4. The tax policy work programme
The laws for imposing and administering tax in New Zealand are contained in a number of Acts of Parliament. In broad terms the laws that impose taxes are contained in the Income Tax Act 2007 and the Goods and Services Tax Act 1985. The Tax Administration Act 1994 contains the rules for how obligations are to be satisfied. Changes to the regimes delivered by Inland Revenue therefore need to be initiated in legislation. The tax policy work programme is the plan Inland Revenue is working to for the development, management and delivery of legislative change.
How is the tax policy work programme developed?
The Generic Tax Policy Process (GTPP) has operated since 1994 to ensure better, more effective tax policy development through early consideration of key policy elements and trade-offs of proposals, such as their revenue impact, compliance and administrative costs, and economic and social objectives. Another feature of the process is that it builds external consultation and feedback into the policy development process, providing opportunities for public comment at several stages.
Consultation throughout the policy process contributes to greater transparency of policy-making, allowing the Government to set out the policy objectives of proposals and the trade-offs it has made in developing them. The process therefore helps the public to understand the rationale behind Government policy proposals. It also helps to ensure that when Ministers are making policy decisions, they are fully informed of different views and can judge them on their merits. This improves the quality of tax policy.
The consultative process cannot be used for changes that require immediate action to protect the revenue base. It would not be possible to move quickly and, at the same time, to engage in wide consultation on changes to close a recently identified loophole, for example to block a scheme that is losing the country hundreds of millions of dollars in revenue.
The GTPP is widely accepted as the way to make tax policy, and tax professionals and professional associations expect it to be used. It leads to co-operation, assistance and frank dialogue.
New Zealand’s private sector is particularly well informed on tax policy issues. In large part this is a legacy of the open and constructive policy debates that started 30 years ago and were consolidated into the GTPP 20 years ago. In recent years there has also been growing engagement with the academic community on tax reform. This is helping us embark on an open process of engaging with the wider community on the opportunities that are opened up as part of Inland Revenue’s Business transformation programme.
Developing a new tax policy work programme
The tax policy work programme follows the development of Government’s revenue strategy and economic strategy. Developing the work programme involves identifying and scoping broad policy proposals and prioritising and sequencing the development of initiatives. Stakeholders are invited to suggest how the work programme may be developed. We also look at budgeted resource requirements, the time needed to develop, legislate for and implement initiatives, and the methods of consultation and communication to be employed throughout the process.
This stage of the GTPP culminates in a joint report by Inland Revenue and the Treasury to the Minister of Finance and the Minister of Revenue, proposing a tax policy work programme. Once approved, the work programme becomes a detailed tax policy agreement between the Government and the two departments.
The work programme is generally made public, attracting strong interest from the tax and business communities, to whom it provides greater certainty and an understanding of the Government’s direction in tax policy.
As time passes, and the work programme is updated and new policy initiatives are added to it, there is a risk that there will be more items on the programme than can be reasonably progressed. It is therefore important that when items are added to the work programme, existing priorities are reviewed to ensure that the Government’s expectations across the work programme are met.
Prioritising the contents of the tax policy work programme
The items on the work programme are prioritised using the following criteria:
- efficiency (to what extent will the policy help the tax system to minimise impediments to economic efficiency and growth);
- equity and fairness (the degree to which the proposal will support the Government’s goals for vertical and horizontal equity);
- compliance costs for the taxpayer or “customer” are minimised;
- administration and system costs are minimised; and
- integrity and coherence of the tax system is maintained and enhanced.
Prioritisation is undertaken by Inland Revenue tax policy specialists and is endorsed by the Project Prioritisation and Allocation Committee which includes Treasury officials.
The tax policy work programme in recent years
The work programme over the last three years has been aimed at supporting the Government’s priorities of responsibly managing the Government’s finances and tax system, building a more competitive and productive economy, delivering better public services and rebuilding Canterbury.
In line with the focus on building a more competitive and productive economy, Treasury and Inland Revenue conducted a Taxation of Savings and Investment Review (reported on in 2012). The aim was to find whether changing fundamental tax settings would have been likely to lead to a material improvement in economic performance. The conclusion was that the more radical departures from current settings that were investigated were likely to lower economic welfare and that our current broad-base, low-rate tax settings remain fit for purpose.
The tax policy work programme for 2016–17
Each tax policy work programme covers three years. The 2016 update takes account of recent developments and ensures that tax policy officials are working on the highest priority items for the remaining period of the programme to the end of 2017.
The tax policy work programme consists of:
- sub-programmes, which identify the key broad areas of focus;
- projects, within those sub-programmes, which focus on specific issues and changes;
- remedials – smaller changes, which while important for accuracy and clarity, typically do not change the policy intent; for example, correcting an earlier drafting error;
- watching briefs which are the developing issues being monitored or researched and for which there is not yet a clear or overwhelming need to make changes;
- regulatory updates – Inland Revenue maintains a regulations register, which identifies the routine updates and reviews that are undertaken to maintain the currency of the tax and social policies it administers, such as a routine rate adjustment; and
- research – this includes staying up to date with economic literature and developments overseas.
The sub-programmes of the tax policy work programme reflect the strategic context of Inland Revenue as well as the challenges facing Inland Revenue’s regulatory management. These are:
- policies to support Inland Revenue’s Business transformation;
- policies to address international taxation concerns and implement necessary measures to address base erosion and profit shifting;
- policies to enhance and maintain the broad-base, low-rate tax system; and
- social policies.
Business transformation and Better Public Services
A significant part of the tax policy work programme will frame and support the design and implementation of Inland Revenue’s Business transformation programme. This will be achieved by simplifying and modernising the current policy and legislative tax administration settings. Overall this should reduce compliance costs for taxpayers, reduce administration costs for government and improve the overall efficiency of tax administration, including increased voluntary compliance. It will also create opportunities to improve Inland Revenue’s contribution to cross-agency initiatives for the delivery of better public services.
The areas on which we will focus include:
- progression of the two phases of the business tax package. The first phase announced in Budget 2016 is part of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill introduced in August 2016. The second phase is being scoped and analysed.
- legislative proposals on better administration of PAYE and GST to be included in an early 2017 tax bill.
- the release of the next suite of consultation documents covering:
- pre-population and filing obligations for individuals; and
- further proposals to modernise the Tax Administration Act 1994;
- modernising and simplifying the administration of social policies is being scoped. This is a potentially far-reaching project and is complicated by the multi-agency involvement of many of the social policy regimes Inland Revenue administers. A consultation document arising from this work is expected to be released mid-2017.
Better Public Services
Inland Revenue is committed to working collaboratively across government to deliver outcomes for New Zealanders. It plays a key role in the Better Public Services (BPS) programme through Results 1, 7, 9 and 10, as follows:
- BPS Result 1 (Reducing long-term welfare dependence). Inland Revenue shares a significant amount of information with the Ministry of Social Development. Current work includes reviewing the information sharing programme in collaboration with the Ministry of Social Development (and the Accident Compensation Corporation) with a view to improving efficiency and enabling better outcomes for customers.
- BPS Result 7 (Reduce the rates of total crime, violent crime and youth crime). The Gang Intelligence Centre was launched on 14 December 2015 with Police Commissioner Mike Bush acknowledging Inland Revenue for its support and assistance in getting the centre up and running. Our focus is now on getting certainty on the legislative path required for Inland Revenue to fully participate in the Centre by the Cabinet deadline of December 2016.
- BPS Result 9 (New Zealand businesses have a one-stop online shop for all government advice and support they need to run and grow their business). Inland Revenue is working closely with the Ministry of Business, Innovation and Enterprise on the design and implementation of the New Zealand Business Number, which, as part of Business transformation, is on schedule for businesses to be recognised by their New Zealand Business Number by 2017. In addition, there are other transformation policy projects that will simplify business tax rules, including making provisional tax easier, particularly for small business.
- BPS Result 10 (New Zealanders can complete their transactions with the Government easily in a digital environment). Inland Revenue has made a substantial commitment to the ICT Partnership. This framework has been set up to “support the goal of a single, coherent ICT ecosystem supporting radically transformed public services”.
Inland Revenue is also contributing to key initiatives including:
- The Birth of a Child Life Event (a project led by Department of Internal Affairs). This initiative focuses on how to best deliver an easy and seamless experience for parents interacting with government, including setting up a digital identity for the baby.
- Turning 65. Turning 65 workshops have been co-hosted by Department of Internal Affairs and the Ministry of Social Development to better understand the interactions agencies have with those who have or are turning 65, with a view to understanding how government can proactively deliver age-related entitlements to this group.
International tax and base erosion and profit shifting (BEPS)
BEPS describes techniques used by multinational companies to avoid paying tax anywhere in the world. BEPS tax planning strategies may exploit gaps and mismatches in countries’ domestic tax rules or they may take advantage of tax rules that are grounded in a “bricks and mortar” economic environment which may not address less tangible forms of commerce – such as digital services. Addressing BEPS issues requires international co-ordination. International concern around BEPS remains high and is prominent in the news media. The G20 and OECD have emphasised the need for a co-ordinated multilateral solution by developing a 15-point action plan which covers three themes:
- greater transparency and exchange of information;
- more robust domestic tax laws; and
- international agreements and co-operation.
Greater transparency and exchange of information
The proposed work programme includes the work we need to continue to meet OECD timelines to implement the Automatic Exchange of Information (AEOI) initiative. Following recommendations made by the Government Inquiry into Foreign Trust Disclosure Rules, we are changing the disclosure requirements for foreign trusts.
More robust domestic tax laws
New Zealand’s domestic cross-border tax laws need to be robust. This is to ensure that our domestic tax settings protect our tax base and do not facilitate double non-taxation, tax avoidance or evasion. New Zealand already has strong controlled foreign company rules; and does not have harmful tax practices (as confirmed by the OECD in its last review in 2012). Furthermore we have introduced GST on online services consumed in New Zealand – this legislation will apply to transactions from 1 October 2016, and we are introducing measures to prevent the avoidance of non-resident withholding tax on interest paid to related parties. We will:
- undertake further work on a package of BEPS initiatives which will include hybrid mismatch rules to prevent companies structuring their business entities or financing arrangements to take advantage of differences in how countries’ tax these arrangements and interest limitation rules which would prevent companies stripping excessive profits out of New Zealand by way of deductible interest payments; and
- consider whether other measures to help address BEPS concerns may be appropriate for New Zealand (for example, a diverted profits tax like that adopted by the United Kingdom and Australia, and possibly proposals on increased public transparency of information about the tax paid by multinationals in New Zealand).
International agreements and co-operation
The proposed tax policy work programme reflects the need to work with the OECD and treaty partners to ensure international agreements are fit for purpose. We will be working to ensure that New Zealand:
- signs up to the OECD’s multilateral instrument, which will amend our network of tax treaties to insert a new anti-treaty abuse article, a new permanent establishment definition, anti-hybrid entity rules and dispute resolution articles (OECD has indicated the signing ceremony will take place in the first half of 2017);
- maintains the tax treaties we have with 40 other countries and applies these to New Zealand income. We will propose prioritising the tax treaty work in this next work programme period in order to progress the treaties with Korea and Fiji; and
- applies revised OECD Transfer Pricing Guidelines to address misallocation of profits to low tax jurisdictions. Legislation could be introduced to facilitate this (if needed).
New Zealand is a committed and active member of the international tax community, which is important for improving the effective functioning of the world economy. Our OECD commitments account for the majority of our resources committed to our international obligations. The OECD is a rule-making body. As an OECD member, decisions made by the OECD have a direct impact on New Zealand’s international tax policy settings and this has given rise to much of the domestic and BEPS tax policy work programme.
Our contributions, in addition to the projects we have listed, will include:
- New Zealand’s trans-Tasman relationship and the Single Economic Market – which includes considering mutual recognition of imputation credits;
- support for the Ministry of Foreign Affairs and Free Trade Agreement programme;
- supporting New Zealand’s participation at the OECD Centre of Tax Policy and Administration;
- support and guidance for the New Zealand delegation at the United Nations on tax matters; and
- the Study Group on Asian Tax Administration and Research (SGATAR). New Zealand supports this group and will be chairing it in Wellington in late 2016.
Enhancements to tax policy within broad-base, low-rate (BBLR) tax settings
There is high public support for New Zealand’s general tax structure, with its BBLR tax settings. BBLR settings involve taxing a very broad range of consumption through GST and a very broad range of business and personal income through income tax at low or moderate tax rates. Keeping bases broad minimises distortionary costs of taxes. Moreover, this allows tax rates to be kept as low as possible which also helps minimise distortions. Our BBLR tax system also helps keep compliance costs relatively low.
It is impossible to maintain a good tax system through a set of static rules. An effective approach necessitates on-going modification and refinement of legislation as new situations, behaviours, related legislation and judicial rulings emerge. We will not serve Government or our customers well if we do not put sufficient resource into the repair and maintenance of existing tax law. There is capacity reserved within the tax policy work programme to ensure there is a balance of enhancements to tax settings within the BBLR framework that will go some way to meeting stakeholders’ need for clarity and certainty in the tax system while ensuring expected Government revenue is maintained.
This includes dealing with important remedial issues as they arise, which ensures that current tax law is operating as intended. This is essential in maintaining public support for the tax system.
Examples of issues with higher priority that we propose addressing under the theme of enhancing tax settings within the BBLR framework include:
- continued work on the review of the tax framework for employee share schemes;
- demergers – initially raised by the New Zealand Shareholders’ Association, demergers by Australian-listed companies have resulted in a tax obligation that is inconsistent with policy intent;
- trust beneficiaries as settlors – recent legal analysis indicates there are instances when beneficiaries of trusts who leave their beneficiary income in a “current account” with the trust can become inadvertent settlors. There can be significant tax consequences for beneficiaries resulting from being treated as settlors – for example, they can be liable to meet the trustee’s tax liability. This is not in accordance with the policy intent and is potentially widespread – we propose to review this;
- property – this will include addressing a request from the Finance and Expenditure Committee to look into the deductibility of the holding costs for revenue account property, and review the requirement for bank accounts for offshore persons’ IRD numbers to ensure that the requirement is applied efficiently, and address concerns from stakeholders such as the New Zealand Law Society about the operation of this rule; and
- remedial items – to make remedial changes to ensure that the tax rules work as intended and remain fit for purpose.
There are also a number of areas on which we maintain a “watching brief” as we are aware that there may be developing issues that as yet have not formed to the point that we determine a remedial or policy law change is required.
About half of Inland Revenue business is delivering social policy programmes, including the repayment of student loans, and administering Working for Families tax credits, child support and KiwiSaver. Inland Revenue has an important role in providing advice on these policies. Social policies such as Working for Families involve significant government expenditure and affect large numbers of people. Our role in these social policy areas is closely linked to other portfolios, including ACC, education, health and social development.
In 2016, as part of Business transformation, a programme will be developed to look at how our social policies can best be delivered within Inland Revenue’s transformed infrastructure and processes. In addition, we need to allow for the maintenance and enhancement of existing social policy settings.
The social policy-related work programme has been planned to ensure that we have capacity to respond to emerging issues across each social policy regime and will also include:
- supporting the Minister of Revenue’s commitment to the joint work of the Ministry of Education and the Ministry of Social Development on student loans, including reducing legacy student loan debt. This work is led by the Minister for Tertiary Education;
- responding to the Ministry of Health on the Financial Assistance for Live Organ Donors Bill; and
- maintaining capacity to respond to social policy initiatives passed by other Ministers.