The Week in Tax – the potential tax implications of the Climate Change Commission’s draft advice, the latest from the OECD on international tax, and Inland Revenue's tax policy priorities

This week, a look at the potential tax implications of the Climate Change Commission's first draft advice to the Government. The latest from the OECD on international tax and a look at what a recent slew of reports and documents say about the state of Inland Revenue and its priorities.

Last Sunday, the Climate Change Commission released its draft advice for consultation. The draft advice has already stirred up a great deal of controversy and discussion about the suggested objectives for the country and how they are to be met.

On tax, the Government, he Commission’s Necessary Action 3 recommended accelerating light electric vehicle (EV) uptake.  As part of this it suggested the Government

“Evaluate how to use the tax system to incentivise EV uptake and discourage the purchase and continued operation of internal combustion engine vehicles.”

I've covered this elsewhere and my suggestion is that Inland Revenue needs to look at greater enforcement of the fringe benefit tax rules, maybe including an exemption for electric vehicles and looking also at the application of FBT to parking.

What else did the Commission discuss on the taxation side? Well, it noted that the climate transition will impact government taxation and spending and that the Government needs to plan for this. It noted that fuel excise duties, the revenue comes from that which is spent on land transport will change and probably decline. It also noted that reducing oil and gas production will result in less tax revenue and also affect the balance of exports because of the reduction in oil exports.

On the other hand, the emissions trading scheme will generate income from the sale of emissions units. Obviously the amount raised will depend on the volume of units and the market price for years, but at current estimates are that it could equate to about $3.1 billion over the next five years.

Now, what the Commission has suggested is that maybe these funds could be recycled back into climate change projects. And that's something I would agree with. In my piece on the Commission’s draft report I suggested that increased FBT take should be recycled into funding a vehicle purchase scheme.

So I think one of the things that comes out of the Commission’s draft report is that its recommended changes are  going to affect the country and the community greatly, and we need to mitigate for that. And if funds are being raised from environmental taxation, my view is they need to be recycled into the economy to mitigate the impact of change.

That, by the way, was also the view of Sir Michael Cullen when he presented the Tax Working Group's report, which covered environmental taxation, but its interesting observations on that were completely lost in all the hoo-ha over capital gains tax. As the Commission notes, one of the key objectives going forward is a

“process for factoring distributional impacts into climate policy and designing social, economic and tax policy in a way that minimises or mitigates the negative impacts.”

There's going to be a very interesting debate on this issue which will continue for quite some time. But we are at a point where we're going to need to take quick action, I believe, which come with consequences. We need to mitigate those consequences as far as possible.

Late last week, the OECD held its 11th meeting of the OECD slash 2020 inclusive framework on base erosion and profit shifting (BEPS). This is the international project on reforming international taxation.  

The (virtual) meeting included a last address from the outgoing Secretary-General of the OECD, Angel Gurría. He talked about what has happened over his 15-year term as Secretary-General. As he said when he took the helm in 2006,

“tax avoidance and evasion were running rampant. Urgent action was needed, and the aftermath of the global financial crisis presented the opportunity to crack down on these nefarious practices backed by the newly established G20.”

The Secretary-General then ran through the latest developments noting that 107 billion euros of additional tax revenue has been identified as a result of the initiatives such as the Common Reporting Standard and the Automatic Exchange of Information. There have been over 36,000 exchanges of tax rulings between jurisdictions and over 84 million financial accounts have been identified and exchanged in 2019, with a total value of around 10 trillion euros.

He also made a very important point that in a globalised world, tax cooperation is the only way to protect tax sovereignty. That was true at the start of his term in 2006 and remains the case now.  Without such cooperation each country's domestic tax policies is at risk. The latest state of play is a reflection of this where if a international solution is not found by the middle of the year, over 40 countries, including New Zealand, are considering or will move ahead with a unilateral digital services tax.

The solution to this is the so-called Pillar one and Pillar two proposals. Now, these are progressing, and an encouraging fact is that the new United States Secretary of the Treasury, Janet Yellen, as part of her confirmation hearings stated the United States is

“committed to the cooperative multilateral effort to address base erosion and profit shifting through the OECD/G20 process, and to working to resolve the digital taxation disputes in that context.”

So that's extremely encouraging.

The Secretary-General also picked up the Climate Change Commission's draft report, that carbon pricing is an issue that needs to be addressed. As Mr Gurría noted across the OECD 70% of energy related CO2 emissions from advanced and emerging economies are entirely untaxed. And so, as he put it, “putting a big fat price on carbon is one of the most effective ways to tackle climate change by creating incentives to reduce emissions.”

He also made an interesting comment about rising inequality and saying that policymakers need to do more in this space.  This picks up a general trend I have seen emerging for quite some time, following the double whammy of the global financial crisis and covid pandemic, of a renewed focus on taxing wealth and using taxation to reduce inequality.

Now, the Climate Change Commission's recommendations and the ongoing OECD BEPS Initiative are just two of the major policy issues on which Inland Revenue will be needing to provide policy advice and ultimately implementation. Although the Treasury provides advice to the Ministers of Finance and Revenue on tax policy, Inland Revenue is the main tax policy adviser to the Government. That's actually quite unusual by world standards, where more often it is the Treasury Department that drives tax policy advice.

So where is Inland Revenue at in terms of what it thinks tax policy is going? Well, as part of the as part of its general processes it prepares a briefing to each incoming Minister of Revenue. And the briefing Inland Revenue provided to it the new Minister of Revenue, David Parker has now been released.

Inland Revenue, in conjunction with Treasury, will develop a tax policy work programme, which is then signed off by the Ministers of Finance and Revenue.  These programmes will show what the priorities are and the expected policy focus over the next 18 months.

Now, obviously, Covid-19 will have some impact on the programme. The five top policy issues that Inland Revenue has identified as key priorities are rebuilding the economy, issues related to misalignment of the top personal tax rate, the role of environmental taxes, and what an environmental tax framework should look like, improving data analytics, and international tax settings.

And the briefing then goes on to set out significant current significant policy issues, most of which reflect these policy priorities.  There is a specific item on taxing the digital economy which notes

“Ministers will need to make a decision about the suitability of any OECD multilateral solution for New Zealand and whether to progress a unilateral digital services tax.”

But as often is the way it’s what's not actually said in a document that makes it interesting. Briefings to Incoming Ministers, are usually frank in giving an overview of where the department is at, what the main policy issues are as it sees it, and how it proposes that it should deal with the issues. But not everything is revealed.

And there is one or two interesting redactions in here, one of which appears to relate to some form of investigation into taxation of wealth.  At a guess this is identifying the wealthy in the group, usually defined as those with more than $50 million dollars in assets, their tax behaviours, how much tax they pay and what are they doing to mitigate tax.

Interestingly, by the way, the tax concessions charities and not for profits get is going to be reviewed to “ensure they operate coherently and fairly and to ensure the integrity of the tax system is protected.”  As the Tax Working Group noted, it received a number of submissions complaining about tax preference treatment of charities.

The Briefing also talks about Inland Revenue’s Business Transformation project, described as “complex, high-risk and fiscally significant (costing $1.8 billion)” in the separate briefing provided by the Treasury to the Minister of Revenue.

And there is some more very interesting redactions in here relating to funding of the Inland Revenue including references to other reports which have not been provided and which I have therefore requested under the Official Information Act.

What some of these redactions to is an issue that in my view the Minister of Revenue and the Commissioner of Inland Revenue, Naomi Ferguson, need to address. And that is the poor state of morale.

Inland Revenue’s 2020 Annual Report, released just before Christmas, at the same time as the Briefing to Incoming Minister, puts its staff engagement at a shocking 25%. And it has been bumping around at the 25 to 29% for several years now. And that's an impact of Business Transformation, which has shaken up the workforce in Inland Revenue quite substantially. In the year to June 2016, the headcount of Inland Revenue was 5,789. As of 30 June 2020, that has fallen to 4,831.

So a substantial amount of change has gone on in the department which doesn't appear to have been welcomed or met with enthusiasm.  It has certainly had a dramatic impact on the Inland Revenue staff engagement and morale. Whatever you might think about Inland Revenue and its activities, poor staff engagement is not good for the tax payers at large.

It should be said that remarkably and consistently Inland Revenue staff in their direct interactions with tax agents like myself and the general public continue to be highly professional, well-mannered and and responsive to our needs. But clearly behind the scenes, there is stuff going on that needs to be fixed and that should be a priority for the Minister of Revenue and the Commissioner of Inland Revenue.

There's also ongoing controversy around exactly what savings are going to be achieved by from Business Transformation. The scale of the Business Transformation project means the Cabinet gets regular updates on progress. So next week I'm going to take a closer look at a couple of the documents that have also been released in relation to Business Transformation.  These report on how it’s progressing relative to what was expected and what changes and additional funding, if any, may be required.

Well, that's it for today. I'm Terry Baucher and you can find my podcast on website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Until next week, Ka kite āno.