3 March 2018
Speech to International Fiscal Association Conference, Heritage Hotel, Queenstown
It’s my great pleasure to be able to join you here today in Queenstown.
The IFA conference is a highlight for any Revenue Minister as it provides an opportunity to refresh dialogue with tax experts who have a keen interest and investment in robust tax policy.
It’s a busy time for everyone with a stake in the tax system, and of course that includes both me and the Minister of Finance.
We have a hefty work programme to negotiate which needs to take into account our coalition agreements and also work already commenced by the previous Government.
And as Grant has just explained, the Tax Working Group will be vital to achieving an overarching direction for tax policy.
The Government will remain dependent on its partnership with the private sector and other interested groups to ensure that NZ’s tax system remains fair and fit-for-purpose. I’ll talk a bit about that later.
But as Minister of Revenue I won’t be sitting on my hands waiting for the Working Group to do its work. There are other issues which we need to address right now.
With a new Government comes new priorities. This Government has a clear vision to make things fairer for everyone.
I suspect there are inherent inequities in the system that need addressing, whether it’s ensuring small businesses aren’t disproportionally burdened in complying with tax requirements, or ensuring entrepreneurs aren’t incentivised to invest in property rather than research and development.
Community expectations about living in a fair and decent society with first-world public services rely on the tax system delivering adequate revenue.
And because tax is an essential pillar of a fair society, it follows that a tax regime should be fair across the board, with minimal scope for loopholes to exploit.
So I have two key interests as Revenue Minister.
It’s got to be simple to understand, for businesses large and small, and for individuals. And it has to be fair.
But I also want to balance that against opportunities to make business even easier to conduct in New Zealand. How can we ensure that complying with tax doesn’t get in the way of doing business?
Current priorities – fairness and integrity
So, with these things in mind, today I’m mainly going to talk to you about what the Government’s immediate priorities are for tax policy.
Firstly, let’s look at some key upcoming policy measures that will improve the integrity of the tax system.
Loss ring-fencing / bright line
The Government has made a number of commitments to making the tax system fairer while improving housing affordability for owner-occupiers.
One of these is ring-fencing of residential rental losses.
This will mean that investors will no longer be able to offset tax losses from their residential investment properties against their other income to reduce their tax liability.
My officials are working on this issue and will ensure it follows the usual GTPP process.
Another lever we intend utilise in the property space to even the playing field is extending the current bright-line test from two years to five.
This will help ensure that more residential property speculators pay tax on the gains from their activity and to also improve housing affordability for owner-occupiers by reducing speculative demand.
This measure has been added to the current tax bill.
BEPS / Multinationals
We’re also continuing work to ensure multinationals pay their fair share of tax.
12 months ago at this conference you were updated on progress on BEPS, or Base Erosion Profit Shifting.
And now, as you’ll be aware, the Government has introduced a new Bill into Parliament that codifies that work.
The Bill reflects many of the submissions made by you and others in the private sector on the original proposals.
It counters particular strategies some multinationals have used in New Zealand to unfairly reduce their tax bill.
These include avoiding a taxable presence in New Zealand, stripping out New Zealand profits through high priced debt or mispriced dealings, and using highly structured hybrid instruments to take advantage of differences in the tax laws of New Zealand and other countries.
New Zealand is not working in isolation. The OECD has recommended several measures to counter BEPS.
The Bill’s measures are broadly consistent with these recommendations which many other countries are also picking up.
New Zealand signed the OECD’s Multilateral Instrument in June 2017 which quickly and efficiently amends many of our tax treaties to stop them from being used by multinationals to avoid paying taxes here.
We expect some multinationals with a physical presence in New Zealand will want to restructure their business operations here in response to the measures.
This should lead to more sales being booked in New Zealand and so more revenue.
The measures will also prevent multinationals from shifting their New Zealand profits offshore under artificial arrangements.
The Government will continue to monitor other possibilities – both legislative and administrative – to counter BEPS activities in New Zealand.
Current priorities – making life easier for businesses
Aside from maintaining a robust tax system, this Government is prepared to use tax policy where appropriate to ensure New Zealand remains the best place in the world to do business.
R&D tax credits
As Grant pointed out, the Labour Party has committed to considering a tax credit for research and development as part of its set of election promises.
And I certainly believe there is more the Government can do to incentivise private investment in new technologies to ultimately boost productivity.
As you might remember, the previous government removed the last R&D tax credit regime in 2008.
We think this needs to be reinstated. We are now able to draw on lessons learned in other jurisdictions which will help us develop a robust, future-proof system.
A tax credit is an effective way of encouraging businesses to undertake R&D, as it gives them the space they need to make decisions without any second guessing by the Government.
However, I recognise that it will be hard to ensure R&D expenditure is ring-fenced appropriately.
Therefore it’s essential that officials design the policy carefully to reduce the risk of firms claiming tax credits on expenditure that is clearly not R&D.
I’m looking forward to seeing what innovative policy solutions Inland Revenue and other Government agencies come up with in that regard.
No decisions have been made on how this scheme will look, yet. But we are working hard on the design. Policy development and Select Committee stages will provide interested parties with opportunities to define the problem and contribute to a workable solution.
Feasibility study expenditure
I’m sure many of you will also be keen to know what the new Government’s intentions are around the treatment of feasibility expenditure.
While our immediate priorities in the tax space focus on ensuring a fair and level playing field across all spheres of the economic output, we also recognise the potential value in reform in this area. This will remain on Government’s work programme, but for now we’re focussed on other measures to help businesses.
Business Transformation / Reducing compliance costs
And while I have a captive audience I’d like to take the opportunity to briefly touch on the work Inland Revenue has done recently to make paying tax easier and reduce compliance costs for businesses.
This aligns with the Government’s focus on making things simpler for tax payers, and certainly interests me in my capacity as both Minister for Revenue and for Small Business.
You’ll all be well aware of Inland Revenue’s Business Transformation. It’s a massive undertaking but essential as it seeks to modernise the tax system for the 21st century.
The Inland Revenue’s Business Transformation programme will deliver a range of changes that will significantly reduce compliance costs for all businesses. By April 2019 customers will have:
- more on-line services for all tax products;
- integrated tax and business processes;
- faster, more accurate tax information, providing near real-time visibility of tax;
- faster tax refunds;
- less likelihood of tax debt; and
- more payment options.
As a result, we expect small businesses will benefit the most out of their changes as they spend a greater proportion of their time and resources on meeting tax obligations.
Inland Revenue estimates that SMEs will spend between 8 and 14 fewer hours a year on compliance by 2023/24.
It is clear that things are going well so far as Inland Revenue goes through its staged implementation.
Nevertheless, I expect Inland Revenue to continue to listen to its stakeholders most impacted by the changes.
Ultimately BT is about future-proofing the tax system, making things easier for people, and maintaining the revenue base in the face of changes and challenges we cannot foresee.
Accounting Income Method (AIM)
On the subject of making life easier for businesses, I’m excited about Inland Revenue’s Accounting Income Method, or AIM as we’re calling it, due to be launched in April.
Although that SME group is probably not a core market for most of you there will be others in your firms, organisations or friends at a BBQ (who hit you up for some free advice) who may benefit from what AIM has to offer.
Small businesses will be able to manage their provisional tax through AIM-capable accounting software.
Already more than 70,000 businesses use their accounting software to manage their GST – so using AIM is going to be a logical next step for them. While we are unlikely to get this many to adopt AIM at the outset, I’m hoping a good number will start using AIM and this builds steadily.
Businesses using AIM will pay provisional tax based more on actual cashflow, rather than on what their profit was last year, or what they think they will make this year.
This will take the guesswork out of provisional tax for small businesses.
AIM means provisional tax can be managed as part of its routine financial activity – it can stop being a separate compliance burden.
AIM will help us to support our small businesses to be flexible, adaptable and technically skilled for an economy that is increasingly digital.
IFA members’ role in improving the tax system
I recognise that your engagement with tax policy is over and above your day job, but we absolutely value your contribution.
In fact, it’s critical to ensure NZ maintains a robust tax policy development process.
Stakeholder engagement has been hardcoded into tax policy development since the GTPP was established in 1995.
We’re lucky in New Zealand that we’re starting from a good place. We already have the systems in place to take advantage of the experience of corporate and not-for-profit tax professionals as well as tax academics and other groups interested in tax policy outcomes.
I know that Inland Revenue and successive Revenue Ministers of all colours feel they can engage with key players in good faith in the knowledge that all parties want the best and fairest outcomes.
Of course, there will always be areas where full agreement cannot be reached, but it shouldn’t be a fundamental disagreement on crucial tax legislation.
While recognising that absolute consensus is not always possible, I’d like to see us get to the point where there is an acknowledgement on what all parties agree on and what they don’t.
I see this as in the spirit of GTPP where key players have an opportunity to socialise potential policy changes before Government officials spend countless hours fleshing them out. Part of this getting a better understanding of problem definition from affected and interested parties before consultation on options has begun.
We need the people in this room to help the Government, and Inland Revenue, ensure that GTPP remains a good process that adds value.
A recent example of GTPP in action was the error identified in the interest limitation provisions in the BEPS Bill. While any error is unfortunate, it is important that we front-foot it, which GTPP allows us to do. In this case, although the normal date for submissions on the Bill had closed, submissions have been re-opened on this aspect.
The upcoming work programme has a number of things in particular that really do need wide and considered consultation.
But just as importantly we need key stakeholders to engage on the bigger challenges facing the tax system that I have just outlined.
We will all need to think outside the box as to how to ensure the tax system is agile enough to respond to new ways of working and earning money in the digital age.
Again, keep an eye out for upcoming discussion documents and opportunities to make submissions to select committees and otherwise engage in the policy development process.
Revenue is a portfolio that excites me. Tax is not just about taking dollars off people. It enables a fair society that provides opportunities for everyone.