Tackling industry-wide tax evasion
A discussion document released today sets out government proposals for cracking down on the hidden economy through targeted tax measures.
"Tax evasion can become ingrained in an industry, which often puts operators who pay tax at a competitive disadvantage," says Associate Revenue Minister David Cunliffe.
"Even if they don't want to, operators can become trapped in a spiral – they evade tax in order to compete, then are caught and put out of business because they can't pay their back-taxes.
"In the meantime, the rest of society has to make up the tax shortfalls that result from their evasion.
Under an idea being explored by the government, tax-evading operators within a problem industry would be given a last chance to break out of the spiral, clean up their act and begin complying with the law.
"Those who front up would be offered a limited amnesty in exchange for repaying a certain number of years of the back-taxes they owe, and they would have to comply fully with the law in the future.
"As part of the package, the target industry would be closely scrutinised by IRD auditors. Evaders caught in the process would face full back-taxes and penalties.
"In the long run, it's better to have tax evaders start to pay tax – and make a belated contribution to the public coffers, than to have them put of business and make no contribution, either now or in the future.
"If implemented, the system would be trialled to ensure it achieved the maximum benefit. Safeguards are proposed in the discussion paper to ensure the program would remain under close supervision.
"These are matters that affect us all. For this reason the government is seeking the public's views on the proposal – whether they think it's a good or bad idea, whether it would be fair to honest taxpayers, or whether there are better ways of tackling the problem," Mr Cunliffe said.
The discussion document, "Options for dealing with industry-wide tax evasion", is available at www.taxpolicy.ird.govt.nz and www.treasury.govt.nz. Submissions close on 1 October 2004.
Contact: Julian Kersey, Office of Hon David Cunliffe, 04 471 9116, 021 811 999 or [email protected]
Why is the government releasing this discussion document?
Some industries have entrenched tax evasion. This affects everyone as those who evade tax contribute less than their fair share to services such as education, healthcare and the police but they still use those services. It also disadvantages those in the industry who comply with the law as they bear costs that those not paying tax do not.
A barrier to cleaning up tax evasion is that those who have evaded tax in the past and who want to begin complying with the law can face back taxes and penalties that are so high they may be forced out of business.
The thinking behind this discussion document is that tax rules that focus solely on individuals may not deal most effectively with industry-wide evasion. Therefore, innovative ways of dealing with the problem are needed. There may be an overall benefit to New Zealand that industries can be cleaned up by offering limited amnesties to businesses to allow them to "clean up their acts" so they can continue trading and start contributing their fair share to society.
Given that it is innovative thinking, any action arising from the discussion document would be trialled and very closely monitored to ensure it was achieving its aims.
Why would some industries be targeted and not others?
We are concerned about the pressures being placed on honest, hard-working operators in some quarters because they have to compete with other, less scrupulous operators who do not pay tax and so can charge less – commonly done as a "cash" price. In some industries, we think this is making it hard for legitimate businesses to stay afloat without adopting the same practices – even though they might not want to.
What industries would be targeted?
This is just a proposal at this stage, but if it goes ahead, Inland Revenue would identify groups for whom amnesties would be effective as part of a broader strategy to clean up problem industries, from a tax compliance point of view. This strategy would include intensive follow-up audit and investigation in the targeted industry.
No potential candidate industries have been decided. The first word on any industry will be when a limited amnesty is offered. This is to prevent people changing their current taxpaying habits in anticipation of an amnesty in the future. And no industry could be certain it would be offered an amnesty, so it would be much wiser to continue paying taxes rather than gamble on perhaps having one.
How would the limited amnesties work?
Limited amnesties would allow tax evaders the opportunity to get back on track by coming forward and paying only a certain number of years of back-taxes. The discussion document canvasses options on how much back-tax they should pay, in terms of two, three, and four year options.
Wouldn't tax evaders just be let off the hook?
They will be assessed with penalties for whatever period is decided following the discussion document and policy process. They may not end up paying their full tax liability but this is also likely to be the case if they were bankrupted by a large tax assessment so it is a matter of finding a balance. The limits of the incentive to come forward talked about in the discussion document aim to prevent those arrears from being overwhelming, so they can be managed, say, by instalment arrangements, while the operator involved also has to meet future and current tax obligations.
It might look unfair in some respects but it might be more unfair not to try to do something about the evasion problem in some industries. This is also because we think there are groups of people who are not hard-core evaders but have been pressured into, and trapped in, dodgy tax practices by having to try and compete with hard-core evaders.
The law currently treats all evaders the same way. Pursuing this in a lot of cases could result in large numbers of bankruptcies, which could disrupt the industries involved, meaning that no-one will gain in the long run. The government is considering offering a concession now to improve the long-term picture for everyone.
Why wouldn't a limited amnesty be offered to everyone?
General amnesties normally do not provide any positive benefits and they risk encouraging future non-compliance, especially if people think another one is going to be offered in the future.
A key part of the proposal is the ability to ensure that follow-up investigations and audits can be conducted intensively. From a practical standpoint, there is no way a limited amnesty could be credibly proposed if spread too thinly over large numbers of people or the whole economy.
Wouldn't it be unfair to offer limited amnesties to some people and not others?
The aim of the government is to increase fairness by making sure that businesses are operating on a level playing field. This is an opportunity for industries with ingrained evasion to come clean and start to contribute their fair share to society. Limited amnesties may be a way to shift the aggregate behaviour of an industry in which evasion has become a deeply ingrained problem. The aim is to get a whole group of people back on track in the most manageable way, giving them a chance to come forward first, so Inland Revenue is able to focus its attention on those who choose not to. It's a last chance before the full force of the law is exercised.
How would things like child support be affected?
Social policy programmes like child support, student loans and family assistance will be affected to the extent that income is disclosed and assessed for tax when someone comes forward under an amnesty. In the case of child support this may have a flow on effect of providing more financial support for children.