Media Release - 5 July 2011
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Taxpayers boxing at shadows in an increasingly hostile environment
5 July 2011
Parliament’s Finance and Expenditure Committee (FEC) has rejected concerns of major groups including the Law Society, New Zealand Institute of Chartered Accountants, major accounting and law firms and the Corporate Taxpayers Group in its report on amendments to the controversial tax administration Bill first introduced in November 2010.
These amendments relax the IRD’s secrecy obligations for information sharing and tax administration purposes and change the disputes resolution procedure reducing taxpayers’ rights to access the Court in certain situations.
It is unfortunate that the changes to the secrecy obligations allowing more effective information sharing from the IRD to other government agencies do not come with more statutory safeguards for taxpayers. For example, there will be no legal requirement that the recipient of information from the IRD treats that information with the same level of secrecy that the IRD would or is required to do. Nor will there be any compulsion on the Commissioner to notify taxpayers that confidential information about them (considered factual by the IRD but which could be disputed by the taxpayer) has been provided to another government department.
However, the increased sharing does not extend to better access to information for the taxpayer; for example, giving access to redacted decisions of the IRD’s Adjudication Unit, the unit which makes the ultimate decision in a tax dispute. The Adjudication decisions not only bind individual taxpayers who are the subject of the tax dispute, but also other taxpayers through the IRD’s Escalation Process, an internal administrative IRD requirement designed to promote consistency in the application of tax laws. The policy requires IRD to apply the decisions in the reports to disputes with other taxpayers as if they were case- law precedents. However unlike case-law, Adjudication decisions are not publicly available and taxpayers are prevented by the secrecy rules from knowing what they say.
Officials noted the submissions made that these reports should be available to the public but recommended against a change on the grounds this would “elevate” the status of Adjudication decisions. However, in our view, IRD’s “Escalation” policy has already done that, as IRD officers are required to apply the decisions to other taxpayers but are unable to tell those taxpayers the contents of the report that binds them. This forces taxpayers to box at shadows and reduces IRD officers’ ability to make up their own minds.
Changes to taxpayers’ ability to opt out of the formal disputes process were opposed by submitters on the bill. Why is this even an issue when so few taxpayers currently use their right to opt out and elect for tax cases to go to Court early? After all, Court is a last resort and the Commissioner and taxpayers are encouraged (now required) to take every opportunity to settle issues as quickly and cheaply as possible. The response needs to be understood in the context of some taxpayers’ experience of the process. Fighting a tax dispute is expensive in terms of both time and money and the momentum in recent tax avoidance cases has swung squarely behind the Commissioner. It is well publicised the IRD achieve a 500% return in revenue gathered from taxpayers for every additional dollar the Government invests in audit activity. Part of this return is provided through millions of dollars collected on tax avoidance and tax evasion cases currently being brought by the IRD. Some tax practitioners see the IRD’s view to be that taxpayer must organise their affairs to pay the most tax possible, because to do otherwise is tax avoidance.
Although the public does not usually lament “big businesses” having to pay “their share” of taxes, these changes affect everyone; big business, individual taxpayers and SMEs. We know of taxpayers of all sizes who are simply paying up, even when they genuinely believe their legal position is correct, in order to avoid the costly, stressful and protracted disputes process. Officials acknowledged concerns about taxpayers being “burnt off” by the process, but disagreed with submitters that legislation was the best way to deal with the problem (page 46 of the Officials Report to FEC). Instead, they say that the process should be governed by the Commissioner’s policy statements, even though these are legally unenforceable by taxpayers.
We think it is important the Government considers the perceptions of the process and the impact this can have on the longer-term development of New Zealand Inc. The Government wants to attract “big business” to New Zealand. But if potential investors feel the tax environment is hostile to their investment, this is one more hurdle in the way of growth and improving New Zealand’s productivity.
Authors: Aaron Quintal, Tax Partner, Ernst & Young. Kirsty Keating, Executive Director, Ernst & Young. The views expressed in this article are the views of the authors, not Ernst & Young.
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