Tax revenue is to increase from $68.4b to $70.5b in 2017/18 and by an average of 5% thereafter, despite the Budget’s nearly $2b of personal tax cuts.
Due to GDP growth, and an increasing GST take on the back of this, Base Erosion and Profit Shifting (“BEPS”) measures and profitability adding to the company tax take and higher Resident Withholding Tax from higher deposit interest rates.
The significant increase in Business Transformation funding is due to the implementation of the next phase of the system and changes to Inland Revenue’s operational model. This next phase will affect business, individuals and of course Inland Revenue.
The forecast suggests that the BEPS measures currently under consultation (for hybrid mismatches, new interest limitation rules, and transfer pricing and permanent establishment changes) will take effect for part of the year from 1 July 2018. The forecast indicates a very tight implementation timetable (legislation by mid-2018) with little time to react. For those potentially affected, assessing the potential impact and planning your response should not be delayed. However, this may not be easy given the uncertainty of what exactly those measures mean.
TheTrustpower Supreme Court decision narrowed deductible expenses for business. The case involved expenditure to determine what action a business should take – “feasibility” expenses. A broader entitlement to deductions, compared to the Commissioner’s position following the TrustPower decision, is proposed.
As with beauty, “fairness’ in the tax system is in the eye of the beholder. Although there is some truth to the adage that a good tax is one that someone else pays, fairness in tax is important. Without a perception of fairness, there is a higher incentive to find ways not to pay.
It is easy to label a tax change as fair. That helps achieve a measure of political support.
However, mere labelling does not make it so. (Calling it a duck, doesn’t make it a duck.)
The multi-national BEPS project, which Budget 2017 again supports, is not necessarily a good base for measuring the New Zealand tax system’s fairness. As we have noted in a number of submissions, the OECD project is unprincipled or, somewhat less pejoratively, pragmatic.
To move the global tax system forward so that it appropriately deals with the modern global economy, the OECD had to achieve a degree of consensus. That has been achieved without going back to basics or testing the assumptions.
Two simple (to state) illustrations.
The BEPS project assumes companies are taxpayers. If they do not pay tax where they operate, that is a bad thing.
However, the New Zealand framework is that a company pays tax on behalf of its shareholders. We allow a credit to the shareholder when the company pays dividends from tax paid profits. This prevents the same profit being taxed twice – that seems fair.
(This benefits many New Zealanders. Many of the 2.7m KiwiSavers benefit from this rule.)
The BEPS project does not attempt to achieve this fairness. It ignores taxes that shareholders pay.
Another more difficult example. A global company spends money developing its technology in one country. Its New Zealand subsidiary is charged a royalty for using that technology. New Zealand charges a withholding tax. The tax applies whether or not the global company makes a profit on that royalty income. It applies even if the costs are greater than the income.
This does not seem fair when an income tax is supposed to tax profits. (However, employees, who cannot claim any work related expenses as a deduction may be less sympathetic.)
These problems of principle leave New Zealand in a difficult position. Implementing the BEPS recommendations means that New Zealand is “in line” with the OECD’s efforts.
It may not however achieve a fair result. This is compounded by a number of countries having “localised” their adoption of the recommendations. Others, such as the USA, may adopt none at all. This increases the likelihood of producing unfair results for New Zealand.
New Zealand therefore needs to carefully consider its response so that it is consistent and coherent with its framework.
By contrast, Inland Revenue’s Business Transformation is a necessary step to protecting the tax system. The outcome we all hope for is a better tax administration. The expectations are high. This brings with it risk. For those outside Inland Revenue, engagement with the process so that change is less painful will be important to managing that risk.
Businesses continuously consider how they operate and what they need to operate. These are a natural expectation of business and an operating cost. These activities do not always lead to successful outcomes (by definition). The lack of success is compounded by being denied a tax deduction. The proposals are a welcome reduction in the tax irritant.