31 October 2014
Speech to Chartered Accountants Australia and New Zealand tax conference
I’m pleased to be here today as this is my first speech since the election and I have, to my great satisfaction, retained the Revenue portfolio and therefore the privilege as the Minister of Revenue of opening this conference.
I’m happy to say that New Zealand is in an enviable position with a good tax and social policy system. We are served well by our broad-base, low-rate (BBLR) tax settings.
This is consistent with the advice I have received from Inland Revenue in its recent Briefing to the Incoming Minister.
I don’t see fundamental problems requiring an urgent and radical shift in these settings. But a big challenge and also a huge opportunity is IRD’s Business Transformation.
Taxes are critically important, but taxes impose costs in addition to the actual tax. This includes costs to taxpayers and their advisers in complying with the tax system as well as costs to Inland Revenue itself in administering the tax system.
It also includes distortionary costs because taxes can encourage people to do things that would not be sensible in the absence of tax.
They can encourage firms to invest or individuals to save in unproductive ways. They can discourage entrepreneurs from taking on risk or individuals from joining the workforce, undertaking training or taking on more demanding jobs.
So it is beholden on us to minimise those costs and collect revenue in as efficient a manner as possible without high and very distorting tax rates.
Our broad tax bases keep distortions to a minimum and this is reinforced by keeping tax rates as low as possible.
New Zealand’s relatively consistent broad base, low rate (BBLR) framework is well regarded. Deloitte’s 2014 Asia Pacific Tax Complexity Survey Report found that most survey respondents rated New Zealand’s tax policies as straightforward, consistent and predictable compared with other countries in the region.
And most recently, an international study by the Tax Foundation based in Washington DC ranked New Zealand as having the second most competitive tax system in the OECD. This study took account of the neutrality of tax settings as well as tax rates.
Despite the fact that NZ is not a “low tax” OECD country (NZ tax collected as a percentage of GDP is around the OECD average), we still achieved this high ranking in the study, which I find remarkable and a tribute to our BBLR settings.
So I don’t see any “burning platform” requiring an urgent and radical shift in tax policy settings. But at the same time there are huge opportunities with Business Transformation to improve the way that taxes are administered.
The Government remains focused on returning to surplus and its long-term fiscal objective remains to reduce net core Crown debt to 20 per cent of GDP by 2020.
The Government has 10 priority goals and targets in the areas of long-term welfare dependency, supporting vulnerable children, boosting skills and employment, reducing crime and improving interaction with government.
The key way the tax system can help with this is in providing revenue to improve the fiscal position and spend on priority areas.
Taxes also have an important role in allowing New Zealand to create a genuinely inclusive society where everyone has a reasonable chance to get ahead. We want a society where everyone pays a fair share of tax.
Fairness is not a matter of kneecapping entrepreneurs who make a success of building businesses from New Zealand. We want innovative ideas to flourish and businesses to thrive in New Zealand.
But we want a tax system which is fair where everyone does their bit to finance government spending and look after those who are genuinely disadvantaged.
Business transformation is not simply about replacing an old computer system. It’s about bringing the tax administration into the 21st century to reflect changes in technology and to meet customer expectations.
A big part of this is changing the tax administration rules to make things easier for individuals and businesses and reduce costs across the economy as a whole. To achieve this we will look at all the rules for when people pay tax, how they pay it and what happens if they don’t pay.
And it’s not just straight payment of tax. Inland Revenue aims to be an intelligence-led organisation. Therefore a key part of the exercise is ensuring that Inland Revenue collects relevant and useful information in a form it can use.
As I mentioned before, taxes result in costs: administration, compliance costs and distortionary costs. An efficient tax system keeps these to a minimum.
Apart from anything else, we need the tax system to be fair and seen to be fair.
Our tax system rests on voluntary compliance. It should be as easy as possible for those who want to do the right thing to comply. Equally it should be difficult for taxpayers not to comply.
This will become more and more important as we look to the future. An ageing New Zealand population creates extra fiscal pressures and well before we rush to bringing in higher tax rates or new taxes we should do everything we can to make sure that the current tax system works as well as possible.
This means that IRD’s transformation cannot have a single focus. It must balance minimising the costs of raising taxes with fairness concerns and ensuring the tax system promotes high levels of compliance. And this will inevitably involve making trade-offs between competing priorities.
The Government is not going to write a blank cheque for this transformation. We’re operating in a constrained fiscal environment and the Government is demanding value for money.
But business transformation is not about shifting costs from the Government to taxpayers. The reforms will not be successful if administration costs are cut but we see compliance costs rise and total costs for NZ as a whole increase.
Nor will transformation be successful if compliance costs fall but these are replaced by greater distortionary costs.
We want to avoid simplistic solutions such as lowering tax rates, denying deductions for expenses and taxing turnover. If someone can employ someone for $90 and make $100 in revenue, we want this to happen. This requires us to allow deductions for valid business expenses.
We are dealing with major issues.
Chris Evans who spoke at the 21st Century Tax Admin Conference argued that compliance costs per SME were likely to be very low in New Zealand. But at the same time we have very high numbers of SMEs.
IRD’s 2009 compliance cost study suggested compliance costs of a bit over $5,500 per SME. But there were almost 450,000 SMEs. This would suggest an aggregate compliance cost for SMEs of $2.5 billion which is more than 1% of NZ’s GDP. This is for SMEs alone.
In the US, academic research has suggested compliance costs could be of the order of 10% of tax revenues.
Thus, compliance costs are likely to be big and important. The distortionary costs of taxes are likely to be larger still. This is despite New Zealand’s relatively attractive BBLR tax policy settings.
Cutting compliance costs, especially for SMEs, is a priority. Using Business Transformation to simplify things for SMEs is one of the Government’s top 10 priorities under its Business Growth Agenda. But it is important to understand what this involves.
Cutting compliance costs for SMEs is not about cutting taxes for them. If smaller businesses face lower tax rates on their income than larger businesses, this reduces productivity by biasing business activity towards smaller firms.
Simplification is about realising that close enough may be good enough for SMEs. If it is possible to make things simpler for SMEs without putting a major hole in the tax base, this is worth considering.
At the same time there are reasons to be wary of creating too much choice. Compliance costs tend to rise in countries that give SMEs too many options for paying tax. Wading through options increases the amount of time and effort you’re spending on your tax obligations.
Also as much as possible we don’t want to have rules that create difficult boundaries for successful firms increasing in size.
There are important trade-offs.
We will be exploring whether we can come out with simpler (but not generally concessionary) rules for SMEs in certain circumstances. We will also be exploring more general simplifications by replacing the EMS with information which is more directly linked to payroll systems.
There are pressure points associated with the payment of provisional tax.
As much as possible we want firms to be paying tax during the year as income is earned. This is consistent with the way in which other taxpayers are taxed.
But at the same time we want to make this as painless and easy to comply with as possible. We will be exploring whether there are ways of making improvements in this area.
It should come as no surprise that international studies have found very high levels of compliance for certain forms of tax such as PAYE and considerably lower rates of compliance for others such as self-declared income.
An important question will be whether there are good ways of making it easier for those who want to comply and harder for those who don’t.
A practical difficulty is in getting rates of withholding as good as possible and minimising the costs of square ups when tax has been withheld at rates that subsequently turn out to be wrong.
Modern technology may help by making square ups less costly.
We will be exploring whether we can provide more extensive prepopulated information on tax returns available to individual taxpayers.
For those with simple affairs and without business, rental, or foreign income, filing a tax return might be no more complex than saying whether the sources of income that Inland Revenue identifies are the only sources of income.
We will also be exploring whether we can simplify square ups with automatic bank transfers to those who have paid too much and higher rates of future withholding on those who have paid too little.
Automatic square ups could also reduce pressure points around “secondary tax”.
Improvements may also be possible in the rates at which secondary tax is withheld. Many of those using the secondary tax code have low levels of disposable income and can least afford to wait for things to come right in the end. More timely employment interaction may allow Inland Revenue to interact with employers to get better rates of withholding.
It should be acknowledged that there will be trade-offs in all of this. Even though the overall direction will be to reduce compliance costs, there will inevitably be instances where compliance costs increase for some. All of this will need to be worked through and this will be with the full consultation that GTPP provides.
It should be noted that all this is more than an Inland Revenue issue. The transformation programme is aimed at providing wider benefits to the government. An early challenge will be getting better salary and wage information from employers in real time. This will have a spin-off for MSD in increasing numbers receiving the correct levels of benefits.
Business transformation will clearly be an important part of the 2015/16 Tax Policy Work Programme.
But the new Work Programme will obviously be much broader than business transformation.
It will work through issues such as international tax and the BEPS work. We need to work with the OECD and ensure that our international tax rules provide a robust way of taxing multinational enterprises. At the same time we want to ensure that New Zealand remains a good place to base an exporting business.
The new Work Programme will also include important measures which are aimed at maintaining and enhancing tax and social policy within our current BBLR tax settings. One example is work on debt remission income which responds to concerns that the current rules may involve overreach and be getting in the way of sensible debt capitalisation. We are also working through the issue of GST and bodies corporate. Here it is important to balance purity, fairness and compliance costs. We have listened to submissions and are working through solutions. A priority is keeping compliance costs low.
More generally, we need to keep reinvesting in our current tax framework to make the law clearer and more predictable. This includes an active programme of remedials.
Tax policy officials are in the process of starting to consult with key stakeholders in identifying priorities for the Work Programme. This should be released reasonably early in the new year.
New Zealand is starting from a great place with a good tax system. In large part this is helped by the very good consultation that takes place under GTPP and the willingness of tax professionals such as yourselves to be generous with your time and energy. Your approach to tax policy supports the greater good of New Zealand and is very much appreciated.
Business transformation creates a once-in-a-generation opportunity to make a transformational change in the way the taxes are administered. It will involve a number of difficult trade-offs. To make it work well, your contribution is essential.