultant with ASB in Auckland, and he believes the tax policy landscape has been fractured and suffocated by political roadblocks. I don’t think he’s wrong there. Jordan’s proposing an independent statutory authority that would be responsible for the independent management of fiscal policy as it relates to the tax base. It’s an idea I’ve heard floated in other places and another one I look forward to hearing more about. This fracture is one reason why the Minister of Revenue, David Parker, has proposed his Tax Principles Act.
The finalists have all been asked to develop a 5,000-word submission on their proposal. They’ll then make a final presentation and answer questions at a function later this year in October, after which the winner will be announced.
This is a great initiative by the Tax Policy, Charitable Trust, and I look forward to hearing more about these proposals. And as we did with Nigel Jemson, the winner of the last competition and runner-up John Lohrentz we will hopefully have the prize winners on the podcast.
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
4 Jul, 2022 | The Week in Tax
- Focus on international tax – getting serious about foreign income compliance
- A $70 million win over Big Tobacco.
- How are we going to pay for our roads in the future?
Transcript
It’s been a very busy week in international tax, beginning with the launch of Inland Revenue’s Compliance Focus on Offshore Tax.
This was accompanied by a number of presentations in Auckland, Wellington and Christchurch. As part of the launch, Inland Revenue has released a couple of guides aimed at the general public, one on Offshore Tax Transparency and the other a Foreign Income Guide. Alongside those, there’s a Foreign income checklist and a flowchart on the rules relating to the transitional residency exemption. All this is aimed at the general public and written clear in plain English.
It’s good to see Inland Revenue have stepped up the focus in this area because we deal with quite number of clients in this space around their international tax obligations and there is a sometimes-surprising lack of knowledge. The main guide is the form IR1246 on Offshore tax transparency. It’s relatively short at 28 pages, including a glossary and as I said, is aimed clearly at the general public.
It begins with a little section at the start about “What your taxes pay for”. I think we’ll see more and more of this as Inland Revenue rolls out various publications as part of its compliance programmes. It’s a reminder of how much tax revenue is raised and where does it go. In case you’re interested Social Security and Welfare is the biggest single amount at $36.8 billion in the year to June 2021 with Health coming in second at $22.8 billion and education third at $16 billion.
This is adopted from similar initiatives we’ve seen in other tax authorities around the world, emphasising your taxes are for the common good and here’s where your taxes are spent and here’s how they may benefit you. So that’s a deliberate policy aimed at reminding people that tax is part of the price we pay for a civilised society.
The guide explains Inland Revenue’s role within New Zealand and then works its way through the various international obligations and standards. Some of this is pretty boilerplate and well known to tax agents and advisors but possibly isn’t so well known to the general public.
And the key point that Inland Revenue is really stressing is that it has access to a number of international exchange or information exchange programmes such as an exchange of information on request through one of the various double tax agreements or international exchange agreements New Zealand is a signatory to.
Then there’s a section which would make anyone with property overseas sit up and pay attention:
We annually exchange land data with many of our treaty partners. The data we exchange is a combination of this information we obtained from the land transfer tax statements, received land information in New Zealand and our own internal tax data. We also receive similar information from some of our treaty partners, which serves as good initial intelligence with an option to follow up with further exchange of information requests during the course of more in-depth compliance work.
We actually experienced this with one client when Inland Revenue requested whether we had disclosed income from property in the United States as they had received information from the US regarding the property. We had, but it was still illuminating to see how much Inland Revenue knew.
And then there are the spontaneous exchanges of information under FATCA (the Foreign Account Tax Compliance Act), and the Common Reporting Standard on the Automatic Exchange of Information. Incidentally, the next exchange under the Common Reporting Standard is happening in September. There are the collection assistance agreements under several double tax agreements. This is something I don’t think people are really aware of Inland Revenue’s ability to ask overseas jurisdictions to go hunting for delinquent taxpayers and outstanding tax.
And then there’s the foreign trust regime’s reporting requirements. An interesting point here is that any information collected during the registration and annual return process of a New Zealand foreign trust is shared with the Department of Internal Affairs as the supervisor of trust and company service providers and the Financial Intelligence Unit of New Zealand Police. This information is shared because of their regulatory role in relation to anti-money laundering and countering the finance of terrorism.
The guide then runs through the various types of overseas income, and you can find more details in the Foreign Income Guide. This also includes taxpayers working remotely in New Zealand for overseas employers. This appears to be part of a new initiative.
One page in the guide has the header “Offshore is no longer off limits” and the guide explains Inland Revenue is involved with other international collaboration outside those agreements have already mentioned. These include the Joint International Taskforce on Shared Intelligence and Collaboration which apparently includes 35 of the world’s national tax administrations. There’s also the Study Group on Asia-Pacific Tax Administration and Research. I was not previously aware of these two organisations. So, you learn something every day.
Overall, this is a welcome and important initiative from Inland Revenue. People are now able to access easily understandable guidance as to their overseas income obligations. There’s an interesting comment that as a result of an initiative under the Common Reporting Standards, it received over 900 voluntary disclosures from people after they were advised Inland Revenue had received information regarding their overseas income. Voluntary disclosures happen regularly once people realise they have not complied with their obligations they come forward to rectify their errors.
“Leaving on a jet plane…”
Now, with the borders reopening and international travel resuming, Inland Revenue has decided to release for consultation a draft “Questions we’ve been asked” (QWBA) in relation to the deductibility of overseas expenses. This publication was actually delayed because of the pandemic as Inland Revenue thought it and we advisors might be busy elsewhere and really nobody was travelling.
This draft consultation covers the issue as to what extent can income tax deductions be claim for overseas travel costs other than meal costs? And basically, the answer is they can only to the extent they have a connection with deriving assessable income or carrying on a business. No deductions can be claimed for any part of the costs that are of a private or domestic nature or incurred in deriving exempt income. Now where the costs need to be impulse apportioned between deductible and deductible, then this must be done on a basis that is reasonable.
The draft QWBA doesn’t consider two issues: the treatment of a companion’s travelling costs which is covered by QB 13/05. And secondly, the deductibility of meal costs which is dealt with in Interpretation Statement IS 21/06.
This draft QWBA is a short document, 14 pages. It sets out the legislation, considers some of the current case law and then includes four practical examples covering various scenarios. The first is where there’s a both business and private purpose for travelling overseas. The second where there’s a business trip involving incidental private expenditure. Example three deals with someone is travelling overseas privately, but then realises on arrival there’s actually some business opportunities.
The final example deals with cancellation costs, which have not been refunded, something no doubt quite a few businesses experienced because of COVID 19. The example suggests that the cancellation fees are deductible because the costs were incurred in the course of, carrying on a business.
This is more useful guidance on a day-to-day issue which businesses and advisors are going to be encountering regularly now. It’s particularly opportune with borders reopening now, and international travel resuming.
Big Tech’s transfer pricing strategies
Now, last week I covered Google New Zealand’s December 2021 results. The same day Facebook also released its December 2021 results. These are the first results it’s released since December 2014. This is because Facebook has changed its model to now report on a country-by-country basis.
It’s interesting to see what’s gone on in the interim. Back in in 2014, Facebook paid $43,000 of tax on $1.2 million of revenue. This year, it’s reporting $6.5 million in revenue with a tax charge of $605,000. But the detail that’s of interest is what’s going on with its related party transactions as these give you a clue to the level of activity actually going on.
Facebook ‘s gross advertising income for the year to December 2021 was $88 million, which I have to say surprised me a bit as I thought it was higher than that. But anyway, these are the first concrete numbers we’ve seen for a while now.
$84 million was paid to Facebook Ireland for purchases of services.
Coincidentally, Facebook Ireland’s corporate tax rate just is 12.5%. So, you can work out yourself the potential saving that could represent for Facebook.
As I said in relation to Google’s results last week, it’s possible Inland Revenue is looking at this. We know there’s a lot of review activity going on in this space. Transfer pricing, audits and investigations do take some time and we got a clue as to how long and how they might play out result when British American Tobacco released its December 2021 results.
Included in these was a note that it had been engaged in an Advance Pricing Agreement (APA) process with Inland Revenue and the UK’s H.M. Revenue and Customs. This has been going on since March 2016 and it related to the combustible tobacco operations of the British American Tobacco Group. Agreement on the APA was finally reached in July 2021.
As a result, British American Tobacco New Zealand’s 2021 financial statements included a profit adjustment for prior years resulting in $70.6 million of additional tax payable for those prior years.
Now, the effect also of this agreement is that the tax payable for the December 2021 year rose from $3.8 million in the previous year to over $17.8 million. This increase illustrates the impact of the reduction in what overseas associates can charge. The turnover for New Zealand was roughly similar for both 2020 and 2021 at $247 million and $251 million respectively.
A win therefore for Inland Revenue and a little bit of a windfall as well for the Government. The case does show how long it takes to reach agreement on these issues.
Funding the road network
And finally, back in New Zealand, back in March the Government cut the fuel excise duty as a cost-of-living countermeasure. That was initially for a three-month period but is now being extended for a further two months until mid-August.
And this prompted David Chaston to take a look at the fiscal impact of this.
The National Land Transport Fund (NLTF) uses the funds from fuel excise duty and road user charges for the maintenance of country’s highway network.
The NLTF has some fairly big numbers going through it: in the year to June 2020, the total amount of fuel excise duty and road user charges amounted to just over $3.7 billion. In the June 2021 year, that total rose to just under $4.2 billion. However, as of April 2022, the total expected income from fuel excise duty and road user charges was about $23 million short of target. And obviously the longer the government keeps the fuel excise duty cut in place, the lower the income for the NLFT is going to be.
David therefore raised the issue about how are we going to fund the NLTF in the future? Remember that electric vehicles are currently exempt from those user charges, but thanks in part to the government’s clean car discount and the growing availability of electric vehicles, the number of EVs is rising. When does this exemption end? Longer term as the proportion of electric vehicles in the fleet rises, the amount of fuel excise duty will fall. This has to be an accelerating trend in order for the country to meet its emissions targets.
So, how is the NLTF to be funded in the future in order to maintain the highways? It seems to me there’s only two possible answers to that; firstly, increase road user charges, which means the exemption for electric vehicles must end, probably very soon. And secondly, and this is part of a wider decarbonisation issue, shift heavier traffic which increases wear and tear on highways to other modes of transport like local shipping and rail.
So that’s an interesting dilemma for any future government to be considering. I think any sort of environmental taxation moves in this space, are really more like behavioural taxes and therefore as the behaviour you are trying to discourage, the use of internal combustion engine vehicles declines, your revenue declines.
So longer term, some thinking has to go into how are we going to fund the maintenance of our highways? And it seems to me ultimately general taxation will need to become part of the mix. Rather than being specifically funded out of the National Land Transport Fund, the taxpayer will be paying a different way through contributions from the general tax pool.
That’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time. Ka pai te wiki, have a great week.
30 May, 2022 | The Week in Tax, Uncategorized
- Will the IRD be able to deliver the cost-of-living payment?
- Potentially unwelcome GST surprise for farmers selling up.
- The latest developments from the OECD
Transcript
In the wake of the Budget, a Cost of Living Payments bill was introduced and has now been enacted. As part of the enactment a supplementary analysis report was released giving background to the proposed $350 payment. And this supplementary analysis has some very interesting commentary.
It appears the Cost of Living Payment was put together very much at the last minute as a response to the adverse effects of inflation on low to middle income households. According to these documents, this report was finalised on May 4th, barely two weeks before the Budget was delivered, which is very late in budget terms.
According to the document, Inland Revenue recommended against being the delivery agency for this Cost of Living Payment. The reason it gave was that it was concerned, that being asked to administer the payment would significantly impact its services to customers – taxpayers in plain English.
“The addition of this payment to their portfolio of services Inland Revenue already delivers will compromise Inland Revenue’s already stretched workforce and affect the taxpayer population, including the families and individuals that the payment would be intended to support them.”
Inland Revenue correctly identified that as soon as the announcement was made, they would get contacted about it which would put strains on their systems. It calculated a maximum of approximately 750 full time equivalent staff would be required to handle the payments to be made in the weeks of 1st August, 1st September and 1st October. Now, to put that in context, Inland Revenue staff as of 30th June 2021 was 4,200 full time equivalents. It would therefore need to use the equivalent of 18% of its staff to handle the delivery of this Cost of Living Payment. Quite clearly this would put strains on its system. The $816 million appropriation for the Cost of Living Payments includes $16 million to Inland Revenue for delivery of the services.
It’s therefore likely that Inland Revenue will need to hire additional staff, presumably contractors, on a short-term basis. And as we’ve discussed previously, the issue of contractors hit the courts with the Employment Court ruling that the contractors were not employed by Inland Revenue although I understand that decision is being appealed.
It also seems the Inland Revenue poured a bit of cold water on how the payments would be structured. According to the report, 55% of the total payments to be made will be to the middle 40% of households, 20% would be made to the bottom 30%, and 25% would go to the top 30%. There would be an estimated 478,000 households with children and 610,000 households without children who would receive a Cost of Living Payment. Although around 60% of all potentially eligible recipients will have annual income below $70,000, 10% would have family income of between $70 and $100,000 and 30% will have family incomes over $100,000.
And this led Inland Revenue to point out that potential equity concerns could arise because using individual income to calculate the eligibility for the payment rather than household income may result in different outcomes for households with the same income level. For example, a single person earning $100,000 won’t receive a payment, but a household with two people working who each have income of $50,000 would both receive the payments.
There’s also some analysis regarding how the eligibility is dependent on a person’s prior year’s income, which means the tax returns for the March 2022 must be filed. The paper notes that by the time Inland Revenue begins making payments on 1st August, it expects to have already raised individual tax assessments for approximately 3.2 million individuals, about 75% of individual taxpayers. But that leaves about 500,000 individuals, who may not initially receive the payment between the August to October payment run period because they haven’t filed their tax return. And this includes people who file through tax agents and have in theory until 31st March 2023 to file last year’s tax return.
This underlines a point I made in last week’s Budget commentary that you can probably expect tax agents to come under more pressure to get tax returns done on time so that those people who think they’re eligible may get a Cost of Living Payment. Overall, it’s some interesting insights into the administration of these systems and the Budget process.
GST pitfalls for the unwary
Now moving on, GST is probably the best example you can find of the broad-base low-rate approach to taxation policy. But even though it’s a highly comprehensive tax, that does not make it a simple tax. In fact, it’s full of pitfalls for the unwary. And I’ve been alerted to one which may affect farmers who are selling up.
Back in 2020, Inland Revenue caused some consternation when it issued Interpretation Statement IS20/05 on the supplies of residences and other real property. The Interpretation Statement reversed a long-established policy since 1996 on the sale of the farmhouse where the farmer might have used part of the property for their taxable activity, for example a home office in the homestead. Previously Inland Revenue’s position was that the sale of a farmhouse would generally be a supply of a private or exempt asset and not subject to GST.
However, in IS 20/05, Inland Revenue reversed that position and now said that the sale of the dwelling would have been useful for families who would now be subject to GST. The example the Interpretation Statement gave was if a GST registered farmer was claiming an automatic 20% deduction for farmhouse expenses, an Inland Revenue would expect that the property was therefore being used 20% of the time in the taxable activity and consequently sale of the farmhouse would be a supply in the course or furtherance of a taxable activity and therefore subject to GST.
This change has caused some consternation although some relief was given in the recently enacted Taxation Annual Rates for 2021-2022, GST, and Remedial Matters Act. This included a provision which allowed a deduction for the private use portion of a sale. Coming back to that 20% example I mentioned a moment ago, if 20% of the homestead was used for farming business and 80% for private purposes, there would be an adjustment for the output tax of 80% of the private portion. But that would still mean that 20% of the current value of the farmhouse at the time of sale would be subject to GST, which would be an increased tax burden for many farmers and undoubtedly a surprise for some.
Apparently Inland Revenue is now indicating that it may reconsider its position in its Interpretation Statement, which is a classic example of the military maxim “Order, counter-order, disorder”. But until that point is clarified, farmers who are selling their farm should be aware of this potential liability and seek advice on that transaction.
How the OECD influences our tax policy
And finally this week, a couple of updates from the OECD. Firstly, it released its annual report on the taxation of wages. This includes its tax wedge analysis, which looks at the difference between labour costs to the employer and the corresponding net take home pay for the employee. Basically, the tax wedge is the sum of the personal tax income tax payable by the employee plus any employee and employer social security contributions plus any payroll taxes less any benefits received by an employee. (I think ACC is included for these purposes).
As can be seen New Zealand, scores very highly with a tax wedge of 19.4%, which is the third lowest in the OECD. The average in the OECD is 34.6%.
What this tax wedge measure also points to is the significance of Social Security and payroll taxes in other jurisdictions. One of the criticisms of the Government’s proposed social insurance scheme is it would be the first real Social Security tax that New Zealand has. It seems from early feedback this is one reason employers are pretty reluctant about the scheme. But even if the scheme was introduced, we’d still be down the lower end of the tax wedge.
Now the second OECD report was titled Tax Cooperation for the 21st Century. This was prepared by the OECD for the G7 finance ministers and central bank governors when they met recently in Germany. It’s particularly interesting because it picks up on what’s been happening with the adoption of the Two Pillar solution for international taxation we’ve talked about recently.
The OECD was asked to prepare was a report that would focus on the further strengthening of international tax co-operation and what recommendations it has in this field. This is looking beyond the implementation of the Two Pillar solution which makes it very significant, in my view, about the future administration of international tax.
For example, a key recommendation is tax administration should be seen as a common mission by tax authorities rather than a potentially adversarial exercise. The development of international cooperation is one of the biggest themes in international taxation in the 21st Century and is also probably one of the least understood. And I will repeat what I’ve said beforehand, most people are oblivious to the amount of information that is being shared by tax authorities at all levels. China, incidentally, has just signed up to the mutual agreement and protocols on that. So every major jurisdiction in the world is cooperating or looking to cooperate on international tax at some level. This is why this paper is important because it starts to map out and where that international co-operation might be going.
The report focuses initially on corporate tax saying there needs to be a reliable framework for cross-border investment. As just noted, tax administration should be seen as a common mission. There should be a collaborative approach with early and binding resolution.
The impact of going digital is emphasised and that it needs to speed up to improve engagement with taxpayers. There are also recommendations beyond corporate tax about moving to real time data availability for taxpayers and tax administrations to make efficient use of evolving technologies while maintaining data privacy and confidentiality.
The issue of data privacy and confidentiality is a developing area where taxpayers are starting to push back against tax authorities because they are concerned, rightly, whether everything is secure as it should be. Furthermore, some are, understandably, not too happy about information sharing.
Finally there’s a recommendation that advanced economies should commit to supporting developing economies so that they can fully benefit from the policy changes. This means building capacity which is going to be needed, especially for the implementation of the Two Pillar solution. Overall, this is a relatively brief but fascinating paper with potentially significant implications.
And just incidentally, on the international Two Pillar solution, the Secretary General of the OECD has now indicated that he expects that implementation will be delayed by a year until 2024. That doesn’t surprise me, given the scale of the project, because there’s a lot of legislation that needs to be put in place by the middle of next year at the latest. Inland Revenue have only just started consultation on the matter.
Still, the Two Pillar project has moved on quicker than some cynics might have expected. But as I’ve said previously, politics is likely to get in the way, particularly the upcoming US Congressional midterm elections. Anyway, as always, we shall bring you the news as it develops.
Well, that’s all for this week I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
16 May, 2022 | The Week in Tax
- Inland Revenue consults on the OECD Pillar Two GloBE rules for New Zealand and has a new CEO
- Working for families consultation
- A look ahead to next week’s Budget
Transcript
Last year, the G20 and OECD agreed on a two pillar solution to the issue of international taxation and in October 2021, this two pillar solution was endorsed by over 130 countries in what is deemed the OECD sponsored Inclusive Framework. New Zealand was one of the signatories to that endorsement.
Inland Revenue has now released an issues paper looking at how these so-called GloBE rules (Global anti Base Erosion) would operate. Now as this is an issues paper it does not represent government policy. Instead, Inland Revenue is putting the matter out for consultation because the government has not yet decided whether in fact it will adopt Pillar one or Pillar two, and in fact is also not ruled out adopting a digital services tax. So, this issues paper is a basis for formulating policy to be taken to the government. It therefore partly represents a background paper, but also explains how the rules would operate.
To recap, the purpose of the GloBE rules is to ensure that affected multinational groups (MNEs) pay at least a 15% tax on their income in each country where that income is reported for financial reporting purposes. It’s initially intended to apply to MNEs if their annual turnover exceeds €750 million per annum in two of the last four years. It’s estimated to initially apply to approximately 1500 multinational groups worldwide, of which approximately 20 to 25 are based in New Zealand. The OECD estimates that the global revenue gains under Pillar two will be in the order of US$130 to $185 billion annually, which represents about 6 to 7.5% of global corporate income tax revenues.
The paper is split into three parts. Part one is a general overview with Chapter one giving the background on the initiative and on its intended purpose. Chapter two has a summary of the rules in general, and chapter three raises the question which may seem odd ‘Should New Zealand adopt the GloBE rules?’ Part two then explains the proposed rules in more detail, and part three then covers all specific issues form a New Zealand perspective,
The paper is quite comprehensive running to 84 pages so there’s quite a bit of detail to go through here. Fortunately, we’ve got quite a good period of consultation because consultations open until 1st July. Normally we only have a 4-to-6-week period for consultation.
Now, as I said, what may seem a rather strange question is whether New Zealand adopts the rules is a key part of the consultation. The official view is that if a critical mass of countries do adopt or are likely to adopt the global rules, then officials would recommend New Zealand take steps to join them. Officials take the view that they see no benefit, or not much benefit, in New Zealand going it alone and adopting global rules without a critical mass.
Three questions are put to submitters on this issue.
- Do you think New Zealand should adopt the GLoBE rules if a critical mass of other countries does or is likely to do so?
- Do you have any comments about what a critical mass of countries would be?
- Do you have any comments on the timing of adoption?
Now my response would be ‘yes’, New Zealand should, because it’s part of being a good corporate global citizen. Obviously, there’s a likelihood of additional revenue gains, although according to the paper the potential gains are said to be modest.
What would represent a critical mass of countries? Well, that’s a difficult one. I guess the key country to being involved would be the United States. But as you know, they’ve always ploughed their own furrow on this matter. And politics are such that the Midterm Congressional elections may mean that the Republicans are able to block change on this. Like we’ve said in the last couple of weeks when discussing possible wealth taxes, it all comes down to politics. But certainly, if the majority of the 130 countries that have endorsed it do sign up, you’d think that we would want to go ahead even if the United States didn’t. But it would be disappointing, obviously, if America did not.
And then about the timing of these rules this is actually quite tight. Under the Pillar 2 proposals, there is an income inclusion rule which will impose the top up tax on the parent entity in a multinational group. Now under the OECD timeline that should be enacted during 2022 in order to be effective in 2023. And then there’s another part, the under-taxed profits rules, which should come into effect in 2024. I think that timeline is pretty optimistic. I would be expecting to see it slide out a bit, but who knows what the international mood is on this? Maybe progress happens much more quickly than we expect
Anyway, this is an important paper and there’s a lot to consider here. Maybe the gains might be modest, but it is part of the change in international taxation, which will have ripple effects all the way through the tax world
Issues for the recycled ‘new’ IRD CEO
Moving on, Inland Revenue has a new CEO, Mr. Peter Mersi, who has been appointed for five years with effect from 1st July. He takes over from Naomi Ferguson, who has been the CEO of Inland Revenue for the past 10 years and has seen the department through the Business Transformation project.
As it transpires, Mr. Mersi, who is currently the CEO at the Ministry of Transport was a Deputy Commissioner at Inland Revenue at the start of the Business Transformation Project back in 2012. And prior to that he also spent some time at Treasury where he was the Deputy Secretary, Regulatory and Tax Policy branch.
So, although he’s coming from a Ministry of Transport background, Inland Revenue is not unfamiliar territory for him. It will be interesting to see how the organisation develops under his direction and governance of whichever hue will want to cash in on the benefits of the Business Transformation project.
And of course, one of the areas that he and the department will be involved in will be the implementation of law changes such as the proposed GloBE rules we’ve been talking about. And one thing he will need to ensure alongside the Minister of Revenue is that the Department continues to remain adequately funded. And I point to the troubles of the United States Internal Revenue Service, which has had its problems with enforcing the controversial FATCA rules which I mentioned a couple of weeks back.
It seems from another report from the United States Treasury Inspector General for Tax Administration, that the IRS is struggling with funding and its enforcement is falling off as a result. This led the Inspector General to comment. “The trending decline in enforcement activity is likely causing growth in the overall Tax Gap as taxpayers are less likely to be subject to an examination.”
The numbers of what the IRS call examinations, what Inland Revenue terms risk reviews, have fallen by between 55% and nearly 60% in the past five fiscal years. It bears to keep in mind that our IRD is actually a very efficient organisation, which, to borrow a phrase, you mis-underestimate at your peril. But as the example of the IRS shows, if funding falls away the opportunity opens up for the unscrupulous to evade tax.
‘Consulting’ on WfF
There’s a lot going on at the moment, partly because we are in the run up to the Budget next week. Something that’s been underway is for a few weeks now is a public consultation on Working for Families tax credits. This is being handled by the Ministry of Social Development and Inland Revenue. It’s part of a government review of working for families.
It’s interesting to look at what we’re being asked here compared with a typical Inland Revenue consultation, which has a lot more detail and is quite focussed.
The basic question that’s been posted is what do you like about Working for Families? Is there anything you want, don’t want changed? How do you think it can better support low income working families, families changing hours shift, working part time hours and those with care arrangements? What concerns do you have? And if you could change one thing about working families, what would it be? Now those are a set of questions are really not directed at professionals, but I hope that it gets a lot of good buy-in from the public.
In relation to concerns which I would raise one would be about how accessible it is. As my colleague, Professor Susan St Jones has pointed out, the in-work tax credits are a problem because they’re not available to everyone. And then there is the abatement rates and the resulting very high effective marginal tax rates which people on Working for Families suffer. They actually have the highest effective marginal tax rate of any taxpayer in the country. So those are areas where I think should be the focus for improvement.
Tinkering with WfF
Speaking of Working for Families, the Budget is next week, and I expect that there will be some tinkering going on with Working for Families based around the background papers to the consultation. They seem to be pointing towards an increase in payments being announced or being implemented in the Budget. Of course, with the cost-of-living issue, the Government probably will be keen to do something on that matter.
New Zealand budgets are actually really quite boring from a tax perspective. They’re not like budgets I used to see in Britain, for example, where tax measures came out from left field and were not always very coherent in what they’re trying to do. They certainly contained a lot of tinkering which kept us on our toes.
We’re not likely to see much like that next week. Bill English was one for sneaking in quiet tax increases or changes such as imposing employee contribution superannuation tax on KiwiSaver employer contributions, or withdrawing smaller allowances that were meant for children, the so-called “Paper-boy tax”.
One tax issue which has been hammered away at in recent weeks is fact that the tax thresholds have not been increased or adjusted since 2010. Eric Crampton of the New Zealand Initiative had a look at this. He considered what had gone on with the thresholds and where as a result the average tax burden had shifted. He made some educated guesses as to where those thresholds should be now.
But there is actually some information floating around which would give us a more reasonable direction of what the thresholds should be if they had tracked along with inflation. These are the ACC thresholds for the upper limit of earnings on which the maximum 80% of income that may be paid out under a claim is based.
Back in 2010, when income tax rates were last adjusted, the ACC threshold was $110,018. As of 1st of April this year, it’s now $136,544. And so that increase over time over the period represents just over 24.1%.
So if you applied that 24% increase to the tax thresholds, this would be the position
| Tax rate |
Current thresholds |
Adjusted thresholds |
| 10.5% |
$0-$14,000 |
$0-$17,375 |
| 17.5% |
$14,001-$48,000 |
$17,376-$59,573 |
| 30% |
$48,001-$70,000 |
$59,574-$86,870 |
| 33% |
$70,000-$180,000 |
$86,871-$180,000 |
| 39% |
>$180,000 |
$180,000 |
(Note I’ve not adjusted the $180,000 threshold as it has only been in effect since 1 April 2021).
So that gives you some indication of what’s been going on. I think Governments of both sides have been, quite frankly, underhand in not adjusting for inflation. It isn’t just the tax thresholds, they’ve also done it in their other areas, such as Working for Families, where the threshold for abatement kicking in at $42,700, which is well below the $59,500 odd I suggested would be the upper limit to the 17.5% threshold. It will be interesting to see if anything is said or done about tax thresholds next week, but it’s a point that will certainly be addressed one way or another before next year’s election.
Talking of inflation, Inland Revenue has released a CPI adjustment to the square metre rate for dual use premises. This is where you can base a deduction for home office on a square metre rate. This has been set for the year ended 31st March 2022 at $47.85, which has been adjusted for 6.9% inflation in the 12 months to March 2022. So that’s a little useful thing to keep in mind when you’re preparing tax returns for clients who work from home or have a home office.
Rich entertainers avoiding tax
And finally, what have the Rolling Stones got to do with tax? Well, apparently this week is the 50th anniversary of the release of their magnum opus, Exile on Main Street. And the title is a deliberate reference to the fact that the Rolling Stones in 1971 decamped to the south of France because they were in trouble with UK tax authorities and facing very significant tax bills. At that stage, tax rates in the UK in some cases topped out at 98%.
So they went to France to record this album which is regarded by many as their creative peak. There’s a great story in The Guardian about what happened, including this fantastic quote ‘People took so many drugs, they forgot they played on it’.
Tax troubles and musicians go hand in hand. There are plenty of stories about various musicians and actors who’ve got themselves into terrible trouble with tax authorities and either finished up in jail, such as Wesley Snipes, or decamped elsewhere, like the Rolling Stones.
Well, that’s all for this week I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
9 Feb, 2022 | The Week in Tax, Uncategorized
- Terry Baucher looks at what’s ahead in the world of tax this year and finds some big issues
- some lingering from the past
- and some new ones to be grappled with
Transcript
2022 is only four weeks old, but as was the case last year and in 2020, COVID-19, this time in the form of the Omicron variant, will dominate the news and fiscal policy.
Tax responses to the pandemic
What exactly the Government’s fiscal response to Omicron will be is not yet clear. There’s no mention so far of a new round of Resurgence Support Payments or a general wage subsidy. And now, since we’ve moved into the red traffic light setting as of midnight on 23rd January, there’s concern many employees will soon be unable to work because they’re either sick or self-isolating from Omicron.
So what support is available? Well, at the moment it’s just the Leave Support Scheme or the Short-Term Absence Payment scheme. These have replaced the wage subsidy. The Leave Support Scheme is a payment for when a person or a dependent is required to self-isolate due to Covid-19 either because they’ve been exposed to it, or they’re considered high risk if they were to contract it. The Short-Term Absence Payment, on the other hand, is designed to help employees who are self-isolating while they’re awaiting the result of a Covid-19 test. In order to be eligible for the Leave Support Scheme the Short-Term Absence Payment the employee needs to be unable to work from home.
The Leave Support Scheme is paid at a rate of $600 a week for full time workers, those doing more than 20 hours a week, and $359 a week for part time workers, i.e. less than 20 hours a week. The rules around these payments are set out in the Covid-19 guidelines, and for the moment, that’s all that’s available. And by the way, both payments are administered by the Ministry of Social Development and will be made regardless of the financial position of the employer.
Industries such as hospitality, tourism and the performing arts sector have all been hit hard and will be affected by the move to the red traffic light system. But at present, nothing in the form of an updated Resurgence Support Payment or something new has been mentioned.
Any response to this issue is clearly a matter of politics although it will have a fiscal impact. Bernard Hickey, the economic commentator and journalist, has put together an analysis of the impact of the Covid-19 support to date and who has benefited from that, and the numbers are quite eye watering. In his daily newsletter, he says that the government’s interventions to print $58 billion through the Reserve Bank and give $20 billion in cash to business owners helped make owners of homes and businesses $952 billion richer since December 2019. This is one of the greatest transfers of wealth New Zealand has ever seen. It’s also highlighted the pressure on those at the other end of the scale. The poorest New Zealanders now owe $400 million more to MSD and need twice as many food parcels as they did before Covid-19.
Now as I said most of this is political, and we’ll see if the optics of such huge changes will affect how the next form of fiscal support will be designed. Will it be as generous, or, as many people have said, should the funds be going directly to employees and those infected rather than through their employer?
Taxation of capital
More importantly, the never-ending issue of the question of the taxation of capital will re-emerge on this. We’ve already had discussions with one or two other people in the policy space around what we think could be happening in the year ahead and the question of inequality and taxation of capital has popped up again. Although it seems incredible to think the last election wasn’t so long ago, there’s an election next year, and I imagine there would start to be some jockeying around positioning for that.
So Omicron and Covid-19 and God forbid, any further variants, will play out on the economy. What type of support the Government gives and how it funds it will have tax implications. It might be, for example, the Government might have a look again at whether it allows the carry back of tax losses. They were going to push ahead with, a permanent scheme, but dropped it for fiscal costs. They may have a think again because the fiscal cost might not be so great as expected or feared, and can actually be concentrated on sectors which are getting hit hard anyway. So that’s something to look out for. So, watch this space and we’ll bring you news of developments throughout this year as they happen.
International tax reform
The next area I think we will see, and again repeating a theme from last year, will international tax reform and following through with the implementation of the agreement on the taxation of the largest multinationals and the digital tech giants. This year the detail of that agreement is to be worked out. The OECD released last week the transfer pricing guidelines for multinational enterprises and tax administrations for 2022.
140 odd jurisdictions have committed to the reforms of digital taxation and will be working on making sure that it meets these pretty ambitious deadline to be in place by the end of the year, so we’ll see a string of developments in that field.
How our tax system is run
And finally, on the domestic front, the issue which I think will dominate is what next for Inland Revenue now it’s completed its Business Transformation? Basically this is about how the tax system is run. Now, this may sound like a dry topic, but there’s already been quite a bit of manoeuvring around what is the future of tax administration.
On this, I would recommend reading a paper prepared by Business New Zealand in conjunction with tax experts (some of whom included members of the Tax Working Group, such as Robin Oliver) on the future of tax administration. I understand sometime soon we’ll see a Government Green Paper on tax administration, which would explore what tax administration could look like in future and how to make best use of Inland Revenue’s completed Business Transformation project.
What Business New Zealand and its working group have done, is put together a roadmap including a series of revised tax principles applicable for tax administration. This is talking about the delivery of tax policy and administration, not about actual tax policy settings, per se.
One of the things that’s stands out from this paper is that Business New Zealand, and from my initial discussions with Inland Revenue on the topic, see Inland Revenue moving more to focus on system management and partnering and assisting a wide range of participants in the tax system other than taxpayers themselves. This is a bit of a change in the whole approach. Inland Revenue is no longer adopted a top down “It’s my way or the highway” around how tax is administered and delivered.
The paper sets out seven tax administration principles. Firstly, “The purpose of ongoing reform is to reduce the risks and costs for all participants in the tax system and improve national wellbeing”. Nothing too controversial about that, totally agree.
Secondly, “The tax system is built to assist those who voluntarily comply, with robust enforcement for those who do not.”
I wholeheartedly agree with that. Voluntary compliance is undermined if Inland Revenue does not throw the book at those who are not complying.
One of the issues raised in this paper and which has been picked up in other papers on tax administration I’ve seen from around the world, is that sometimes this means tax authorities have to take an approach to a particular sector or area of enforcement where it might not necessarily see there’s a lot of money in it for them. For example, the fringe benefit tax issue around the infamous twin cab Ute. Inland Revenue has said, “Well, yeah, we think there’s an issue there, but we don’t know whether it’s worth our while”. Under this tax administration principle, it’s, “No, you really do need to look at that, there are wider integrity issues as to why you should do so”.
Three. “Everyone understands their rights and obligations through clear, unambiguous legislation and guidance.”
Very strong support of that principle. And as we talked about last year, one of the pressures that’s coming into the tax system is we’re getting less clear legislation and guidance. This is because the Government is doing things a little bit ad hoc as it responds to pressures, inevitable pressures sometimes, but the tax policy process has not been as robust as it could have been.
And there are two obvious example to talk about here. Firstly, the interest deduction rules and secondly, the proposals to ask high wealth individuals to provide more details about their assets and how they’re held. Both those policies have been done one would argue, a little bit on the hoof, and this certainly caused pushback as a result.
Following through on this, the fourth principle is “Tax rules are designed and administered in a way which reduces compliance and administration costs.” And again, everyone can get behind this. Business NZ paper points out this is something that’s actually much more important for small businesses and microbusinesses where the costs fall heaviest on them, and often they don’t have the tools in terms of the resources to manage their tax liabilities.
The fifth principle is “Tax policy proposals are critically evaluated against the ability to automate outcomes.” Very straightforward. No issues there.
Sixthly, “A well-functioning tax system recognises the role and importance of intermediaries.” Now, regular listeners of the podcast will know that sometimes as tax agents, we felt unhappy about how Inland Revenue had interacted with us and about how the Business Transformation process was implemented.
And what this paper points out is intermediaries such as tax agents and other software designers are incredibly important to the tax system going forward. To be fair to Inland Revenue, that seems to be also coming through on what I’m hearing from them. A very important change there and a welcome one, too.
And finally, “Taxpayers and intermediaries are held responsible only for matters within their knowledge or control.” This is a fair point setting some boundaries so that taxpayers are not held accountable for errors beyond their control or knowledge. This might happen because sometimes information wasn’t available or can never be made available to a taxpayer or an intermediary. At present the tax system can come down hard on the reporting person because they should have known, when in fact they may not have done or could not have done.
The paper suggests for example that Inland Revenue which has better knowledge should be responsible for advising taxpayers and intermediaries of incorrect tax rates and tax codes. So this is an issue of increasing fairness in the tax system.
Now I understand that Inland Revenue is going to produce a Green Paper for discussion and is considering holding a symposium later this year to discuss these matters. Although it sounds like an arcane topic it’s certainly, going to be quite an important issue for the year going forward. And as always, we will bring you developments as they happen.
Well, that’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and send me your feedback and tell your friends and clients. Until next time, kia pai te wiki, have a great week.
