24 July 2014
Address to the BDO Tax Conference
Thank you for inviting me here today. I’m especially pleased that you’ve asked me to talk about the challenges for the NZ tax system and creating certainty.
These are very topical issues and two things I am deeply interested in.
Taxation is a necessary part of society as long as government is required to provide services such as health, education, police, social welfare and rebuilding Christchurch.
Yet today, it seems to me that our tax system and in fact tax systems around the world, are at a cross roads.
The design of tax systems is crucial if adequate revenue is to be raised in challenging economic circumstances.
Following the Global Financial Crisis, many tax jurisdictions around the world who do not share our broad-based, low rate tax framework face the pressing issue of sustainable revenue raising.
For New Zealand, this is not a top concern. I’m not suggesting that we are awash in tax dollars, but revenue is sustainable and relatively predictable.
At the height of the GFC tax revenue fell from $56 billion in 2008 to $50 billion by 2010. It has subsequently largely recovered, and is forecast to grow to $77 billion by 2018.
This Government’s response to the Global Financial Crisis was deliberately measured, with a clear and definite plan, and without a sense of panic.
We are now starting to experience the benefits of the government's discipline and economic plan.
The New Zealand economy continues to expand - faster than almost every other developed nation. It grew by 3.1 per cent in 2013 – the fifth-highest among the world’s developed economies. Growth is forecast to reach 4 per cent next year.
The Budget forecasts average wages to grow by another $7600 to $62,300 by 2018.
So New Zealand is well placed compared to most countries.
Crucially, we are on track to restoring the Government’s books to surplus. From a modest forecast next year to increasing surpluses in the coming years – out to $3.5 billion in 2017/18.
Our broad-based, low rate tax system has played a very important role in this return to surplus. It means that the Government can fund more of its operations not by imposing extra or higher taxes on the current generation or on future generations by raising debt, but simply by ensuring that the existing tax bases are applied fairly and correctly.
In fact, if you’re looking for certainty from the tax system, then there are two features of our tax system that I believe deliver this: a broad-base, low-rate framework for tax policy and good public consultation.
Our broad base, low rate framework acts to promote revenue integrity. It keeps administrative and compliance costs as low as possible and by avoiding complex rules and frequent changes it promotes business certainty.
In fact I might describe our system as boringly predictable, and that’s no bad thing at all!
Businesses can plan their affairs without worrying about the future tax consequences of their decisions.
This Government is focussed on ensuring that the tax burden is fairly and efficiently shared, in practice, as well as in theory. That is, that everyone pays the tax that they are obligated to. For if they don’t taxes on other taxpayers must rise to compensate, which discourages productive activity.
Our tax system relies on voluntary compliance which works as long as most people see that the tax system is fair.
A key means to ensure that we get the system as fair as possible is through public and industry consultation.
A particular strength of New Zealand’s tax system is its reliance on consultation and the willingness of the tax community to engage. I think it is the main reason that tax reform in this country is generally well targeted and has a high degree of buy-in from the public.
Consultation helps to ensure that proposals are fair and will not impose undue compliance costs. Crucially it gives taxpayers certainty.
For instance, the amount of effort by private sector individuals who volunteered their time and professionalism in a number of reviews of the tax system over the last thirty years is, I believe, unprecedented internationally and I thank you and your professional colleagues for it.
Our ability to work together across government, business, tax professionals and academia is one of New Zealand’s greatest strengths.
We’ll be looking for your input again particularly as we face some interesting challenges ahead.
The challenges I want to talk about are due to the changing world we live in. Many of you will be familiar with them: base erosion and profit shifting, and customer service expectation changes.
Our tax system needs to evolve to meet these challenges.
But how do you design a good tax system to do this?
Many here will be familiar with Jean Baptiste Colbert’s comment about tax system design: “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest amount of hissing.”
That may have worked for Colbert in 17th century France but not today. The goose gets nothing in return, yet we all know that taxes pay for all our government services. I actually think that as New Zealanders we get a pretty good deal for our taxes.
Our tax system works well and is complied with by the vast majority of taxpayers because they feel that what is asked of them is fair and reasonable.
This Government has an ongoing focus on reducing compliance costs and minimising or eliminating obstacles that can make life difficult for taxpayers.
The simpler we make paying tax, the easier it is for people to comply, and the better we use the tax we collect, the easier it is to justify collecting it.
Which is part of the reason why two years ago the Prime Minister set ten Better Public Service targets. The latest update, released earlier this week, shows we are making good overall progress on these.
We have now met the targets for reducing total crime and youth crime.
There has also been good progress in reducing long-term welfare dependency, increasing Level 2 NCEA pass rates and those with New Zealand Qualifications Framework Level four.
In other result areas, more work is being done to reduce rheumatic fever, reduce assaults on children, and improve online business transactions.
What has all this got to do with tax?
Well, this Government believes that New Zealand taxpayers deserve this level of accountability. If our taxes are spent on these government programmes, then we all have a right to know what we are getting for that investment.
In the past year or so issues of corporate taxation have increasingly been on the agendas of not only Finance and Revenue Ministers, but also Heads of Government.
And the particular issue that is most in the news is Base Erosion and Profit Shifting or “BEPS”.
BEPS is a problem where companies can legally arrange their affairs so that profits earned in a taxable jurisdiction are either artificially allocated to a low-tax jurisdiction, or are subject to arrangements that result in no taxable profits being declared anywhere.
The OECD, the principle international taxation standard setting body, has been leading the charge on this and New Zealand has been a very active participant in this work.
It is not in the interest of New Zealand businesses and individual taxpayers if multinational companies avoid paying their fair share of tax in New Zealand or anywhere else for that matter.
Countering BEPS helps to level the playing field. Moreover, if New Zealand suffers base-erosion, other taxes must increase to make up the difference, which reduces the efficiency and competitiveness of the New Zealand economy.
We’re well placed to make a strong contribution. I think it’s fair to say that New Zealand’s rules in this area are as good as any, and better than most. In domestic rules applying to such income, we have already made considerable progress.
Our thin capitalisation rules, transfer pricing and taxation of passive income of controlled foreign companies were designed to protect New Zealand from base erosion strategies.
Work continues to refine these domestic rules.
New Zealand cannot solve this issue alone, international cooperation is necessary.
Further progress on the BEPS issue requires collective action led by the OECD. 15 Proposals have been identified and the OECD sub-committees are scheduled to report on some of them from as early as September this year.
Already the first of these proposals is being readied for delivery.
BEPS is principally a policy issue; however there are two parts to a successful tax system: sound tax policy and a good tax administration. Our tax administration system is good, but the time has come to modernise and adapt to meet customer’s 21st century expectations.
After all, if people can conduct all their other business and personal activities using new online technologies – grocery shopping, buying a home, getting approval for a mortgage, or planning an overseas holiday – then by clinging to a paper-based model we risk becoming out-of-step with the modern economy, making it increasingly difficult for taxpayers to meet their obligations.
IRD has therefore launched a business transformation programme with the following objectives:
- Provide better public services by making sure our tax administration collects the right amount of tax from the right people, in the most cost-effective manner possible;
- Reduce compliance costs to taxpayers as much as possible;
- And finally, to ensure that the tax administration process and systems are flexible enough to implement government priorities and deal with future policy changes.
When the current FIRST system was designed it only needed to deal with 9 different tax products, since then it has been asked to handle an additional 30 tax and social policy functions.
It is no exaggeration when I say that the FIRST bucket is full!
However, Business Transformation is not just about new computer systems for the IRD. It is a chance to review all of the internal and external processes, policies and legislation to ensure that they are consistent with the objectives I have just outlined.
Your input will be an extremely valuable part of this process.
In conclusion, New Zealand’s tax system is up there with the best, but it will need to evolve and adapt to meet the needs of the 21st century and an increasingly globalised and interconnected world.
Tax policies will need to adapt to fit these challenges and so will our tax administration. But I am confident of success given the strong foundations of our broad-base, low-rate tax system and the focus on public consultation which will work to produce practical, fair tax reforms while providing certainty to businesses.
Thank you. I wish you a successful and enjoyable conference.
Media contact: Hayden Cox 021917339