Inland Revenue appeared before a Parliamentary Select Committee yesterday with a mostly bright and upbeat account of its activities this year.
It even divulged that the number of people who resent paying taxes had dropped by 5% over the past year.
But all the positivity couldn’t obscure the ongoing controversy that swirls around the IRD numbers and “brightline” tax on property speculation.
Three months ago both taxes were being derided in the same committee – the Finance and Expenditure Committee — by a series of accountants and lawyers for being either easily avoidable, riddled with ambiguities or possibly unlikely to be effective.
Yesterday IRD revealed it would cost $5 million to set up to implement the changes the taxes — but it was expected to gather only $5 million in revenue from the brightline tax
“Cost neutral,” interjected Labour’s Grant Robertson.
But the IRD’s problems with the IRD numbers and the brightline test are of politicians’ making.
It is having some successes of its own.
Its new massive computer system, called the Business Transformation Programme, not only keeps going down in cost — from $1.9 billion to now possibly just $1 billion —but is designed to cope with political whims.
Inland Revenue Commissioner, Naomi Ferguson, told committee member Chris Bishop that the drop ibn cost was largely because IRD had found an off-the-shelf tax system called Gentax which was already working in 30 US states and countries like Finland and Poland.
“It has meant that compared to the original assumption on which our work was based which was that we would have to design and build our own system pretty much from scratch as we did in 1989-90 and that would take considerably longer and we don’t have to do that,” she said.
In papers released earlier this year Treasury revealed that the current IRD computer system struggles to cope with changes to taxes.
Ms Ferguson said that was one of the questions IRD asked when it went looking for a new system.
“It is very agile and we have evidence from other authorities of a completely new tax type being stood up in a matter of months,” she said.
And then a flash of humour from the tax woman.
“I’m not sure I should have shared that with you because your expectations might be high with future policy work.
“We have to put it in first.”
It was a National MP, Andrew Bailey, who asked what IRD was doing to stop “base erosion” (in layman’s terms – tax avoidance) by multinational companies.
Acting deputy commissioner of policy and strategy David Carrigan said that New Zealand’s thin capitalisation and transfer pricing rules for foreign companies were robust but there was concern about two other areas.
One was hybrids.
“These are instruments that clever tax planners essentially ensure that the flow coming out of a country is deductible but when it reaches the other country it is non assessable,” he said.
So as an example a company could deduct a sum of money for tax purposes in New Zealand but would not be required to include it in its tax assessment when it reached Australia.
He said the tax planners exploited different rules for debt and equity in different countries.
“We are thinking very seriously about whether we need to change our rules to combat that sort of situation.”
The other issue he cited was related party debt where a foreign company set up a subsidiary in New Zealand by funding it with debt rather than equity and then claimed a deduction on interest payments being repaid to the parent.
“The question is do we need any more rules to protect us against that,” he said.
Arlene White, the IRD’s Deputy Commissioner for Service Delivery explained that an IRD auditor, John Nash, was heading an OECD committee looking at transfer pricing and whatever that committee decided would eventually make its way into New Zealand tax law but Mr Nash’s presence ensured that New Zealand had a voice in it.
The Select Committee seemed suitably impressed by the IRD presentation — even if its Opposition members had a few questions about the taxes the Department was actually being asked to collect.
