Author Archive: Andrea Black

Taxing multinationals (2) – the early responses

Ok. So the story so far.

The international consensus on taxing business income when there is a foreign taxpayer is: physical presence – go nuts; otherwise – back off.

And all this was totally fine when a physical presence was needed to earn business income. After the internet – not so much. And with it went source countries rights to tax such income.

Tax deductions

However none of this is say that if there is a physical presence, or investment through a New Zealand resident company, the foreign taxpayer necessarily is showering the crown accounts in gold.

As just because income is subject to tax, does not necessarily mean tax is paid.

And the difference dear readers is tax deductions. Also credits but they can stand down for this post.

Now the entry level tax deduction is interest. Intermediate and advanced include royalties, management fees and depreciation, but they can also stand down for this post.

The total wheeze about interest deductions – cross border – is that the deduction reduces tax at the company rate while the associated interest income is taxed at most at 10%. [And in my day, that didn’t always happen. So tax deduction for the payment and no tax on the income. Wizard.]

Now the Government is not a complete eejit and so in the mid 90’s thin capitalisation rules were brought in. Their gig is to limit the amount of interest deduction with reference to the financial arrangements or deductible debt compared to the assets of the company.

Originally 75% was ok but then Bill English brought that down to 60% at the same time he increased GST while decreasing the top personal rate and the company tax rate. And yes a bunch of other stuff too.

But as always there are details that don’t work out too well. And between Judith and Stuart – most got fixed. Michael Woodhouse also fixed the ‘not paying taxing on interest to foreigners’ wheeze.

There was also the most sublime way of not paying tax but in a way that had the potential for individual countries to smugly think they were ok and it was the counterparty country that was being ripped off. So good.

That is – my personal favourite – hybrids.

Until countries worked out that this meant that cross border investment paid less tax than domestic investment. Mmmm maybe not so good. So the OECD then came up with some eyewatering responses most of which were legislated for here. All quite hard. So I guess they won’t get used so much anymore. Trying not to have an adverse emotional reaction to that.

Now all of this stuff applies to foreign investment rather than multinationals per se. It most certainly affects investment from Australia to New Zealand which may be simply binational rather than multinational.

Diverted profits tax

As nature abhors a vacuum while this was being worked through at the OECD, the UK came up with its own innovation – the diverted profits tax. And at the time it galvanised the Left in a way that perplexed me. Now I see it was more of a rallying cry borne of frustration. But current Andrea is always so much smarter than past Andrea.

At the time I would often ask its advocates what that thought it was. The response I tended to get was a version of:

Inland Revenue can look at a multinational operating here and if they haven’t paid enough tax, they can work out how much income has been diverted away from New Zealand and impose the tax on that.

Ok – past Andrea would say – what you have described is a version of the general anti avoidance rule we have already – but that isn’t. What it actually is is a form of specific anti avoidance rule targetted at situations where companies are doing clever things to avoid having a physical taxable presence. [Or in the UK’s case profits to a tax haven. But dude seriously that is what CFC rules are for]

It is a pretty hard core anti avoidance rule as it imposes a tax – outside the scope of the tax treaties – far in excess of normal taxation.

And this ‘outside the scope of the tax treaties’ thing should not be underplayed. It is saying that the deals struck with other countries on taxing exactly this sort of income can be walked around. And while it is currently having a go at the US tech companies, this type of technology can easily become pointed at small vulnerable countries. All why trying for an new international consensus – and quickly – is so important.

In the end I decided explaining is losing and that I should just treat the campaign for a diverted profits tax as merely an expression of the tax fairness concern. Which in turn puts pressure on the OECD countries to do something more real.

Aka I got over myself.

In NZ we got a DPT lite. A specific anti avoidance rule inside the income tax system. I am still not sure why the general anti avoidance rule wouldn’t have picked up the clever stuff. But I am getting over myself.

Of course no form of diverted profits tax is of any use when there is no form of cleverness. It doesn’t work where there is a physical presence or when business income can be earned – totes legit – without a physical presence.

And isn’t this the real issue?

Andrea

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Taxing multinationals (1) – The problem

It is seriously odd being out of the country when seminal events occur.

On that Friday I was in London. Waking at 4.30 am and checking Facebook. Just coz.

My Christchurch based SIL posted that she was relieved now she had picked up her kids from school. Sorry what? Thinking there might have been another earthquake I checked the Herald app.

Oh right.

In the swirl of issues has come the suggestion Facebook and Google should be taxed into compliance. Of course a boycott could be equally effective. Except if users of Facebook are anything like your correspondent and there is inelastic demand. Possibly not at insulin levels but until demand changes I am not sure taxation would be that effective.

But the whole issue of tax and Facebook, Google and Apple has been a running sore for many years now and so I thought I’d take a bit of time to go through the background of it all. [Really keen readers though could search Cross border taxation on the panel on the right for more detail]. Future posts will look at what is being proposed as a solution in New Zealand and by the OECD.

Background to the background

The international tax framework since like forever aka League of Nations – before even I was born – has been that the country that the taxpayer lives in or is based in – residence country – can tax all the income of that taxpayer. Home and abroad – all in.

Where it gets tricky is the abroad part. As the foreign country, quite reasonably, will want to tax any income earned in its country – source country.

So the deal cut all those years ago – and is the basis of our double tax treaties – was:

For business income the source country gets first dibs if the income was earned through the foreign taxpayer physically being in their country – office, factory etc. Rights to tax were pretty open ended and the residence country of the taxpayer would give a credit for that tax or it would exempt the income.

So far so good.

Except if there were no physical presence then there was no taxing rights. But in League of Nations times – or even relatively recently like when I first went to work – the ability to earn business income in a country without an office or factory was pretty limited. So as constraints go – it kind of went.

For passive income like interest, dividends, and royalties the source country could tax but the rate of tax was limited. 10-15% was standard. And again the residence country gave a tax credit for that tax or exempted the income.

Presenting problem

Looking now at our friends Apple, Google and Facebook. Apple provides consumer goods and Google and Facebook provide advertising services.

When your correspondent started work, foreign consumer goods arrived in a ship, were unloaded into a warehouse and then onsold around the country. Such an operation would have required a New Zealand company complete with a head office, chief executive and a management team. All before you got to getting the goods to shops to sell.

Such an operation would most likely have involved a New Zealand resident company. Even if it didn’t no one would be arguing about a physical presence of a foreign company as – to operate in New Zealand – it would have needed more physical presence than Arnold Schwarzenegger. And yes both creatures of the eighties.

For advertising services, no ships involved but people on the ground hawking classified and other ads for newspapers. Again more physical presence than Princess Di. [Getting to the point – promise – as am now running out of 80’s icons]

Now internet enter stage left.

For goods consumers now don’t need to go to a shop. iPads and iPhones bought on line. Physical presence non existent along with (income) taxing rights.

For services – more interesting. Still seems to be some presence but like – sales support – not like completing contracts. So no taxable presence and no (income) taxing rights.

At this point the Tax Justice outrage, BEPS and the Matt Nippert articles started. The UK and Australia brought in a diverted profits tax and our government did something.

Phew. So everything is ok now.

So why then is the Government making announcements and the OECD still doing stuff?

Next post. Promise.

Andrea

Sparking Joy

Hello. How’s it going?

Thought I’d come back for a wee while.

Am currently on my hols. Tax Working Group gig appears to be over and have – I hope – put in my last bill. Contract got extended to June for any residual stuff but as there isn’t any residual stuff – I have effectively tagged out.

Have various ideas about what next but have decided for the next [insert time period here] I would Marie Kondo my energy.

And what is it that sparks joy in the life of your correspondent? International Tax and learning French.

No really.

The latter I haven’t done since 2016 and the former not since issues like ‘death as a rollover event’ dominated my tax brain.

And because I am a deeply relational individual you can all come with me. For international tax that is. French, probs, will be a more private pursuit.

So the blog is reopening for une période indéterminée.

The plan is mostly international tax but you might get other stuff.

Tax Working Group stuff is unlikely – see reference to contract – although there are some cinderella bits like Charities or the Tax Advocate or the Crown debt agency that have got lost in the CGT noise I might discuss further.

What you won’t get dear readers any more is the cartoons. At times sourcing those took as much time as writing the fricken blog post. Not a joy spark and so out.

And comments will still be moderated. Soz.

But otherwise. I’m back.

Andrea

The last post

Well dear readers this is it. Our time together is coming to an end. I now have a grown up job.

Sir Michael Cullen has asked me to become the independent advisor on the Tax Working Group. And I have accepted.

Through a combination of no longer having the time and not really feeling comfortable publicly commenting on stuff that may also be under review; I am closing the blog for the duration. I will still pay the princely sum of USD 30 or so to WordPress to keep it all in existence. But new stuff – soz.

I have really enjoyed the opportunity to write as I would like and not as a policy official or a disputant. I have also enjoyed all the new people I have met as well as the polite and intelligent- albeit limited- engagement on the blog itself. But I get to be a grownup again which I am looking forward to. Even if that does mean womens work shoes and writing in complete sentences.

Looking into my future compliance, I am very pleasantly surprised with the new tax landscape for contractors. GST registration and filing can be done online. Even registration for ACC seems to be automatic with GST registration. And provisional tax largely avoided through withholding taxes if the payer agrees. Which I am hoping the Treasury will. The tax system has clearly benefited from my absence.

I do still have some partially written posts that I never finalised. Including alternative minimum taxes and GST on online shopping. Even had a cartoon ready for the latter.

But what I can do is encourage you all to engage with the Working Group processes particularly if you aren’t a tax person. The tax system belongs to us all. As independent advisor I will have a role – if they want – in helping community groups and NGOs frame their submissions. So they are able to fully engage with a system that can – at times – seem oblique and arcane. Even after reading the blog.

So I hope I am able to engage with a number of you through the Working Group processes. But otherwise I would like to thank you all for your attention and wish you a very Happy Christmas – no recipes this year – and New Year. In the immortal words of Douglas Adams:

So long, and thanks for all the fish.

Andrea

When Harry met FATCA

Let’s talk about tax.

Or more particularly let’s talk about the taxation of US citizens living abroad.

I just love the Royal Family. Yeah I know it goes against any and every possible progressive and egalitarian ideal I hold but phish.

I grew up reading my grandmother’s Women’s Weekly and their coverage of Princess Anne’s (first) wedding and the Silver Jubilee. Over time this progressed to Diana, Fergie and their babies. And the Womens Weekly became the Hello magazine. Complete with Princess Beatrice aged two at a society wedding. So good.

And season two of The Crown has landed. Brilliant. I mean seriously- what about Philip?

Of course season one was dominated by the spectre of the abdication of a King who wanted to marry a divorced American woman. As well as the sister of the Queen who wanted to marry a divorced man.

So it was with every sense of delighted irony that I watched the recent engagement of Prince Harry to a divorced older mixed race American woman. Whose father might be catholic. ROFLMAO.

And my delight became complete when the Washington Post pointed out Meghan and Harry’s children will be subject to FATCA and US residence taxation. Oh and I have been meaning to write about the joys of US citizen taxation since like forever. So finally here was my angle.

The British Royal family – the gift that keeps on giving.

First key thing is that all people born in the United States or born to at least one US parent – like Harry’s children will be – are US citizens. And at this point such people who don’t live in America can get a little over excited. I can work in America woohoo. No green card or resident alien stuff for me! Transiting through LAX will be a breeze.

All true. But much like the British Royal Family – US citizenship is also the gift that keeps on giving.

Now dear readers we have covered tax residence of individuals before. The tests that determine whether a country can tax on the foreign income of its inhabitants. And most countries have some version of the being here or owning stuff rule to work out whether someone is tax resident.

But thanks to American exceptionalism they go one step further. The US applies residence taxation to its citizens even the ones who don’t live there. So with foreign income and US citizens it is now possible to have the country of the source of the income, the country of ‘main’ residence and the US in the mix. So for Harry’s kids: with that Bermuda dosh: there could be Bermuda; United Kingdom and the United States all with their hand out. Just as well Bermuda not big on taxation. Such a relief. That is if Hazza pays tax in the first place.

Now for lesser New Zealand mortals who might be born in the US or have a Meghan Markle equivalent mum or dad: the US/NZ tax treaty is kinda important. And if they have income from any other country that country’s US treaty will also be your friend.

Because in all those treaties is a nifty little clause called Relief of Double Taxation. Aka such a relief – no double taxation. So let’s look a a situation where a New Zealand tax resident with a US born mum – NZUSM – earns $100 Australian interest income. Australia will deduct 10% tax or $10. New Zealand will also tax that income and another $23 ($33-$10) tax will be paid in New Zealand.

Then – because who doesn’t love a party – so will the United States. Giving an Australian tax credit of $10 and a New Zealand tax credit of $23. Depending on the US tax rate for the NZUSM – they will have to pay more tax; pay no more tax; or get surplus credits to carry forward.

Now for something like interest or any other income source New Zealand taxes; this is just annoying. Maybe a bit more tax to pay but not the end of the world.

The full horror comes when NZUSM has types of income that the US taxes but NZ doesn’t. You know like capital gains? Taxable in the US. And the horror becomes squared when NZUSM realises that the US uses its – not NZ’s – tax rules and classifications to calculate the income. Who would have thought?

So that look through company or loss attributing qualifying company where income has been taxed in hands of shareholders – treated as company the US – maybe not so clever after all. Coz what about a LTC loss that was offset against the taxable income of NZUSM – coz it is all like the same economic owner? US – no loss offset allowed – full tax now due. In the US the LTC is discrete NZ company. Nothing to do with NZUSM.

And then of course there is FATCA. For like ever the US has a requirement that its foreign based citizens report their balances with foreign banks. Now quelle surprise – compliance wasn’t great. So the US then said they would collect the information from the foreign banks directly and if they didn’t comply they’d impose a 30% tax on fund flows from the US. Did concentrate the mind somewhat.

Now the US is using this information to enforce compliance. And the NZUSMs of the world are not best pleased. Finding out there was a dark side – albeit one pretty well known – to the whole I can work in the US thing. Unsurprisingly there is a wave of people seeking to renounce their citizenship. Alg except the tax thing goes on for ten years after such renunciation. And such renunciation can’t be done by parents for their children.

So while Harry may have finally found his bride; he has also found the US tax system. What could possibly go wrong?

Andrea

My fair tax review

So the details of this government’s tax review is out.

Depending on who you read it will either be revolutionary or not radical.

Now even though this blog has come as a response to the Left’s – and fairness’s – relatively recent introduction into the tax debate – I couldn’t see anything I could competently add to the random number generator that is the current public discussion. That was until I read one commentator – who actually understands tax – talk about the last Labour government’s tax review – the McLeod Report.

He referred to that report as having analysis that stood up 16 years later. And with the underlying analysis found in the issues report I would wholeheartedly agree. But in terms of the recommendations in the final report I would say, however, that it was very much of its time.

And by that I mean that while the issues report fully discussed all issues of fairness/equity as well as efficiency – when it came to the final report efficiency was clearly queen.

Now by efficiency I am meaning ‘limiting the effects tax has on economic behaviour’. And fairness as meaning all additions to wealth – aka income – are treated the same way.

The tax review kicked off in 2000 at about the same time I arrived at Inland Revenue Policy. In early 2000 there was:

  • No working for families
  • No Kiwisaver
  • Top personal tax rate was about to increase to 39% but with no change to company or trust tax rate
  • Interest was about to come off student loans while people studied.

That is the settings generally were the ones that had come from the Roger Douglas Ruth Richardson years.

Also in tax land the Commissioner was having a seriously hard time as the Courts were taking a very legalistic attitude to tax structuring. High water mark was a major loss in 2001. And unsurprisingly in such an environment the banks had started structuring out of the tax base. But it would be a while before that became obvious.

Housing was affordable. Families such as mine could be supported on one senior analyst salary – and live walking distance to town.

The tax review was headed by a leading practitioner Rob McLeod; and had two economists, a tax lawyer and a small business accountant. One woman. Because that is what progressive looked like 2000.

And so what were their recommendations/suggestions?

No capital gains tax but an imputed taxable return on capital This one is both efficient and fair. And did materialise in some form with the Fair Dividend rate changes to small offshore investment. It is the basis of TOP tax proposal. At the issues paper stage it was proposed to include imputed rents but the public (over) reaction caused it to be dropped. Interestingly it is explicitly out of scope with the Cullen review.

Flow through tax treatment for closely held businesses and separate tax treatment for large business

What this is about is saying entities that are really just extensions of the individuals concerned should be taxed like individuals not the entity chosen. This is effectively the basis of the Look Through Company rules – although they are optional. It means the top tax rate will always be paid. But it also means that capital gains and losses can be accessed immediately.

Now this is definitely efficient as the tax treatment will not be dependent on the entity chosen. And it is also arguably fair for the same reason.

It does mean though that if a company structure is chosen and the business gets into trouble: the tax losses can be accessed as it is effectively the loss of the shareholder but the creditors not paid because it is a separate legal entity. Which probably wouldn’t exactly feel fair to any creditor.

But all this is unreconciled public policy rather than the McLeod report.

Personal tax scale to be 18% up to $29,500 and 33% thereafter.

The tax scale at the time ranged from 9.5% to 39% at $60,000. The proposal would have had the effect of increasing the incentive to earn income over $60,000 as so would have been more efficient than the then 39% tax rate. As the company and trust rate were also 33% it would have returned the tax nirvana where the structure didn’t matter.

However it would have increased taxes on lower incomes and decreased taxes on higher incomes. So while efficient – not actually fair according to the vibe of the Cullen review terms of reference.

New migrants seven years tax free on foreign income

At this time our small foreign investment – aka foreign investment fund – rules were quite different to other countries. While we didn’t have a realised capital gains tax – for portfolio foreign investment we could have an accrued capital gains tax in some situations. This was considered off putting to potential high skilled high wealth migrants. So to stop tax preventing migration that would otherwise happen; the review proposed such migrants get seven years tax free on foreign income.

This proposal was the other one that was enacted with a four year tax free window – transitional migrants rules.

And again a policy that is efficient but arguably not fair. As the foreign income of New Zealanders in subject to full tax. However Australia and the United Kingdom also have these rules that New Zealanders can access.

The logical consequence though is that no one with capital lives in their countries of birth anymore. And not sure that is ultimately efficient.

New foreign investment to have company tax rate of 18%

Again this is the foreign investment – good – argument. But it ultimately comes from a place where foreign capital doesn’t pay tax because it is from a pension fund, sovereign wealth fund or charity. Or if it is tax paying that tax paid in New Zealand doesnt provide any form of benefit in its home or residence country. So by reducing the tax rate by definition this reduces the effect of tax on decision making.

However doesn’t factor in the loss of revenue if there are location specific rentswhich aren’tsensitive to tax. And not exactly fair that domestic capital pays tax at almost twice the tax rate. Unsurprisingly didn’t go ahead.

Tax to be capped at $1 million for individuals

This again comes from the place of removing a tax disincentive from investing and earning income. Yeah not fair and also didn’t go ahead.

Restricting borrowing costs against exempt foreign income

This was the basis of the banks tax avoidance schemes that ended up costing $2 billion. It is only briefly mentioned in the final report with no submissions. It is to the review team’s – probably most likely Rob McLeod – credit that it is there at all. This proposal was both efficient and fair. Stopping the incentive to earn foreign income as well as making sure tax was paid on New Zealand income.

It will be very interesting to see where this review comes out with the balance between efficiency and fairness. Because both matter. Without fairness we don’t get voluntary compliance and without efficiency we get misallocated capital and an underperforming economy. But the public reaction to the taxation of multinationals and ‘property speculators’ would indicate a bit more fairness is needed to preserve voluntary compliance.

And as indicated 16 years ago – taxation of capital is a good place to start.

Andrea

Moral and Fiscal Failure – the extended dance remix

Let’s (not) talk about tax.

Let’s talk about the disaster that is our criminal justice system.

I have a number of tax things in my head atm. Past tax reviews, US tax proposals and GST on online shopping. Not to mention the slow burning IRD restructure where the top people in Investigations are either being offered their jobs back at up to $20K pay cuts (Senior Investigators) or have to apply for their jobs with up to $20k pay cuts (Principal Advisors).

Two highlights being:

  • Less capable staff getting their performance ratings increased because their untouched salaries are now a higher percentage of the lower new top salary;
  • The psychometric testing assessing one of the department’s best of best technical people as having ‘difficulties with abstract thinking’.

But that will take a while for the effects to unfold on the tax base.

What is very now is our bursting prison population. As a consequence of political and community over reaction to sentinel events the Ministry of Justice sees a possibility of the prison muster hitting 12,000 in the next three years. Awesome. What tax IRD still collects can go directly to Vote Corrections. Suppose that is efficient.

So with all this in mind minus the tax stuff, me and my friends at JustSpeak have produced a Briefing for Incoming Ministers. Worth a read.

Andrea

‘It’s a long way to paradise from here’

Let’s talk about tax.

Or more particularly let’s talk about non-resident trustees and the non-complying trust.

Like Ivanka Trump I had a punk phase.

Unlike Ivanka mine was actually punk and not grunge. And lasted longer than a day. Largely consisted of having orangish spiky hair from late seventh form until I had to get a real job as an accountant. And yeah ‘ real job as an accountant’ not very rock and roll. But I could do the safety pin in my ear thing – albeit through my piercing. And I just loved the music. Still do.

So much so that when the Paradise Papers broke – 30 years after I grew out the spikes – all I had in my head was the Stiff Little Fingers.

And the paradise reference now is not to an alternative Ulster. It is to Bermuda.  A sunny place for shady people. Oh and the Queen.

So from British Virgin Islands to Panama to Bermuda. From Portcullis to Mossack Fonsceca to Appleby. The ICIJ strikes again. Well done boys. Rich people investing their money through complex structures involving sovereign Island nations.  

Now of course investing in such places is only illegit if it conceals income that would otherwise be taxable somewhere else. And as for HM; she is a voluntary taxpayer – oxymoronic I know – so anything she does is totes legit. For everyone else it must be the amazing fund management service that Bermuda offers. Coz you know London is such a backwater.

But what does this all mean for New Zealand? To me this is a far bigger deal than the foreign trusts. With them our reputation was at risk. Here actual New Zealand tax could be at risk.

But first some background. Breathe and take it slowly. Rest when you need.

New Zealand’s trust rules

On the whole New Zealand – like pretty much all OECD countries taxes tax residents on New Zealand and foreign income and non-residents on New Zealand income only. And the corollary of that is not taxing the foreign income of non-residents. Which is a shame as you don’t get a bigger tax base. But mutually assured distruction if anyone tried.

So far so good. But issues abound when income is earned through companies or trusts and not directly by a real person. Maybe dear readers a good time to go back and refresh.

Now with trusts there is the person who hands over the dosh to the trust – settlor; the person wot legally owns the dosh – trustee and the person for whom this is all for – the beneficiary.

Anyone of them would be a reasonable target for the ‘who should we tax’ game of residence. Most countries target the trustee. As that is the legal owner. New Zealand targets the settlor. As they apparently call the shots. Which does seems bordeline fraudulent given they have given away legal ownership. But I digress.

All which is how foreign trusts generally have resident trustees. A foreign trust – and the associated foreign sourced income exemption – only happens if it is settled by someone who isn’t a New Zealand resident. So the foreign bit relates to the person putting the money into the trust rather than the legal owner; income source or beneficiary. 

Distributions are tax free to foreigners; to New Zealanders just their normal tax rate.

The other two types of trust are:

Complying trust. Effectively full residence taxation with the wheeze that if tax is paid by the trustee; distributions can come out tax free. This is all trusts with New Zealand settlors and New Zealand trustees. Or New Zealand settlors and foreign trustees who have elected to be a complying trust.

Non-complying trust. A trust that isn’t a complying trust or a foreign trust. Effectively a trust with New Zealand settlors and foreign trustees. The potential world of the Paradise Papers.

Now distributions to New Zealand residents from a non-complying trusts are taxed at 45%. And there is often a view that so long as you don’t distribute there will be no tax consequences. Maybe. Except for:

Distributions – like dividends – have a transfer of value definition. So let’s say under a trust deed you get you to use a house rent free and that house is in a trust settled by a non-resident. Then the value of that stay is taxable at normal tax rates if it is a foreign trust. 45% if a New Zealander has given the trust any dosh as well and it is a non-complying trust. Have to assume Mojo Mathers was 100% comfortable with her tax compliance when she told her story.

Taxation of foreign income is still a thing for non-resident trustees if a New Zealander has made a settlement after December 1987. Now you might think hah – the trustee is offshore – bah hoo sux Mrs Commissioner. Well you might think that but you would be wrong. New Zealand settlors are liable – as agents – for that tax.

But surely no New Zealanders are involved?

Well that might be true. The past incarnation of this – Portcullis – picked up a Green Party donor. Now he admitted to the Trust but as he was based in the United Kingdom potentially no tax issue for New Zealand. There is also an unnamed blog that details quite interesting tax behaviour of people who look awfully like New Zealanders. And last time in 2013 IRD was pretty hot on it all. 

Can we improve the situation?

Absolutely we can dear readers. Thanks for asking. 

Disclosure

Now IMHO it is completely insane that there is no form of disclosure of settlements or interests in offshore trusts. Now the underlying law is pretty ok but should we have to rely on the ICIJ to get tax compliance? Taxpayers know if they have these interests but Inland Revenue would have no clue without the ICIJ.

There are disclosures of interests in foreign companies and now foreign trusts have to tell IRD about their inner workings. But offshore trusts of New Zealanders who just might be hiding things. Nowt.

Now there is the argument that if people want to be deceptive they also won’t disclose. And that is true. But all these people will have tax agents who as part of their compliance will need to ask each year if they have any. This will give them the opportunity to explain the law and the risks. And yeah they might lie to their agents too. But this is all narrowing the non-compliant group who then become super at risk next time ICIJ gets busy.

And this may even help our National Accounts. Coz you know that thing about how New Zealanders don’t save? Maybe some of this lost money is in an undisclosed offshore trust? Just maybe.

Inland Revenue Capability

This stuff is just hard. And in a world where the department is salary cutting or simply disestablishing the jobs of the people that can do this work; I am nervous. Service just won’t deal with these people. Hard nosed enforcement is needed. Please Hon Stu fix this.

Exchange agreements

Over the last ten years or so officials in OECD countries have been signing Tax Information Exchange Agreements with countries formerly known as tax havens. Wonderful PR for Ministers who look like they are actually doing something.

And when this all broke I thought cool; the Bermuda TIEA could be used. Except while it was signed in 2009. It is not yet in force. Ie we are totally on a promise until that happens.

Now Hon Stu. Your colleagues are busy sorting out the messes from the last government. Looking forward to you fixing this after you have sorted out the restructure.

Because until this is all done, without the ICIJ, offshore Trusts really can be paradise for New Zealanders who want to hide.

Andrea

Cold as charity

Let’s talk about tax.

Or more particularly let’s talk about how charities don’t have to distribute.

Well dear readers the countdown has started to becoming a grown up again. Have been doing the ‘coffee thing’ and put my first real paid job application in on Friday. Most importantly checking my work clothes still fit after a year in active wear. And trying to blot out the horror that is womens work shoes. Not big on shoes at the best of times. Must be why I like yoga.

Now whether our remaining time together is long or short is out of my hands. But I’ll try to get up to date on some of the things I have been promising and not delivering on. And today is Charities. My past ramblings can be found herehere, here, and here

Sometime pre Jacinda Matt Nippert started a series of articles on charities. The last one was all about how charities don’t actually have to distribute to worthy causes to be a charity. The highlight of the article was of course the quote from your correspondent that this was not a good thing. All about the value add me.

So today dear readers the explanation. You get how it is that even though charities get an income tax exemption and a one third subsidy on their donations from the people of New Zealand – the dosh doesn’t actually have to get to the people the charity is serving.

And as a special bonus issue you also get how businesses don’t even have to be registered with Charities Services to get the tax exemption. So good. No wonder we have so many charities in New Zealand.

Let’s start with that.

Section CW 43 makes business income tax exempt if it is carried out directly or indirectly for the benefit of a charity. What the indirectly thing means is a company or other entity owned or controlled by a charity.  And yes the charity has to be registered but no actual like requirement that any subsidiary company is.  But it has to be for the benefit of the charity though. So maybe that means the dosh has to flow up to the actual charity?

Well maybe dear readers. Remember how with accounting tax expense – this was tax that would need to be paid at some stage? Yeah well it is kinda similar here.

The lead case on all this stuff is an Australian one called Bargwanna. At least 4 courts over at least 10 years with shambolic facts and varying legal arguments. While the Commissioner ultimately won the case and the trust was found not charitable; it was a somewhat pyrrhic victory. As along the way the ATO lost its long held view that charities had to distribute its funds in order to be a charity. That is the word applied as in applied to a charitable purpose didn’t mean distribute but more a vibey thing of consistent with its trust deed. Oh and of course it never meant distributing its capital. I mean steady on.

Now while this might be all beautifully consistent with twelve thousand million years of trust jurisprudence; it does IMHO rather take the taxpayer for a mug. Remember the donations tax credit. Remember how for every three dollars you give a charity the government gives you one dollar back? 

Now that donation could be considered capital by the charity. So no need for it to go anywhere except infrastructure  – or an investment base on which income will also be taxfree – for the charity.  And imagine if that were a charity you set up and controlled yourself? Knighthoods anyone?

Or alternatively maybe tax preferences – donations tax credit and all – are given to charities not so they can create beautiful balance sheets in perpetuity; but maybe it is to support them doing good things for the community? And yes I know it does include the advancement of religion – thank you Brian Tamaki. But maybe?

Now of course in New Zealand our word is benefit rather than applied. But not really much comfort as benefit is arguably looser than applied. So tax free income of charity businesses can continue to roll up and support the charity business’ balance sheet just so long as it benefited the charity in some undefined form.

But applied does turn up somewhere. It turns up in the deregistration tax for charities. All through consultation and the legislative process the deal was that the tax would apply unless the net assets were distributed to another registered charity.

Except at the last minute as a drafting matterdistributed became distributed or applied. While this may not have much effect in practice; it does mean that charitable companies who were previously registered with the Charities Commission and then deregister won’t have to pay the tax and won’t have to distribute their assets. Because their assets are by definition already applied for the benefit of the head charity.  Awesome thanks Bargwanna. Still tax exempt under section CW 43 and no more nasty public disclosure with Charities Services.

To be fair though – more an issue of the underlying mess that is our tax and charites law than the addition of the word applied. 

Now the last two governments have got close to the whole charities and businesses thing and then run away. No actual sign it is even on the radar with this one. 

Maybe once they’ve fixed the housing crisis?

Andrea

Alignment again

Let’s tax about tax.

Or more particularly let’s talk about Australia’s proposal for a reduced tax rate for small business.

Ok yes I am excited. A new government. A Labour led government. And a young woman as a Prime Minister. Mostly what I hoped for as I climbed the millions of steps to door knock in Wellington. My left leg is almost recovered too. Thanks for asking.

And as if all of this wasn’t exciting enough two of my young friends Talia Smart and Matt Woolley won the Robin Oliver tax competition. Talia on Charities and Business and Matt on the integration of the company and personal tax. I hope to cover their papers once they become public.

Oh and Stuart Nash has won the pools and become Minister of Revenue.

So big congrats to Talia, Matt and Hon Stu. Expecting great things from you all.

We should hear about the tax working group soon. A group that as well as looking as the fairness thing for tax is also looking at housing affordability. And as of today is now looking at whether small businesses should have a lower tax rate. Like wot Australia has.

Now as hadn’t really paid any attention to this dear readers now seems like an opportune time to have a look. Apparently in 2016 the Australian government reduced the tax rate on companies with a low turnover who were in business like this:


Then they said in future years the threshold for what is small will go up and the tax rate will go down:


And then just to be fun, they introduced but didn’t pass another bill which would have reduced rates for everyone ultimately. At this point I just thank the tax gods I live in New Zealand.

Now there is a thing that if the turnover is more than 80% passive income – dividends and the like – the lower rate doesn’t apply. But 75% alg. And the turnover thing seems to have a group concept in it – so that is something. No splitting up companies – in theory anyway.

Tbh it looks like a fiscal thing. Reducing the company tax rate but it a way that doesn’t all go to the nasty big companies. Some of whom will be foreign. So will cost less than a simple company tax reduction.

Conceptually a tax cut for small business – not nasty big business – what’s not to love? The tax equivalent of free doctors visits. It does have a few downsides:

  • At the margin may inhibit growth. Coz who wants to grow and get a higher tax rate?
  • Incentivise passive holding companies. 80% is still pretty and
  • (You guessed it) incentivise recharacterisation of other  higher taxed forms of income. Aka alignment issues.


As we have discussed before dear readers – alignment matters. Whether it is misalignment of the trust and top rate or the company and the top rate. Income will gravitate to its lowest taxed form. Now if that income stays in the company and helps it grow. Alg. Effectively a tax subsidy for small business who might use this money to – say – help offset the higher minimum wage.

But it also might further incentivise the whole ‘salary at $70k’ thing; an overdrawn current account; and dodgy as dividend stripping. Because with small business the corporate veil in practice is pretty thin. The shareholders, the company and the senior employees are all the same people. And as we saw last week, small business isn’t as tax pure as maybe first thought.

The tax avoidance provision will help but is no way to run a tax system. Maybe we’ll need some tighter rules on getting money out of a company. That has merit regardless.

Will be interesting to see what the working group thinks about it.

Andrea

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