26 February 2016
Opening address at the International Fiscal Association Conference
Good morning and thank you very much for inviting me to speak to you today.
This is my first speech in the Revenue portfolio and I am still in the process of getting my head around all that is happening. Officials have been giving me in-depth briefings and I feel that it is a portfolio in great shape for which I am grateful to my predecessors for their work.
I’m also very aware of, and grateful to you for your valuable contribution in ensuring that our tax system runs as efficiently as we can make it.
That is an ongoing focus and I urge you and other tax professionals to continue to engage in dialogue with my officials and to bring matters forward for consideration to fine tune tax policy.
But a good tax system is not just sound tax policy, but also a strong tax administration to implement those policies and I take over this portfolio at a time when big changes are coming in for administration.
Inland Revenue will of course continue to be the organisation that gathers the bulk of Crown revenue and administers social policies such as child support and working for families, but how it performs its functions and the way that the department sees itself is evolving.
There are two aspects of the transformation programme that I want to mention to you today: the need to boost tax compliance and a desire to ensure that taxpayers’ compliance costs are minimised.
Let’s consider minimising compliance costs first. I understand that you will be hearing from Joel Slemrod today.
He points out that across the world, compliance costs tend to be many times larger than the cost to the Government of administering the tax system.
Joel has suggested compliance costs in the United States may be 10% of tax collections whereas the costs to the Government of administering a tax collection agency are, of course, much smaller than that.
In New Zealand total tax collected over the 12 months to September 2015 by Inland Revenue was about 25% of GDP. The costs of administering Inland Revenue are about 0.3% of GDP.
If New Zealand’s overall compliance costs were similar to what Joel has estimated for the United States, we would be looking at 2.5% of GDP.
So that would mean companies were spending $5-6b on tax compliance alone. I’m sure that's not correct; I think NZ has a leaner and more efficient tax administration regime but we also shouldn't be complacent or think this is as good as it gets.
In New Zealand where we have lots of SMEs, compliance costs for SMEs is a particular concern.
So making an improvement here could have a substantial benefit for our economy.
Boosting compliance is also a huge issue. It’s not a matter of getting the last drop of juice out of the orange.
Instead we want high levels of compliance to be encouraged by good and accurate information and tying in tax reporting and payment with normal business processes.
For instance, we know that compliance with tax rules is high for withholding taxes such as PAYE so we’ll be exploring what other payments could be subject to withholding taxes.
The IRD needs to be much better and smarter at using information.
That information could provide early warnings of potential policy problems as well as helping the department identify who to audit and who should be left alone.
The key that unlocks all of this is a greater use of digital technology, but that’s not simply about replacing a paper form with an online version.
It is re-shaping the way Inland Revenue works with customers, including improvements to policy and legislative settings.
And even more than that, it’s a transformation in the way the department views as the best way to perform its functions.
Behind all of this is a strong determination from IRD to be a customer-focused organisation with the interests of the customer at heart.
It marks a new focus on customer service.
Interactions will increasingly move to proactive assistance to help taxpayers get it right from the start, with less time spent reactively remediating.
If people are to a greater degree self-managing their tax affairs online, then for the IRD there will be less process-driven work allowing the department to become a more professional workforce, capable of providing the kind of information that the public and business really need.
For instance – the tax laws are complex and from time to time people need information from Inland Revenue. They are trying to do the right thing and they need certainty.
You should be able to deal with confidence with Inland Revenue and be confident that an answer you get from Inland Revenue represents the IRD’s view.
That’s an important point. Embarking on this programme means that the IRD will transform itself from a backroom service provider to an organisation that provides higher value services.
This is fundamental to a successful transformation.
But the transformation is not limited to just the IRD’s business.
To varying degrees, it is a transformation of business in New Zealand.
Henri Eliot, who chairs the independent Simplification panel advising Inland Revenue on the transformation project, made an important point when he said that the changes would also affect accountants as there would be less routine transactional work for tax agents.
He said "the 'shoe boxes of receipts' will disappear completely and there will be more work around advising businesses how to grow."
So the IRD will move to providing more professional services and tax agents will be able to move to providing more end to end services, and perhaps also more complex work.
Turning now to policy matters, a second focus for us will continue to be international tax and NZ’s response to the OECD’s work on base erosion and profit shifting or BEPS.
There will be a continuing focus on maintaining tax treaties with other countries and co-operation with other countries on a range of tax issues.
An important example is the Automatic Exchange of Information (or AEOI) which is aimed at increasing the transparency of international financial transactions to increase tax compliance and reduce money laundering.
An officials’ issues paper setting out AEOI implementation questions was released for public feedback last week.
On the BEPS front, I’m happy to say that New Zealand is starting from a better place than most countries because it has reasonably robust rules which limit the scope for BEPS.
We want our tax system to be fair and seen to be fair want but we also want New Zealand to be a good place to base a business and invest. There is a balance to be struck.
A key focus is how we tax inbound investment.
Questions have been raised about our framework for taxing such investment.
There is a concern that the current treatment has the effect of raising the cost of capital.
Tax policy officials at IRD and Treasury will be engaging on this issue with officials from MBIE, MFAT and the wider Treasury.
This will be followed with a dialogue with the tax community on the tax settings for inbound investment and officials will consider the impact of tax settings for the cost of capital.
But the issue of how we should best tax inbound investment is a much broader issue than the cost of capital.
I expect that the dialogue between yourselves and officials should take place in the first half of the year.
Those discussions will help inform decisions about what tax changes to make in two areas: hybrids and interest limitation.
Applying our BBLR framework
Maintaining and improving our tax settings within a BBLR tax framework continues to be another important focus.
A number of measures that have already been consulted on will be part of the first omnibus tax bill in April or May this year. These include:
- NRWT on related party debt
- related parties debt remission – correcting an anomaly which could lead to over-taxation when debt was remitted between related parties;
- changes in tax rules for closely held companies;
- interaction of loss grouping and imputation rules.
Announcements on the details of this legislation will be made shortly.
There will be work in other areas as well. This includes providing certainty on the tax treatment of employee share schemes. This will be included in a second omnibus tax bill I intend to introduce in late 2016.
The tax policy work programme
And the final matter I will mention today is the tax policy work programme.
Officials have briefed the Minister of Finance and me on what is being worked on this year. This very largely involves work on issues included in the tax policy work programme that was released a year ago.
It is planned that the work programme will be refreshed for the next 18 months in the middle of this year.
At that stage we will be seeking feedback from key stakeholders including, for example, CTG the Law Society and CAANZ on what they see as the highest priority issues. It is a busy time and it is obviously critical to ensure that attention is focused on the highest priority tasks.
The changes to our tax administration which are coming in will help improve our tax system by making it easier for people to comply.
Meanwhile our broad-base, low-rate tax system where taxes are evenly and neutrally applied over a broad range of forms of income and expenditure provides a very good tax policy framework.
It helps ensure that taxes are fair and efficient, that costs of administering and complying with the tax system are kept to a minimum and that the tax system is coherent.
In the past, we have looked to you for your input which has been immensely valuable in shaping tax policies.
Now as we start bringing in the big changes to tax administration, we will be needing your help once again.