The New Zealand Tax Podcast – Matthew Handford makes the case for establishing a Tax Law Commission as a way to stop the erosion of the Generic Tax Policy best-practice processes

My guest this week is Matthew Handford, a solicitor in the Mayne Wetherell tax team and another of the four finalists for this year's Tax Policy Charitable Trust Scholarship competition. The Tax Policy Charitable Trust was established by Tax Management New Zealand and its founder Ian Kuperus to encourage future tax policy leaders and support leading tax policy thinking in Aotearoa.

Matthew is proposing a Tax Law Commission, independent of Inland Revenue, to restore the Generic Tax Policy Process (GTPP). Under Matthew’s proposal, a TLC would have a standing mandate to systematically review the operation of New Zealand’s tax laws and make recommendations for their improvement.

I should make it clear here that everything in Matthew's proposal and what is in this podcast represents his views and not those of Mayne Wetherell. Kia ora Matthew, welcome to the podcast. Thank you for joining us.

MATTHEW HANDFORD
Good to be here.

Terry Baucher
Right. So, a Tax Law Commission to restore the Generic Tax Policy Process, what is the Generic Tax Policy Process?

MATTHEW HANDFORD
The Generic Tax Policy Process (GTPP) was developed in the 1990s, around the time of the Richardson Committee’s review into various tax administration and policy matters. And essentially what the Generic Tax Policy Process does is it requires, in a non-legal sense, there is expectation that Inland Revenue will engage in a high level of consultation when it develops tax policy. And that is particularly important for ensuring what’s the key objectives of the tax system, which the Richardson Committee described as including the efficiency of the tax system and fairness. And where the Generic Tax Policy Process is particularly valuable is in terms of encouraging the efficiency of the tax system. Because it allows members of the public and private sectors outside the government basically making Inland Revenue aware of potential unintended consequences of their policies. Which includes things like compliance costs that might arise or potential dead weight losses that might arise from changes in behaviour as a consequence of the proposed policies.

TB
Yes, it's very comprehensive and unique. And I should say that many of us have been involved in this process. Inland Revenue will have an idea, and come to tax professionals, the Law Society, ATAINZ, the Corporate Taxpayers Group and say “here are the issues. This Is what we think. What do you reckon?” And I've been fortunate enough to be involved in some of those discussions as well, and it's all very much above board and quite efficient. It’s actually very unique in world terms isn't it.

The Generic Tax Policy Process – international best practice?

MATTHEW HANDFORD
Yes, that's right. So, the Generic Tax Policy Process is something that has actually been raised quite extensively, both at an international level. There was a review of different tax policy processes that was published in the Canadian Taxation Review and that essentially highlighted that there are a lot of benefits to the Generic Tax Policy Process, particularly in terms of its ability to produce effective tax policy because of the ability to bring in the broad range of public views. And this position is also endorsed by the most recent Tax Working Group in the background paper on the GTPP.

TB
Yes, I know from my experience in Britain that you'd often see legislation pushed through and then you'd see heaps of amendments to it. And you could tell clearly that the policy had not been thought through. So it is seen as integral. I think if you get any group of tax specialists in a room, we talk about it. Those of you who listened to the podcast I did with the Titans of Tax, Sir Rob MacLeod, Robin Oliver and Geof Nightingale will know that we did touch on the whole Generic Tax Policy Process. It’s now 30 years since the organisational review of Inland Revenue brought about GTPP, which is quite some time ago as they remarked, so your proposal is quite timely. The theory is fantastic, but some constraints have emerged. What are the difficulties as you see it now, and why you think the TLC for the GTPP, as you put it, is needed?

MATTHEW HANDFORD
Essentially, I think what we've begun to see over the last few years has been something of an erosion of this GTPP best practise, and I don't think this is necessarily something we want to blame Inland Revenue.

Conflicting demands on Inland Revenue

I think that the officials are definitely doing a good job with the resources and the constraints they have. But what I think we're starting to see is certain conflicting priorities and functions that are emerging from the way Inland Revenue is structured and run that are undermining the effectiveness of the GDP.

The first example of this, and there are three main examples I want to highlight here, is a phenomenon of ministerial priorities appearing to take a lot of Inland Revenue resources, which is understandable. But secondly that these ministerial priorities will sometimes be advanced at the expense of the GTPP.

Probably the classic example of this from the last couple of years was the Taxation Principles Reporting Act. Which, when that Bill was initially published, there was quite an uproar from submitters relating to a number of issues with that bill. Certainly, from a lawyer’s perspective, there are a lot of constitutional law issues which we thought were only really there because there clearly hadn't been enough consultation from the get-go, that wouldn't have found their way into the bill had there been proper consultation.

Then also there was, I think a general belief among a lot of tax practitioners that the way the principles were described was reflecting a particular ministerial agenda and that in an ideal world, those principles would have actually been put out to consultation prior to the bill being introduced as well.

So, that was probably one example of this issue of essentially ministerial capture undermining the GTPP.

Putting administrative convenience ahead of good tax policy

The second point, and this perhaps goes more to the way Inland Revenue is structured, appears to be the conflicting functions for Inland Revenue. Inland Revenue is unique in the sense that there is one organisation which is responsible for the development of tax policy, but then also the administration and enforcement of tax policy. And on top of that, it also actually holds the drafting function. This is unique among New Zealand policy bodies in the sense that it drafts its own legislation, as opposed to the Parliamentary Counsel Office.

And again, somewhat unusually, Inland Revenue has quite an extensive interpretation function through its binding rulings and adjudication processes, which is exacerbated by how few cases actually make their way to court because of the way the tax dispute process works. But I guess focusing more on the policy point, there seems to be somewhat of an incentive when everyone is developing policy that might reduce administration costs for Inland Revenue or make it easier for Inland revenue to enforce tax laws and gather revenue, even if those tax policies might have potential unintended consequences or dead weight losses.

Perhaps an example of this, at least that I've seen in practice, is that some of the recent base erosion and profit shifting reforms had certain unintended consequences for securitisation transactions. For those who don't know, is a particular form of financing transaction that is particularly popular among small vendors, which had various unintended consequences. Inland Revenue seems really unwilling to correct those unintended consequences.

So there were very similar submissions raised in the 2021-2022 tax bill. A number of very similar submissions were made by similar bodies, which raised basically the effects of these unintended consequences on these transactions.

TB
This is interesting because I talked about BEPS last week. And correct me if I'm wrong here, Pillar One and Pillar Two are targeting the very largest multinationals in the world. But the legislation you're saying is although it's meant to be targeting the largest multinationals in the world, it’s actually capturing far more than it is intended.

MATTHEW HANDFORD
Yes, in some instances and obviously less perhaps focused on, things like Pillar Two, expressly have the revenue requirements to actually capture objective bodies.

But I guess New Zealand is more tailored. in terms of the way we operate things. For example, the restricted transfer pricing regime. The point being that there needs to be a lot of care when those are drafted to ensure there aren't unintended consequences, and if there are unintended consequences then Inland Revenue should be very responsive to fixing those.

And the point I want to raise here is that in response to the submissions that were raised in the 2021-22 bill Inland Revenue repeatedly cited that essentially these submissions had merit. However, they said that further consideration of this matter would require prioritising and resourcing as part of the government's tax policy work programme.

However once, by the time we got to the 2023-24 bill almost identical submissions were raised by the same submitters because the changes hadn't been made, and Inland Revenue once again said “This matter would require prioritising and resourcing as part of the government's tax policy work programme”.

Essentially what we see here is unintended consequence creeps its way in to the Inland Revenue’s administration enforcement functions. When these matters are raised within Inland Revenue, they recognise them as a problem, then they don't do anything about it. I think this type of situation is illustrative of the types of problems that arise because of the way Inland Revenue is structured in terms of their integration with policy and enforcement.

An over-mighty Inland Revenue?

TB
Yes, that's a great example of the issue there. And there's also something that Sir Rob McLeod, Robin Oliver and Geof Nightingale touched on. This point that there were concerns that the policy and administration being in the same body, which is unique in world terms, and creates these particular issues. I was particularly interested in what you were saying about the question of a lack of disputes. That’s not quite within your remit, which you're describing here.

But it is a problem as I see it that there is stuff going on, but we don't actually know because the courts aren't seeing it, and the question arises whether Inland Revenue has too many functions here? And do you see the Tax Law Commission resolving that issue. The separation of powers is actually very important, isn't it? If you've got something that's basically writing and administering the law, it’s an awful concentration of power, isn't it?

MATTHEW HANDFORD
Yes, I think this is probably one of the biggest issues really within Inland Revenue’s current structure. And obviously as someone you know, who has quite a big interest in public administrative law consequences of this type of behaviour, I see there's serious issues with it.

I guess what my Tax Law Commission proposal is not trying to break up Inland Revenue altogether, but we're basically targeting specific functions and saying about specific functions, there should be greater independence from Inland Revenue. Essentially to act as a check, at least in relation to Inland Revenue’s policy function. ‘

Now I guess something that's probably worth stressing is actually when you do look at the Inland Revenue structure compared to overseas peers, there is generally this understanding that actually there are a lot of efficiencies particularly in a smaller economy, perhaps a shallower pool of talent like New Zealand.

Having these functions integrated together does mean you can kind of draw upon the expertise when you need it. However, I think what we really need to be doing is perhaps less thinking about breaking up Inland Revenue wholesale, and more saying that there are certain functions which should have a greater degree of independence. And that independence comes from having someone outside of Inland Revenue perform specific functions.

Time for a Tax Law Commission?

TB
I mean, we had the Rewrite Committee, which was disestablished quite some time ago, but it was independent. Someone mentioned at the recent New Zealand Law Society conference there was something like 900 remedial amendments required at the moment. Now currently Inland Revenue determines which of these gets chosen for implementation, but what you're saying is that a Tax Law Commission could do that instead.

MATTHEW HANDFORD
Yes, exactly. So, thinking about specifically the Tax Law Commission’s responsibilities would be. Its main roles would be remedial amendments, and post implementation reviews - really just taking a critical eye over recently enacted laws and thinking what needs to be improved here, why isn't it working right. And then also I anticipate that from time to time it would be asked to prepare a more in-depth report on a particular regime and how that's working. But that's really aimed at the more technical questions you might look at say imputation credits or something like that, something quite technical as opposed to looking at the big picture questions - like should we have a new tax or should the tax rates? Those really are policy questions that need to be debated and decided on by the public.

TB
They're very much very political decisions. I mean, tax is always politics I keep saying, and those sort of decisions - new taxes, tax rates – are inherently political and basically the Minister decides “that's what we're going to do guys, you get on with it.”

Just picking up on this question of post implementation reviews, we haven't actually seen many of those.

MATTHEW HANDFORD
No.

TB
That was something Rob, Robin and Geof touched on, that 30 years on I think what you're suggesting is extremely timely and it's not the first time that someone's said we need to strengthen institutional arrangements. Because the Victoria University of Wellington’s Tax Working Group, the Buckle Review, which reported in early 2010, and said they needed strengthening. So, I think you're pushing against an open door here, post implementation reviews, I do think is something we really should be seeing more of. But between ministerial priorities and other matters Inland Revenue’s tax policy division has got too much to do, is that the issue?

MATTHEW HANDFORD
Yes, think that’s the crux of the matter. I think policy has probably got too much to do in terms of there's a lot of things to pack into their work programme when they are making those prioritisation decisions.

There are certain stresses that kind of drive Inland Revenue focus in a particular direction. What I'm really saying here is that we need to have someone who can allocate via their resources to the things that perhaps are less popular for Inland Revenue or the Minister. And really that would still make a big difference for taxpayers in terms of how the tax system operates.

An example to follow? The Australian Board of Taxation

TB
Australia has a Board of Taxation, doesn't it? And that seems to have some of the functions you're talking about. Is that right?

MATTHEW HANDFORD
Yes, that's right. And I guess picking up on that post implementation review, one of the things the Board of Taxation has done is post implementation reviews of particular regimes. So, in that sense there are definitely elements of the Board of Taxation which are reflected in my proposal for a Tax Law Commission.

Now I’ll just give a little background on the Board of Taxation, and how that works. Essentially it's a board that consists of a range of members from the private sector in Australia, but also with representation on the board from certain senior government officials. Essentially their job is to provide a kind of private sector view and scrutiny to tax policy in Australia, and I think that is very valuable.

However, I think perhaps one of the weaknesses of the Board of Taxation is they ultimately are a non-statutory body and for that reason sometimes the role can perhaps be a bit lessened.  I think one of the things you saw, particularly out of the recent scandals in Australia with tax consulting, was that actually when we look on the Board of Taxation’s website, it looks like the government is stripping back some of its functionality possibly in response, and that kind of stripping back is something that we don't really want in New Zealand.

TB
I like what you're suggesting because I think we were missing this post implementation review. It is 30 years of Generic Tax Policy Process, so we should be thinking about that and constant improvement. So, this would be a permanent establishment, you'd be modelling it on the existing Law Commission wouldn't you?

Following The Law Commission model

MATTHEW HANDFORD
Yes, exactly. And I think perhaps going into a little bit explanation about why I think the Law Commission model is actually so helpful here. I understand the Law Commission has been around for nearly 40 years.  

There are usually only three Commissioners, and they're usually very experienced lawyers, but they don't have to be lawyers. They have their own team and what they will do is go away and conduct an in-depth review and consultation into normally quite technical theories of law, what Chris Finlayson calls unsexy areas of law. Then they'll come back with a detailed set of proposals, which they'll present to Parliament. Then Parliament will respond by introducing a bill or basically issue a response saying why they reject some or all of the recommendations of the Law Commission.

When you look at their track records, I think the first thing you see is that they have actually produced some very, very good legislative updates in some very technical areas of law. Recently, there was the Trusts Act update.

TB
I was thinking of that. Yes, that's a very good example. Thank you.

MATTHEW HANDFORD
They’ve done periodic reviews of Evidence Act which perhaps is another example of more technical law. And throughout this time they have maintained a very good reputation across the political spectrum for both their quality of work and the neutral and consultative way in which they carry out their work.

I think that is the type of model that if we're thinking about a policy body that's going to be undertaking these quite technical and detailed reviews of parts of the tax legislation, then that's the type of model we want to invite.

TB
It's also fairly transparent, isn't it?

MATTHEW HANDFORD
Yes, it's very, very transparent. They publish pretty much every stage of the consultation process, putting out issues, papers and other consultation documents, inviting submissions. Often they will appoint a group of experts to essentially peer review their work. So, it is a very transparent, very consultative process. And again, that is what we want to model, and that is exactly what the GTPP is about. And so that's why I think it's such a good match for the restoration of GTPP.

Time to rewrite the GST Act?

TB
Excellent. Coming to mind with discussions talking about legislation updates, the GST Act is now 39 years old. A rewrite or consolidation of that, would that be part of the Tax Law Commission?  Or you'd say no, that really should sit with tax policy in Inland Revenue. I sometimes think can they just simply re-number everything, tidy it all up without rewriting it in any way, and just consolidate the existing legislation. Or is that something that requires a better process?

MATTHEW HANDFORD
Yes, I guess maybe just to start with. The role I envisage the Tax Law Commission playing and then just how that matches with a more comprehensive rewrite process like that. Ultimately the Tax Law Commission, like the Law Commission, is going to have limited resources.

So now that really needs to be focusing on the technical changes that are going to achieve the most benefits as quickly and effectively as possible.

And I worry about the scale of a rewrite of the GST Act. It would essentially take up their resources and stop them from focusing on other things, which in some ways is the problem we already have with Inland Revenue. That's not what we want to project into the Tax Law Commission.

But what I would say is they would probably perform quite an important role in peer reviewing Inland Revenue’s work on the rewrite project. So whether that would mean a post implementation review, or whether it might actually mean that they decide to dedicate some resources to actually putting in a submission or a discussion paper to accompany Inland Revenue’s proposed rewrite to basically pull out any issues that they see there.

And of course, the Tax Law Commission, under the Law Commission model, would actually have the power to go and talk to government departments. So I imagine it would also be the opportunity under the Tax Law Commission to similarly go and talk to Inland Revenue directly and say “Hey, look, we’ve got an issue for you.”

TB
Thanks Matthew any concluding comments? I love what you're suggesting. I think it fills the gap. As I said I was very interested in what Sir Rob McLeod, Robin Oliver and Geof Nightingale said was happening in this space. And you've also alluded to this administrative capture. And our lack of actual case law in situations like this, I think what you're suggesting certainly clears the pathway there.

MATTHEW HANDFORD
There are some bigger questions to be asked in terms of the interpretation and dispute process as well that that my proposal doesn't really get at, but I think it's perhaps starting to unpack some of the issues with the Inland Revenue’s integrated structure. So perhaps that's a that's a good place to leave it.

TB
Excellent. Well, what's next for you with the scholarship?  You've written your final submissions, I believe. The scholarship’s final day - it's 24th of October, isn't it?

MATTHEW HANDFORD
Yes, that's right. So, we've got a couple of weeks now until the actual oral presentation, and we've got to make some slides to send ahead of that to let people look at. On the night we'll have a bit of time to present and then we'll have some questions from the audience, which I'm sure will promote some good discussion. I'm very much looking forward to that.

TB
Well, we'll leave it there. Thank you, Matthew for coming on and explaining your proposal and the best of luck with your final presentation.

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 to rā. Have a great day.