Improving disclosure of tax information
Consider introducing a code of practice for large corporates
Codes of practice are a form of voluntary self-regulation where organisations commit to a set of principles that promote good behaviour. The codes are typically brief documents that are high-level and aspirational rather than detailed and prescriptive. Codes for large corporates have been introduced in other countries, including the United Kingdom, South Africa and Spain.
In 2009, the UK introduced the Code of Practice on Taxation for Banks, which encouraged banks to follow the spirit as well as the letter of the law. The code asks banks to:
- adopt adequate governance to control the types of transactions they enter into
- not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament
- comply fully with all their tax obligations
- maintain a transparent relationship with HM Revenue & Customs.
By November 2010, the top 15 banks in the UK had adopted the voluntary code. By May 2013, over 250 institutions had signed up.
Codes of practice work best when they are transparent and visible. Organisations that sign up can publicise their adoption of the code as evidence of their good behaviour. Investors and consumers may question organisations that choose not to adopt the code, or they may choose to only invest in code-compliant organisations. Investors, consumers and media will be able to use the code as a framework to challenge decisions made by the organisation when those decisions appear contrary to the principles of the code.
New Zealand’s disclosure requirements are light compared to those of other jurisdictions. While most large corporates provide their financial statements with their returns, this information is not easily scrutinised, and Inland Revenue is unable to efficiently or effectively carry out in-depth analytical work. As these statements do not follow a prescribed format or contain a standard set of information, Inland Revenue often needs to request additional information from taxpayers. This places additional compliance costs on businesses, which, as the requests are made on an ad-hoc basis, can be difficult to plan for.
Inland Revenue envisages a short (one or two page) electronic declaration that would collect essential information only. The information could include:
- key performance metrics
- specific high-risk items (for example, cross-border interest payments)
- group membership details.
Additional compliance costs can be minimised by focusing on information that is already collected in their structure charts, financial statements and tax reconciliations. This targeted approach would compare favourably with other jurisdictions. Australia, for example, requires a very detailed 13-page disclosure from any business with overseas dealings.
In the BEPS action plan, the OECD has recommended that countries establish methodologies to collect and analyse data on the scale and economic impact of BEPS. Receiving this additional information from large corporates and multinationals will help New Zealand meet this action point.
Most large corporates, including multinationals, must file their tax returns by 31 March following the end of the tax year. Depending on their balance date, this gives them six to 18 months from the end of their accounting year to prepare their returns. This length of time is generous compared to other jurisdictions.
Large corporates will generally have finalised their financial accounts well ahead of their return filing date in order to satisfy other obligations. These could include tax returns for other jurisdictions, disclosures to shareholders and returns to the Companies Office. The Financial Reporting Bill currently before the House proposes to give large companies just five months to file their annual report to the Companies Office.
Earlier filing would allow faster detection of transactions and trends that may highlight specific risks to the tax base which will lead to earlier investigations and quicker remedial law changes if required.
Another area where information disclosure could be improved is when the approved issuer levy (AIL) is paid. The AIL is an alternative to paying NRWT on interest payments to non-resident lenders who are not related to the New Zealand borrower.
Taxpayers do not currently file NRWT withholding certificates in cases where they pay the AIL. It is proposed that AIL payers should be required to file an NRWT withholding certificate at the end of each tax year. This will make it easier for Inland Revenue to verify the correct application of the NRWT and AIL rules and to fulfil exchange-of-information requests under our tax treaties.