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Inland Revenue

Tax Policy

PUBLISHED 19 November 2015

Address to CAANZ annual conference

The Minister of Revenue, Todd McClay’s address to the Chartered Accountants Australia and New Zealand annual conference focused on the issue of base erosion and profit shifting (BEPS). He discussed the OECD’s recently released BEPS Action Plan and New Zealand’s response to it. For more information see the Minister’s speech.

Hon Todd McClay
Minister of Revenue

19 November 2015


Speech to Chartered Accountants Australia and New Zealand (CAANZ) Annual Conference

It’s great to be here with you again.

First I want to say thank you. We have had an extremely busy year in the tax community. It has been a year of heavy lifting.

In just this year we’ve put out 14 consultation papers on policy, seen the introduction or passing of seven bills, and have been involved in the development of other legislation.

There has also been significant progress on the Business Transformation (BT) front from a tax administration point of view.

That is huge.

IRD used to have one tax bill each year. Over the next few years, we can expect the volume of bills through the house to increase. This is now the new norm.

The Government recognises that the considered thoughts and goodwill of the private sector have a critical role in the successful implementation of the tax policy work programme.

While we can congratulate ourselves on our cohesive, relatively straightforward tax system, a lot of that depends on you providing feedback on proposals and ensuring that they are workable.

It’s important that this is recognised and I want you to know that it is appreciated.

Your efforts have not gone unnoticed at the highest levels of government.

Last month we received the very welcome news that the Government’s books had returned to surplus.

This was achieved by prudent fiscal management of government spending and by maintaining a stable and robust revenue stream to the government.

Getting the government’s books back into surplus is a major achievement for the economy.

It happened well ahead of almost all of the rest of the world, and years ahead of forecasts for the Australian economy.

Whilst modest, a surplus is a surplus and it shows we’re moving in the right direction.

An efficient tax system is half the story in reaching this achievement.

The lack of a robust tax system can lead to loss of confidence and can cause real misery as some other countries have recently experienced.

Greece springs to mind - where for years they increased spending but nobody paid additional income tax. In fact it’s not actually clear if anybody was paying tax.

But achieving surplus doesn’t mean “mission accomplished”.

The need for continued fiscal prudence remains.

Looking into the future, New Zealand faces the need to fund the rising expenditures associated with an ageing population, and continue to deliver the services Kiwis demand and deserve.

The best way of achieving this is by having a healthy and growing economy.

The Government does not want to get the revenue it needs by taking larger and larger slices of a diminishing pie. Instead it wants to grow the pie.

At the same time we need a continuing focus on maintaining a robust tax base which raises the revenue needed to pay for public services.

And the Government also wants the tax system to continue to be fair and continue to be seen to be fair.

This means that we want to ensure that clever tricks cannot be used to stream profits away from New Zealand, lowering its tax base and national income, but at the same time making sure that New Zealand continues to be a good place to do business.

Our broad tax base, means that there is not much in the way of “low-hanging fruit” for further revenue-raising by broadening tax bases without significant negative effects on economic efficiency and growth.

So this is all a difficult balancing act.

It is critical to maintain the revenue raising capacity of our existing tax system, but we will do so within the principles of a broad base, low rate tax system.

Clear and coherent frameworks are important for good tax policy.

International tax reviews have cited the importance of deciding what it is a nation wants to tax and doing so consistently.

New Zealand is very fortunate to have a clear and coherent BBLR framework for taxation.

Broad bases help ensure that taxes are fair and efficient and do as little as possible to impede productivity and growth.

Broad bases also allow the government to collect the revenue it needs at the lowest rates possible. This, in turn, provides a second-round benefit in promoting fairness, efficiency and growth.

Our broad base, low rate framework for tax policy acts to promote revenue integrity. It helps keep administrative and compliance costs as low as possible.

And by avoiding complex rules and frequent changes in the system, it promotes business certainty and leaves businesses free to focus on seizing opportunities, being innovative and creating profits, jobs and growth.

BBLR was introduced in the 1980s and has a lot of buy-in from the wider New Zealand public. Reviews of taxation including the McLeod Review in 2001 and the Tax Working Group have argued that there should be a high burden of proof before moving away from BBLR principles.

Leading tax practitioners with experience of tax systems in other countries have noted that there can be a sharp difference in the tone of tax debates between New Zealand and other countries where there are much less clear policy frameworks.

The lack of buy-in to a clear framework can act like rust and gradually undermine integrity and compliance.

A clear framework is an important part of the success of the Generic Tax Policy Process. Tax reform debates can be principled and about whether or not tax changes are consistent with the framework.

But over and above this, successful tax reform requires goodwill and co-operation from all involved in the tax reform process.

We want a tax system where as much as possible businesses can plan their affairs without agonising over future tax consequences and where businesses can make sound investment decisions without having tax advantages or disadvantages driving their judgement.

An area that has in recent times had a high news profile is the issue of base erosion and profit shifting or “BEPS”.

With hugely increased levels of international trade and the advent of digital communication for commercial purposes, BEPS is now a concern, not just for New Zealand, but around the world.

BEPS is a problem where companies can arrange their affairs so that taxable profits are booked outside of where the economic activity takes place, or are subject to arrangements that result in no taxable profits being declared anywhere.

We want to have an economy where smart and innovative businesses want to operate and where these businesses thrive.

From the Government’s point of view, BEPS should not be seen as loading more and more onerous burdens on firms.

At the same time we want to ensure that all firms pay a fair amount and fair share of tax.

In our domestic rules applying to such income, we have already made considerable progress.

The international tax review, which exempted active income of companies that was earned abroad from New Zealand tax, contained a number of provisions that were designed to protect New Zealand from the base erosion strategies that have been identified as part of the BEPS project.

I think it’s fair to say that New Zealand’s rules in this area are as good as any, and better than most.

But it must be recognised that the eventual success of the OECD’s BEPS Project will depend on a critical mass of jurisdictions updating their domestic tax laws to international best practice.

Its goal is to make company taxes more transparent and even in their application across companies and countries.

Companies should pay tax somewhere and they should not be free to shift profits to the countries with very low or zero tax rates.

They should pay tax where economic activity takes place.

It is not in the interest of New Zealand businesses and individual taxpayers, if multinational companies can avoid paying their fair share of taxes either in New Zealand or elsewhere.

Our tax system relies on voluntary compliance, which works as long as most people see that the tax system is fair, so our focus has been on ensuring that the system remains coherent and readily understood.

It also aims to distribute the tax burden fairly, that is, that everyone pays the tax that they should.

Last month the OECD released its promised full set of recommendations for countering BEPS.

There are 15 points on the action plan, which I won’t go through today.

As I said before, our approach is to be mindful of the tax system as a whole and to take a considered approach.

The release of the OECD action plan therefore gives us an opportunity to scrutinise our tax rules when held up against the OECD recommendations.

As joint owners of the tax policy work programme, the Minister of Finance and I will agree on appropriate BEPS items to add to the work programme.

We consider that there may be room for improvement in some areas of our tax rules.

In particular we will be looking at interest limitation rules and whether or not they are cast appropriately.

We will also be considering strengthening our anti-hybrid rules.

In the past there has been concern that double taxation of international capital flows could penalise cross border investment and reduce worldwide income.

An opposite problem can arise today if hybrid arrangements can subsidise cross border investment and lead to lower taxes than would arise with domestic investments.

This too can lead to worldwide inefficiency and lower worldwide income.

The OECD has suggested new rules to stem this form of BEPS.

Our approach in the lead-up to the release of the action plan has been to work with the OECD and to be a strong supporter of the global response to BEPS.

That doesn’t mean that we simply adopt all BEPS recommendations into the tax policy work programme. Each country must make its own evaluation of what areas of its domestic laws need strengthening.

At the same time it is critical to ensure that any tax policy changes to address BEPS concerns are not unduly complex and nothing is yet set in stone.

Any changes would be subject to our normal consultation process and consultation documents on these two topics will be released next year. We will be looking for your input again.

An important component in our consultation on BEPS work will be outlining the Government’s thinking on how best to tax inbound investment.

I have agreed with the Minister of Economic Development, Steven Joyce, that a piece of work to consider cost of capital more broadly across government might be undertaken.

The effects of taxes on the cost of capital are important considerations, but so too is the issue of taxing capital as consistently and as neutrally as possible.

I mentioned before that the private sector has input into the work programme.

Naturally, the sector has an interest in seeing an environment that supports growth.

The tax policy work load is heavy at the moment; with work falling into three main themes

  • sensible reforms within a broad base, low rate framework
  • tax administration reform to support Inland Revenue’s business transformation and
  • a sensible, measured response to BEPS.

The work programme includes a number of items which the Government considers important to progress, such as the property tax changes announced as part of Budget 2015.

But there are also a number of items included there raised by the private sector (or which the sector has a keen interest in) which have been adopted onto the work programme as officials considered they would add to the fairness and efficiency of the tax system.

I mentioned earlier that there have been 14 consultation documents sent out for your feedback since I was last here at your conference.

These include loss grouping, closely held companies, residential land withholding tax, GST and online purchases, the bright-line test, NRWT proposals, proposals for allowing PAYE deductions on employee share schemes, the launch of the BT Green paper and proposals for greater use of digital technology, amendments to the rules for related parties debt remission and clarifying the GST rules for bodies corporates.

These various proposals are at different stages in the policy process. For instance, the public feedback on amendments to the closely held company rules is currently being analysed and I expect to introduce amendments to these rules in a tax bill early next year.

Meanwhile the proposals to apply GST to cross-border “remote” services and intangibles (including e-books, music, videos, and software purchased from offshore websites) provided by offshore suppliers to New Zealand-resident consumers have just been introduced into the House.

The amendments address the non-taxation of cross-border remote services and intangibles in order to maintain the broad base of New Zealand’s GST system and create a level playing field for domestic and offshore suppliers.

It does not consider rights issues, as it is a tax bill. It does however consider the avoidance of GST.

These proposals are also consistent with OECD guidelines and with international practice, including the proposals announced in Australia that are expected to come into effect on 1 July 2017.

In New Zealand, the amendments will apply from 1 October 2016.

But whether they originated with the private sector or from the Government, these policy proposals are all aimed at ironing out inconsistencies and improving integrity and making New Zealand a better place to live.

One of the huge advantages of our system of tax policy consultation is that it is extremely responsive.

It makes it easy for you to tell us when the tax law is not producing the answer that was intended.

I encourage you to keep doing this as fixing these issues keeps the system running smoothly.

The trick here for you is to prioritise what’s most important. We simply haven’t the resources to fix everything now.

I want to make a further comment.

As I’ve already said, I’m aware of the important role you have in the success of tax reform.

I am also aware that the better and more complete policy proposals are, the less work that means for you.

The quality of tax policy advice must be maintained to ensure that the focus on BBLR work continues at a high standard.

Three years ago I made a commitment to you that as we worked through BT, we would work hard to ensure that Business As Usual activities did not suffer.

While not all, the majority of our tax work this year has been in the Business As Usual area.

Over the next few years, while there will be a natural convergence of policy work in both BT and Business As Usual, there will be additional policy pressures as we become busier.

To meet my commitment to you with regard to Business As Usual, I have had a number of discussions with the Commissioner of Inland Revenue about our workload. The Commissioner has confirmed that she will increase investment into the policy advice area as appropriate.

An important spin-off will be ensuring that many of the items including remedial matters that are important to professionals such as yourselves have scope to be progressed.

Before I conclude, it would be remiss of me not to mention Business Transformation.

After all, a bulk of our policy resources has been invested into ensuring the successful delivery of the programme – and rightly so.

As I’ve mentioned on several occasions, BT is a once in a lifetime opportunity to modernise and simplify tax administration, and we must get it right.

On the policy front, we are certainly delivering.

Last week I launched policy consultation on two topics covering proposed changes to the GST and PAYE processes and to the Tax Administration Act.

Wider than this, we are working hard to deliver some early wins.

From next month, for example, Inland Revenue together with Xero and MYOB are launching a pilot programme allowing customers to file GST returns straight from their accounting software to Inland Revenue.

It’s been pleasing to see Inland Revenue working collaboratively with the private sector, both locally and internationally, to deliver on the programme.

The Government has been clear that where New Zealand companies can do this work, we expect them to be given the opportunity to do so.

To date, some 67 per cent of the spend on BT has gone to New Zealand companies, supporting businesses and creating jobs.

This has all contributed to us meeting our major milestones – in fact we are running ahead of time and continue to run under budget.

As some of you in the room heard last week, the programme is now planned to be completed within seven years instead of the ten years originally indicated. Further, it is now likely that the new Crown funding required will be under $1 billion over this period. This is well below the highest projections of $1.9 billion.

It’s really great seeing it all come together, but we still have more to do.

I look forward to working with you and hearing your contributions on the BT policy proposals that are coming down the track.

I’ll wind up my speech now by saying that New Zealand’ 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 digital world.

Tax policies will need to adapt to fit these challenges.

BEPS is a matter of global concern for tax jurisdictions and no less so for New Zealand.

The OECD is leading the charge at an international level, but New Zealand’s response will, as always, be to take the considered view and consider the OECD recommendations and how they fit in with our tax system as a whole.

It’s the responsible thing to do. Thank you