Te wiki o te tāke: Using tax law against gangs, OECD tax coordination on MNCs, Ireland's tax risks, IRD back liquidating defaulters, & more

Last Saturday, the ACT party leader David Seymour appeared on Newshub Nation and suggested that Inland Revenue be used to deal with the gangs.

He believed the powers currently being used by Inland Revenue as part of its high wealth individual research project could equally be applied to deal with the gangs. It did make for some entertaining viewing, as interviewer Rebecca Wright was more than a little incredulous at the suggestion that gang members wearing patches would happily submit to filling out questionnaires. On the other hand, the notorious mobster Al Capone, was ultimately jailed for tax evasion so the use of Inland Revenue against organised crime is not that unreasonable a suggestion.

Mr. Seymour does seem to have misunderstood the nature of the powers currently being used by Inland Revenue as part of its high wealth individual research project. Those powers have been deliberately limited so that the information gathered is solely for research purchase purposes. They are therefore more prescribed than the general powers available to Inland Revenue. I also think Mr. Seymour was overstating how much of a sanction non-compliance with the high worth individual research project would be.

Now Inland Revenue does indeed have some extensive powers of information request and where appropriate, search and seizure. And if you want an example of how it can apply those rules that can be found in the case of Tauber v Commissioner Inland Revenue.  

In this case, Inland Revenue was investigating a former accountant who it believed was suppressing income. After its initial information requests were not satisfactorily answered in its view, Inland Revenue then decided to use the powers available to it under Section 16 of the Tax Administration Act.  It carried out simultaneous search and seizure operations at six separate locations, including a boat shed.

Mr Tauber responded by making an application for judicial review, claiming that the various Section 16 warrants were too widely drawn and not specific enough. The application also questioned whether the searches were necessary for carrying out the Commissioner’s functions and if the searches were carried out in an unreasonable manner. Unfortunately for Mr Tauber and the other claimants the courts upheld Inland Revenue’s use of its powers.

The case illustrates the extensive powers available to Inland Revenue. However, what it also illustrates is that applying those powers is a very intensive operation requiring a considerable number of resources. If you're raiding six properties simultaneously with teams of investigators, you’re talking about an operation which may have involved somewhere between 40 and 50 people. Now if you think about dealing with gang members Inland Revenue would also want to be raiding several premises simultaneously. Therefore, that would require considerable resources from it and no doubt police officers to be available in case matters escalated.

It's therefore questionable whether Inland Revenue would actually have the resources to carry out major investigations into gangs. And although tax evasion is a criminal offence, Inland Revenue would probably be of the view that the powers available to police and other authorities under the anti-money laundering legislation, which have been strengthened this week, mean those agencies are more appropriately deployed to deal with organised crime.

This isn't to say that Inland Revenue wouldn't pass up the opportunity to investigate tax evasion involving gangs if it felt considerable sums were involved. But as the Tauber case shows, using its full range of investigatory powers requires considerable resources, which ultimately, I think, Inland Revenue might feel better used elsewhere. In other words, “Nice idea, but yeah nah.”

Update on OECD tax reform

Moving on, the OECD delivered its latest update on the status of the international tax reform agreement to G20 finance ministers and central bank governors a couple of weeks ago. This included a progress report on the status of Pillar One, which is the proposal to ensure that market jurisdictions can tax profits from some of the largest multinational enterprises.

The OECD Secretary-General presented a comprehensive draft of what these proposed technical model rules will be for Pillar One. These are now going to go out for public consultation between now and mid-August. The intention then is to finalise a new Multilateral Convention by mid-2023 for entry into force in 2024.

In addition to updating the status of the Multilateral Convention to implement Pillar One, the Secretary-General's Tax Report also gave an update on how an implementation of the OECD transparency agenda (the Common Reporting Standards on The Automatic Exchange of Information). And the latest update is that information on at least 111 million financial accounts worldwide covering total assets of nearly €11 trillion was exchanged automatically between tax administrations in 2021. And later this year, the OECD will finalise a new crypto-assets reporting framework, which will be included as part of the Common Reporting Standards. So things are moving ahead even if they’re going more slowly than people had expected.

In relation to the Pillar Two work, which introduces a 15% global minimum global minimum corporate tax rate, the technical work on that is largely complete and an implementation framework is to be released later this year to facilitate the implementation and coordination between tax administrations and taxpayers. All G7 countries, the European Union and several other G20 countries, along with several other economies, have scheduled plans to introduce the global minimum tax rules. New Zealand hasn't reached that stage but consultation on the matter has just ended, so we may see something later this year.

Ireland's tax risks

Now one of the ideas behind the Pillar Two global minimum corporate tax rate is to try and stop tax competition driving corporate tax rates lower. Now, one of the poster child’s for lower corporate tax rates is Ireland. And last week I mentioned Ireland’s strong GDP per capita growth in recent years. This appears in part to be a by-product of multinational and multinational investment in Ireland, attracted by Ireland's low corporate tax rate of 12.5%.

Now tax is always full of unintended consequences and this week the Irish Finance Ministry highlighted a potentially huge downside of this policy for Ireland.

Apparently just ten multinational firms pay over half of Ireland's corporate tax receipts. These are expected to be between €18 and €19 billion this year, up from an estimated €16.9 billion forecast just three months ago. And by the way, that's nearly a five-fold increase in the last decade.

Now, on the face of it that all sounds good. But John McCarthy, the Irish finance ministry’s economist, warned that the fact that just ten multinational firms pay more than half of honest corporate tax, represents “an incredible level of vulnerability” for the Irish economy, as a shock, which impacted on the multinational sector would have severe fiscal implications for Ireland. I understand something like one in nine Irish employees are employed by multinationals such as Facebook, Google and Pfizer. Therefore, the fallout from a shock in this sector could be huge for Ireland.

Mr. McCarthy told reporters the level of concentration in such a small number of firms is something he has never seen in any other economy. He was therefore more worried about the overreliance on these types of firms than the impact of the global overhaul of corporate tax regimes could have on Ireland's position as a hub for multinational investment. Ireland power. The same report estimates that Ireland's tax take would be affected negatively by about €2 billion over the medium term.

Irish Finance Minister Paschal Donohoe then chipped in saying he has long shared the concerns McCarthy outlined. He said the best way to manage the risk was to return to the pre-pandemic position where corporate tax receipts are not used to fund permanent spending. This seems an incredible admission that a low corporate tax rate is actually not sustainable over the long term. So that's something to pause to think about when you hear talk about corporate tax cuts.

By the way, these concerns of the Irish finance minister and the Finance Ministry might explain why Ireland didn't oppose the proposed 15% global minimum tax rate. I suspect that on the quiet this represents an opportunity for Ireland to raise its corporate tax rate without too much fuss. It would be interesting to know the level of concentration here in New Zealand. I guess the big four Australian banks and the New Zealand Superannuation Fund would represent at least 20% of the corporate income tax take.

IRD back liquidating defaulters

Moving on, a quick follow up from last week's items about Inland Revenue’s enforcement and collection activity increasing. As of 30th June 2021, 140,000 taxpayers had arrangements with Inland Revenue covering $3.7 billion of tax. Now, Inland Revenue would be keen to ensure those numbers don't continue to grow. Historically, what it's done is taken strong enforcement action including initiating liquidations. Apparently about 70% of all high court liquidations were initiated by Inland Revenue. However, during the pandemic, as part of its more sympathetic response, that number fell to just under 30%.

However, I've been informed that since April that there's been a huge escalation in Inland Revenue activity in the High Court and liquidation proceedings. So that's the clearest sign of Inland Revenue’s increased focus on debt collection and a clear warning to all those out there that if you if you're in trouble you need to front up and try and make arrangements with the Inland Revenue before they take it further to the liquidator.

Awards finalists

And finally, this week, the Tax Policy Charitable Trust has just announced its four finalists in this year's Tax Policy Scholarship competition.

This competition is designed to support tax policy, research and thinking. Entrance is limited to those under the age of 35, and the intention is that people are asked to give ideas of proposals for reforms to our current tax system, to address potential weaknesses and unintended consequences of existing laws. Now there are three topics in this year's competition: environmental taxation, tax, administration generally, or the powers granted to the Commissioner of Inland Revenue and to investigate for research policy purposes. (These are the powers that Mr. Seymour was referring to in his interview about tackling the gangs).

The four finalists are Daniel Doughty, a senior consultant with EY in Wellington. He's proposing a small business consolidated reporting regime to simplify tax reporting for small companies. I think this is an excellent suggestion, so look forward to finding more about this. Our tax system expects a lot of administration from small businesses without really trying to adjust the compliance burden to help them with those processes.

The second finalist is Mitchell Fraser, a tax solicitor with Mayne Wetherell in Auckland. Mitchell is worried that the new powers granted to Inland Revenue for tax policy purposes may have unintended consequences. He's suggesting alternative means to collect the information that's wanted, including through Statistics New Zealand.

The third finalist is Vivien Lei, a group tax advisor with Fisher Paykel Healthcare. Vivien has got another interesting proposal to change New Zealand's environmental practises by introducing an impact weighted tax regime. Under this model, organisations will be taxed on a net positive or negative impact on the environment. Now is an area I'm very interested in and previous readers or listeners of the podcast will know that John Lohrentz, one of the runners up in the last competition, proposed a progressive tax on bio genetic biogenic and methane emissions in the agriculture sector. It's therefore good to see there's plenty of focus on this area.

And finally, there's Jordan Yates, a senior tax consultant with ASB in Auckland, and he believes the tax policy landscape has been fractured and suffocated by political roadblocks. I don't think he's wrong there. Jordan’s proposing an independent statutory authority that would be responsible for the independent management of fiscal policy as it relates to the tax base. It's an idea I've heard floated in other places and another one I look forward to hearing more about. This fracture is one reason why the Minister of Revenue, David Parker, has proposed his Tax Principles Act.

The finalists have all been asked to develop a 5,000-word submission on their proposal. They'll then make a final presentation and answer questions at a function later this year in October, after which the winner will be announced.

This is a great initiative by the Tax Policy, Charitable Trust, and I look forward to hearing more about these proposals. And as we did with Nigel Jemson, the winner of the last competition and runner-up John Lohrentz we will hopefully have the prize winners on the podcast.

Well, that's all for this week. I’m Terry Baucher and you can find this podcast on my 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 time kia pai te wiki, have a great week!

*Terry Baucher is an Auckland-based tax specialist with 25 years experience. He works with individuals and entities who have complex tax issues. Prior to starting his own business, he spent six years with one of the "Big Four' accountancy firms including a period advising Australian businesses how to do business in New Zealand. You can contact him here.