5 - The Generic Tax Policy Process and the tax policy work programme
- The Generic Tax Policy Process (GTPP)
- How the tax policy work programme is developed
- The structure of 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 Inland Revenue’s plan for developing, managing and delivering legislative change. Tax policy work programmes cover three years.
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 sometimes 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 cooperation, 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 the 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 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.
A new tax policy work programme will be developed for the three years following the 2017 general election.
Prioritising items on 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 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-based, low-rate tax system; and
- social policies.
Business Transformation and Better Public Services
A significant part of the tax policy work programme is to support the design and implementation of Inland Revenue’s Business Transformation programme. 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 we are focusing on include:
- progression of the two phases of the business tax package;
- better administration of PAYE and GST;
- pre-population and filing obligations for individuals;
- modernising the Tax Administration Act 1994; and
- modernising and simplifying the administration of social policies.
Better Public Services
Inland Revenue is committed to working collaboratively across government to deliver outcomes for New Zealanders. We play a key role in the Better Public Services through:
- Sharing a significant amount of information with the Ministry of Social Development and the Accident Compensation Corporation with a view to improving efficiency and enabling better outcomes for customers.
- Participating in the Gang Intelligence Centre, launched in 2015.
- Working closely with the Ministry of Business, Innovation and Employment on the design and implementation of the New Zealand Business Number.
- Committing to Digital Government (previously called the ICT Partnership). This framework has been set up to support the goal of a single, coherent ICT ecosystem supporting radically transformed public services.
- Contributing to SmartStart, a project led by the Department of Internal Affairs. It is a product designed around the birth of a baby for use on digital devices. This was released in December 2016, and is the first life-event-based service created by Inland Revenue, the Ministry of Health, the Department of Internal Affairs and the Ministry of Social Development. This tool makes it much easier for new and expectant parents to get the services and support they need to set up their child for the future.
International tax and base erosion and profit shifting (BEPS)
BEPS describes techniques used by some 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 cooperation.
Greater transparency and exchange of information
The work programme meets OECD timelines for the automatic exchange of information (AEOI) initiative. The recommendations made by the Government Inquiry into Foreign Trust Disclosure Rules are also being implemented.
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. In addition, we have introduced GST on online services consumed in New Zealand and measures to prevent the avoidance of non-resident withholding tax on interest paid to related parties.
- Continue working on a package of BEPS initiatives. This includes 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 will prevent companies stripping excessive profits out of New Zealand using deductible interest payments.
- Ensure an appropriate definition is applied for the permanent establishment of multinational businesses.
International agreements and cooperation
The tax policy work programme reflects the need to work with the OECD and treaty partners to ensure international agreements are fit for purpose. Our work includes:
- implementing OECD’s multilateral instrument (signed in June 2017), which amends 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;
- maintaining the tax treaties we have with 40 other countries and applying these to New Zealand income; and
- applying revised OECD transfer pricing guidelines to address misallocation of profits to low tax jurisdictions.
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.
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 requires on-going modification and refinement of legislation as new situations, behaviours, related legislation and judicial rulings emerge. We will not serve the Government or our customers well if we do not put sufficient resources 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.
About half of Inland Revenue’s business is delivering social policy programmes, including the repayment of student loans, 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.
As part of Business Transformation, we are looking at how our social policies can best be delivered within Inland Revenue’s transformed infrastructure and processes. In addition, we ensure 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.