What is the purpose of the Tax Principles Reporting Bill?

Tax has remained constantly in the news since the Inland Revenue released its High Wealth Report in April, and it seems certain to stay high in the consciousnesses of New Zealanders through until the 2023 Election, and beyond.

With many political parties already releasing election tax policies proposing new or increased taxes (particularly for those with wealth) in the name of fairness, the spotlight is clearly on the subjectiveness of “fairness” when it comes to taxes.

Perhaps in an attempt to bring all political parties on a journey toward more consistent thinking on tax and fairness, the Minister of Revenue (‘the Minister’) has been on a quest to have some principles about how the tax system should operate enshrined in legislation. The outcome of this is the Taxation Principles Reporting Bill (‘the Bill’) which was released as part of Budget 2023.

This Bill has been tabled in Parliament, had its first reading, and has been referred to the Finance and Expenditure Committee (‘the FEC’). The FEC has in turn opened this to the public for submissions until 9 June 2023. As drafted, the Bill is intended to come into force on 1 July 2023.

As its name suggests, the Bill is less about setting principles by which tax policies should be judged but is instead focused on requiring Inland Revenue to report, on an annual basis, how the tax system stacks up against seven stated tax principles.

The aim of the Bill can be summed up from this extract from the Minister’s speech on the Bill: “Enshrining these principles in legislation will mean that the fundamentals of a good tax system will clearly be set out for all to refer to. It will provide direction to officials on what information about the tax system should be reported on. This bill proposes that officials periodically report on the operation of the tax system, using the principles set out in the legislation as the basis for their reporting. It's not a straitjacket. Different Governments will want to focus on different aspects of the system at different times to deal with the challenges of the day. Political parties can quite properly have different views on how progressive the tax system should be, but it should be a fact-based discussion. The reports will build up a time series showing how the tax system is changing in relation to these core principles. And by providing information to the public, like that presented in the high-wealth individual report, we can have an informed debate on tax, using solid evidence.”

The Principles

So, what are the seven principles? The following table is taken from the Bill.

Bearing in mind that many existing laws don’t satisfy all of the principles, and most policy decisions involve trade-offs, the principles themselves may seem relatively uncontroversial. However, it is the description of the principles which is likely to cause controversy by virtue of placing value judgements over what should otherwise be an objective principle.

Inland Revenue Officials have noted in the Regulatory Impact Statement which supports the Bill that the inclusion of some of the above descriptions “could present a risk to the integrity, independence and endurance of the reporting framework” and “pose a risk to the perceived independence of the reporting framework”.

What are the reporting requirements?

The Commissioner of Inland Revenue (‘the Commissioner’) will be required to prepare two different reports for the Minister which will each be due before the end of each relevant calendar year:

• an annual interim report “for the tax year that ends in the calendar year, using the best information for that tax year that the Commissioner has on hand at that time”; i.e., the Commissioner will need to report by 31 December 2023 on the tax year 1 April 2022 - 31 March 2023, despite tax returns not being due until 31 March 2024 for any taxpayers with a tax agent.

• a triennial report, with the first report due by 31 December 2025, which analyses the three previous tax years that end in the relevant calendar year; i.e., the Commissioner must report about the three tax years which run from 1 April 2022 to 31 March 2025 by 31 December 2025.

The value of reporting on ‘facts’ based on incomplete data is questionable at best.

Following each annual report being provided to the Minister, the Commissioner will be required to publish a copy as soon as reasonably practicable. Each triennial report will be presented by the Minister to the House of Representatives and then published.

The precise nature of what will be reported is unclear, however, the Bill makes it clear that:

• the Commissioner can use any information held for any purpose but must ensure any data presented is anonymised and aggregated.

• information can be specifically gathered to help the Commissioner perform the obligations under the Bill.

• the reports could cover income distributions and income tax paid, distribution of exemptions from tax and of lower rates of tax, perceptions of the integrity of the tax system, and compliance with the law by taxpayers.

The commentary to the Bill indicates the Commissioner will be able to use judgement when selecting the most appropriate analytical techniques and this could include taxpayer surveys or focus groups.

It’s anticipated by Inland Revenue that 2.5 full-time equivalents will be required to undertake this ongoing workstream.

Comment

The Minister spoke about the proposed Tax Principles Act during his 2022 speech on tax fairness where he said “[a]n important stage of the project will be wide public consultation on the proposed principles and reporting framework. We’ll be going [sic] that around the middle of the year, and hope you will share your views.”

It can only be described as disappointing that there was no public consultation on the seven tax principles, or the need to actually have this legislation, prior to this Bill being tabled, and the compressed time for public submissions and consideration of submissions by the FEC ultimately means it’s highly unlikely there will be consensus on the principles.

As it stands, in addition to the questionable descriptions of the seven principles, the list doesn’t include important concepts like following the Generic Tax Policy Process (GTPP) or considering how the tax system facilitates (or at least doesn’t impede) productivity and investment (i.e., things which grow the tax base organically).

While all tax policy development ultimately involves trade-offs, the notion in the principles that compliance and administrative costs can be trumped by ‘substantial unfairness’ begs the question about whether there needs to be separate rules on what is or is not acceptable; for example, a tax which raises less tax than the cost of administering it does not make sense, and that is why gift duty was repealed in 2011, for example.

While ultimately the Bill is simply putting reporting requirements on Inland Revenue and its not mandating that tax policy development needs to consider the tax principles, it seems logical that the report conclusions should feed through to policy development or Inland Revenue operational practices. For example, if a report came back assessing that the compliance and administrative costs of certain tax rules were unreasonable and were consistently perceived as being ‘unfair’ then those rules ought to be reviewed – otherwise, the reporting itself is undermining the integrity of the tax system.

Overall, while the Bill may have an end goal of facilitating ‘fact-based debates’ about the tax system, the questionable description of the tax principles and the questionable reporting periods may mean this is not the outcome.

June 2023 - Tax Alerts