Year 2014 was eventful.
Internationally, the focus on multinational profit shifting (aka Base Erosion and Profit Shifting – ‘BEPS’) ramped up with the release of the first batch of OECD recommendations to curb such activity.
Whether consensus on implementing these proposals can be sustained remains the billion dollar question. Already, outliers are emerging with a number of countries rushing ahead with their own policies, such as UK’s recently announced ‘Diverted Profits Tax.’
The New Zealand response to BEPS has been more cautious, which is a sensible approach, but these moves will have implications for New Zealand’s tax policy beyond the taxation of multinationals.
The September election, resulting in a third-term National Government, appears to have sealed the debate on a capital gains tax.
However, as Officials have pointed out in their post-election briefing, current tax bases (and rates) may not be sustainable to meet New Zealand’s future revenue needs.
Some medium-term reform may be required to bridge the gap.
The biggest constraint on tax reform is, and has been, systems and processes of Inland Revenue Department (IRD). These are undergoing significant and much required change. However, there will also be the onus on businesses to adapt, as change will not be one-sided.
We expect the focus for 2015 will be as much on IRD’s ‘Business Transformation’ roadmap as the conclusion to the OECD’s BEPS journey.
We reflect on the recent conference facilitated by IRD (held on June 12 and 13, 2014 at Victoria University, Wellington), which brought together an interesting and challenging mix of views and observations from academics, officials, taxpayers and advisors on building a tax administration for the 21st century.
The impetus was the ‘Business Transformation’ project.
This is more than just a replacement of a computer system. It is also an opportunity to ensure that IRD’s processes, and the tax policy framework underpinning New Zealand’s tax system, are fit for purpose and are capable of meeting future demands.
The real benefits of transformation will arise not from the digitisation or automation of existing processes and policies but from recasting both so that technology makes everything more efficient. Technology is a means to an end.
In opening the Conference, Revenue Minister and Inland Revenue Commissioner emphasised that this was a “once in a generation” opportunity for reform and Government and officials are approaching everything with an open mind.
They also emphasised that this is only the start of the journey, with many more discussions between the various tax system stakeholders to come in the coming weeks, months and years (this is not a short-term reform).
IRD currently processes many tax returns (both in paper and electronic format).
Often, these returns are incorrectly completed and need to be manually re-worked or re-entered into its system.
The Department is looking at ways it can be provided information in real time which it can use to determine your tax liability.
If it can access the right information it will be able to pre-populate a return, which also shows what it considers your tax liability to be.
The Department will only be able to do this using technology.
Ensuring compliance: Summarising this area is less straightforward. There are a number of ideas to draw out.
Withholding is the key. Withholding tax, from payments to a person, minimises the opportunity for that person not to comply.
In other words, if tax is withheld at source, there is a greater likelihood that it will be paid, as there is no opportunity for the income earner to hide the income from IRD.
This leads to a real focus on how to make existing withholding systems, such as PAYE, more efficient and accurate and also how to extend them to areas like provisional tax and a wider range of payments made to contractors.
Deterrence and enforcement is still required. IRD audit activity will still be required. While this may seems an obvious conclusion, the nature of audit activity may change if the Department is focused on collecting, managing and interpreting data rather than verifying returns. This will provide opportunities for better targeted and more systematic enforcement.
Higher penalties may discourage compliance. There is evidence that higher penalties do not increase compliance rates and may actually have the opposite effect.
New Zealand has combined late payment penalty and interest regime is significantly harsher than other countries, while nearly half of all outstanding tax debt comprise such penalties and interest. This approach needs a re-think.
The Australian system, for example, relies on a general interest charge to discourage late payment, with penalties for not filing on time. This may provide a better approach.
Taxpayer education is required. A large number of taxpayers have no interaction with IRD. Instead, their interaction with the tax system is via their employer, or their bank, when tax is withheld from their earnings. This means they do not know what is required of them when they step outside their day-to-day world.
Making things simpler will help compliance. It is not enough to tell people what is required; you have to make it easy for them to comply.
One of the ideas being considered by IRD is collecting under-paid tax from future PAYE deductions, rather than through an end-of-year tax bill (which could put that person into debt).
The Department seems to acknowledge that errors happen because they do rather than due to deliberate taxpayer actions. There is a significant hassle factor to fixing those errors under current law and approaches. Importantly, there is acknowledgement that the system should allow taxpayers to correct errors without the threat of penalties.
Dinesh Naik is Tax Partner at KPMG based in Auckland. KPMG was the Sponsor of the ‘Business Excellence in ICT Category’ of the Indian Newslink Indian Business Awards 2014.