EY - The case for an independent tax commissioner

The case for an independent tax commissioner

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Imagine a world where politicians are forced to butt out of tax reform and an independent body, similar to the Reserve Bank, is put in charge.

EY’s Oceania CEO Rob McLeod recently caused a stir in Australia when he called for such an organisation, describing Australia’s tax system as “chaotic”, in disarray, and “incapable of reforming itself”.

Players with divergent and contradictory preferences are crowding the tax reform agenda, McLeod said. While arguments rage about the direction in which Australia should be heading, nobody has noticed that the engine of reform has seized and progress halted.

Australian system failing

An EY report concludes Australia’s tax system is a key determinant of its success as a nation and as a society. It is failing in both areas and urgent reform is needed, but under the current system this is unlikely.

Specifically, the tax system is failing to support Australia’s homegrown businesses, is unattractive to foreign investors and is beholden to the short-term needs of the electoral cycle.

The outcome: insufficient tax revenue is being raised to support Australia’s ageing population, and rising government expenditure. Unless the problem is addressed, the country can look forward to years of budget deficits.

NZ works well

New Zealand should be proud of its tax system. On the whole it works well and is not usually complicated by diverging political agendas. Some tough calls have been made, such as not over-complicating our GST system with numerous exemptions or tax-free thresholds, or excessive differences between the top corporate tax and personal tax rates.

But that could be about to change with the introduction of capital gains tax, higher personal tax rates, and the appointment of a Special Commissioner to target the so- called corporate tax avoiders.

Independent body needed

Despite all the positives in our tax system, there is merit in considering an independent body to monitor future tax needs and reforms. This would prevent tax from becoming a political football each time we face an election, and would give taxpayers and voters more certainty around what is required to ensure our system is sustainable.

National has recently announced another tax simplification review, a potential review of provisional tax and the lure of potential tax cuts. Labour is selling us a capital gains tax as the magic formula to make houses more affordable. But here is no evidence this has worked in other countries with a capital gains tax.

Tax reform is fantastic for giving tax advisors more work and may be alluring to voters because of the perceptions of fairness. But what do we really know about the robustness and affordability of these measures?

Capital gains tax distorts

A lower tax rate for capital gains will create distortions to our tax system when New Zealand already taxes many so-called capital gains.

Why appoint a special commissioner to target corporate tax avoidance when our existing tax office is doing an admirable job, actively participating in the OECD reforms around BEPs (Base Erosion and Profit Shifting)?

Do we really think we can dictate terms to global companies that are not in line with the rest of the world to front-foot the thorny issue of tax minimisation, rather than relying on international efforts led by the OECD?

Labour threatens ban

Labour is also threatening to ban companies like Facebook, Google, Apple and Amazon from operating in New Zealand if they do not pay their “fair” share of tax. Will it also stop New Zealanders accessing Facebook and Google by blocking their sites?

Given the acknowledged failure of tax systems world-wide to keep pace with ecommerce, and the ability of corporates to make the most of differing tax systems, the real question is how much responsibility our politicians should take?

After all, the so-called new way of operating has been around for several decades and now we have politicians all around the world making allegations of tax avoidance against large corporates.

Corporates compliant

If these corporates were not abiding by the tax legislation they operate under, you can guarantee they would be slam-dunked. So those responsible for ensuring legislation is relevant for the current circumstances have failed. If this happened in a corporate environment, the directors and management would be called to account and be fortunate to keep their jobs.

An independent body to manage tax reform, with a role akin to that of the Reserve Bank in setting monetary policy, is worth thinking about.

Joanna Doolan is a tax partner with EY New Zealand