The debate over international taxation and the so-called Two Pillar proposals has been driven largely by the G20 and the Organisation for Economic Cooperation and Development, (the OECD). But in recent years the United Nations has started to flex its muscles in this space. This is unsurprising, because the UN represents the wider world view outside the 40-odd countries which make up the G20/OECD.
All of this is behind the story that RNZ ran at the start of the week about the United Nations Committee on Economic, Social and Cultural Rights statement on tax policy. The RNZ ran this statement under the banner headline “UN Report questions fairness of GST”, in which it pointed out that GST can be regressive for low-income earners.
In fact, the UN Committee statement went much further than GST. It noted the terms of reference to the United Nations Framework Convention on International Tax Cooperation, which had been adopted by the General Assembly,
“This development represents an important opportunity to create global tax governance that enables state parties to adopt fair, inclusive and effective tax systems and combat related illicit financial flows.”
“regressive and ineffective tax policies”
The key paragraph to the UN Committee statement is paragraph 4, which refers to “regressive and ineffective tax policies”, having
“…a disproportionate impact on low-income households, women, and disadvantaged groups. One such example is a tax policy that maintains low personal and corporate income taxes without adequately addressing high income inequalities. In addition, consumption taxes such as value added tax can have adverse effects on disadvantaged groups such as low-income families and single parent households, which typically spend a higher percentage of their income on everyday goods and services. In this context, the Committee has called upon States Parties to design and implement tax policies that are effective, adequate, progressive and socially just.”
It's the reference to consumption taxes that was picked up by RNZ. The regressivity of GST is well known and was noted by the last Tax Working Group. The general approach we've taken here to that issue is to try and ameliorate the impact by benefits or transfer payments such as Working for Families and Accommodation Supplement to lower income families.
The thing is though, as Alan Bullôt, of Deloitte noted in the RNZ story, GST is a very effective tool for the government to raise a large amount of money relatively easy. In fact, GST represents about 25% of all tax revenue a point I repeated when I discussed the whole story on RNZ's The Panel last Monday.
Principles of a well-designed tax system
But the Committee statement is interesting beyond the GST issue because it goes on in paragraph 6 to set out what it regards as the principles of a well-designed tax system. It suggests, for example,
“…ensuring that those with higher income and wealth, in particular those at the top of the income and wealth spectrums, are subject to a proportionate and appropriate tax burden.”
That can be clearly interpreted as a call for a capital gains tax or some form of capital taxation, a point I made to The Panel.
The Committee also fires a few shots over international tax, stating
“The Committee has observed situations in some States where low effective corporate tax rates, wasteful tax incentives, weak oversight and enforcement against illicit financial flows, tax evasion and tax avoidance, and the permitting of tax havens and financial secrecy drive a race to the bottom, depriving other States of significant resources for public services such as health, education and housing and for social security and environmental policies.”
That clearly targets tax havens, but it’s also a shot across the likes of Ireland, for example, with its low corporate tax rate.
A global minimum tax
The Committee also calls for a “global minimum tax on the profits of large multinational enterprises across all jurisdictions where they operate and to explore the possibility of taxing those enterprises as single firms based on the total global profits, with the tax then apportioned fairly among all the countries in which they undertake their activities.”
That's quite the statement even if probably forlorn given the Trump administration's recent declarations. It's probably what the less developed world is after, because they're quite concerned they're losers under the current system. This is going to lead to wider clashes over the G20/ OECD proposal, which I think to be frank, is probably dead. In any case, I thought it was always noteworthy that Pakistan, the World’s fifth most populous country and Nigeria, the sixth most populus country and also Africa's largest economy, both refused to sign up for Two Pillars.
Now economically, that was not highly significant because the economies are small relative to the giant economies of the developed world. However, I think this refusal points to existing issues and this statement underlines there's global tensions ahead on this question of international tax.
As I said, the Trump administration basically is saying no go. But I think you will see countries attempting to find ways of taxing what they regard as their part of the international multinationals’ income. So, plenty ahead in this space.
Rising GST debt
Now moving on, another RNZ report picked up that there had been a substantial growth in GST debt. Allan Bullôt, of Deloitte raised a concern this could be creating zombie companies. In particular he noted the amount of GST collected but not paid to the Government, has risen from $1.9 billion in March 2023 to $2.6 billion by March 2024.
As mentioned earlier, GST represents 25% of tax revenue. It also represents just under 40% of all tax debt and has been rising sharply. That's a reflection of the economic slowdown and the cash flow crunch that's happening to a lot of businesses.
Even so, this is a matter where Inland Revenue has a number of resources it can deploy, and one Alan mentioned is the power to notify credit reporting agencies about tax debt. According to the Inland Revenue, it only did that three times in the year ended 20 June 2024 and not at all during the June 2023 year.
This means that people were trading and doing business with companies without realising the potential risk. What that might mean is that you provide services to a company which is struggling with GST debt, and lo and behold, you suddenly find you've got a bad debt on your hand.
Creating zombie companies?
This is a major issue and as Allan put it,
"That's grown and grown. I get very nervous we're creating zombie companies ... if you're three or four GST returns behind, it's incredibly unlikely if you're a retail or service business that you'll ever come back. If you're three of four GST payments behind, it's incredibly unlikely that your retail or service business will ever come back.
Maybe if you're a property developer who's got big assets that you sell and settle your debt. But if you're a normal business, a restaurant or something like that, you go belly up.”
This is an area where Inland Revenue has information which is not available to the general public and maybe it should be making that more widely available. There's a question here to my mind, of what proportion of debt you would report. The Inland Revenue I think has every right to say this person owes X amount of GST, or is behind on GST, but bear in mind in some cases the debt is inflated by interest and penalties. Or in some cases there may have been estimated assessments.
Notwithstanding this Allan is right to raise concerns and I expect we will see more money being granted to Inland Revenue in this year’s Budget to chase this debt.
Meanwhile, jam tomorrow in the Australian Budget
It was the Australian budget on Tuesday night our time in which the ruling Australian Labor Party promised modest tax cuts starting in July 2026, with a further round in July 2027. Under the proposed cuts, a worker on average earnings of A$79,000 per year (about NZ$86,800) will receive A$268 in the first year and that will rise to A$536 in the second year. In addition, there will be a A$150 energy rebate payable in A$75 instalments.
Otherwise, there weren’t many other tax measures to report. That was hardly surprising because two days later, Prime Minister Anthony Albanese announced that the Federal Election would be held on 3rd May. The Budget was therefore what you might call a typical pre-election budget, promising jam tomorrow if you vote for the ALP.
One tax measure of note was that the Australian Tax Office is getting further funding for dealing with tax avoidance and tax evasion. I think that's a pretty standard pattern we're seeing around the world. The British had what they call their Spring Statement this week, the half yearly report by the Chancellor of the Exchequer or Finance Minister.
No new tax measures were announced. But like the ATO, HM Revenue and Customs was allocated more money to target tax evasion, with the expectation that it would achieve about a billion pounds a year in additional revenue, which seems very light given the scale of the UK economy.
Mega Marshmallows food or confectionery?
Finally, this week, a couple of years back, we discussed the Mega Marshmallows Value Added Tax (VAT) case from the United Kingdom. Basically, it involved the VAT treatment of large marshmallows. If deemed to be food they would be zero-rated for VAT purposes, but if they were confectionery, they would be standard rated which at 20% means quite a significant sum is at stake.
I will cite this and its very well-known predecessor the ‘Max Jaffa’ case involving Jaffa Cakes from the 1990s, when people make suggestions about maybe reducing the GST on food to help with the cost of living, particularly for lower-income families. It's a well-meant policy except the practical issues you run across lead to absurdities at the margins. My view on this topic is if you want to assist people at the lower end of the income scale, it’s better give them income rather than try and fiddle with the GST system because there are unintended consequences, and this mega marshmallow case is a classic example.
The case involves unusually large marshmallows. The recommendation by the manufacturer is that they should be roasted as they're marketed as part of the North American tradition of roasting marshmallows over an open fire. Except it's not clear in fact, if that's if that actually happens.
The story so far is that after HM Revenue and Customs lost in the First-Tier Tribunal, it appealed to the Upper-Tier Tribunal which basically said, “Nope, we're not hearing it.” So HMRC appealed again to the Court of Appeal which has now issued its ruling. The Court of Appeals determined it was not absolutely clear whether in fact these marshmallows can only be eaten if they are cooked, in which case they must be food, or they can be eaten with the fingers, in which case they are confectionery.
Accordingly, the key issue is whether they are normally eaten with the fingers. This is a question of fact about which the first-tier tribunal has not made a finding. In some cases, it will be obvious from the nature of the product whether it is normally eaten with the fingers or in some other way. But that is not clear with this particular product.
The Court of Appeals therefore sent the case back to the First-Tier Tribunal to decide on this question of fact. Are these mega marshmallows mostly eaten with the fingers? If so they're confectionery and subject to VAT at 20%. Alternatively, are they mostly cooked as supposedly intended, and therefore zero-rated food.
Time for the UK to apply VAT to food?
This case came to my attention through the UK tax thinktank Tax Policy Associates which is run by the estimable Dan Neidle, a former tax partner at the mega law firm Clifford Chance. Commenting on the Court of Appeal’s decision, he pointed out the sheer absurdity and costs involved and questioned why this was so. “Why do we have a horribly complicated set of rules that mostly benefit people on high incomes (because they spend more on food)? “
His solution - scrap zero-rating on food, in other words, adopt the approach we have here in New Zealand and tax everything. He estimates that would raise about £25 billion which could be used to reduce the standard rate of VAT from 20% to 17%.
Warming to his theme Dan thinks a better idea would be “Cut the rate to 18% and use the remaining [money] in benefit increases and tax cuts targeting those on low incomes, so they're not out of pocket from the loss of the 0% rate.”
It’s the first time I can recall a British commentator suggest this. I doubt it will happen, but it's just a reminder that although our GST is highly comprehensive, we don't have these absurd but entertaining cases involving marshmallows of unusual size.
But a comprehensive GST is regressive, and I think a better approach is to address that by means of transfers to lower incomes rather than tinkering with exemptions. You never know, there may be something in this space in the Budget, we’ll find out next month.
And on that note, 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
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