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Corporate Tax Update 2000 - Hon Dr Cullen Speech


Corporate Tax Update 2000
Hyatt Regency Hotel
9.10am Tuesday 30 May

Hon Dr Cullen
Minister of Revenue

Speech to Corporate Tax Update 2000

Thank you for your invitation to speak to your conference today.

Before I outline the direction of tax policy under this Government, I think it is important to look briefly at tax policy matters from an international perspective. After all, recent developments in information technology and electronic commerce are removing national borders and making co-operation amongst tax jurisdictions a necessity.

More than ever before, today different countries are meeting to discuss tax administration, enforcement and policy. Today no tax administration can stand alone on these matters.

Within that international community, New Zealand is generally acknowledged as having a sound tax system. It has a reputation for good, well thought out tax design and for sticking to principles, whether in relation to GST, income tax, or international tax. It recognises, however, that good tax design must also accommodate trade-offs between sometime conflicting objectives like efficiency, equity, simplicity, cost and certainty.

To turn to the tax policy objectives of this Government, one of our top priorities is to maintain the flow of revenue and to protect the tax base against erosion.

At the same time, the tax system should minimise the economic costs, as well as the associated compliance and administrative costs.

That means the tax system must function well. It needs to be efficient, coherent and easy to comply with.

The tax system must also be perceived by taxpayers to operate with integrity. Should that integrity be perceived to decline, so too will voluntary compliance, and ultimately revenue.

These, then, are the priorities that will shape the tax policy work programme over the next two and a half years.

One of our immediate tasks as a new Government was to introduce a new 39 percent tax rate on income over $60,000. Our intention to do so had been announced before the election.

When the necessary legislation was introduced and enacted in December, I announced that measures to support the new top tax rate and prevent high-income employees avoiding it were on their way.
These measures are now in bills before Parliament. One is expected to be enacted in July and the other in September.

That achieved, we will now be focusing on longer-term policy work.

We will continue to protect the revenue base in a number of ways: by closing loopholes in the law as they are identified, removing opportunities for tax avoidance, and regularly updating the law and removing unintended anomalies.

Outlets for the urge to avoid tax appear to shift over time. In the late eighties the tax avoidance industry tended to target corporates. In recent years it appears that schemes are directed more at high-income individuals, a trend that started well before the increase in the top personal tax rate to 39 percent. Clearly, some taxpayers objected to paying 33 percent.

You can expect to see major emphasis on tax simplification in one form or another in our policy work programme -- since a good tax system is one that is easy to understand, to comply with and to administer.

The massive job of rewriting the much-used Income Tax Act into a plain language style of drafting will continue. Its purpose is to clarify the law and make the act easier to understand, in order to minimise the various costs of those who use it.

We hope to have an exposure draft of the rewritten Parts C, D and E, the most used parts of the Act, I understand, ready for public consultation early next year.

We will press on with measures to simplify the tax system for businesses, especially small businesses. For example, we are looking at ways of streamlining the information and payment requirements that the tax system places on businesses, and simplifying taxpayer interaction with Inland Revenue.

We will continue to find ways to make it easier for people to comply with the law, since voluntary compliance is essential to the success of the tax system. We have already introduced legislation to provide some relief to what are essentially compliant taxpayers who find themselves in difficulty with paying their taxes.

As you may be aware, the previous Finance and Expenditure Committee, in its report last year on the “Inquiry into the Powers and Operations of the Inland Revenue”, made 27 recommendations covering a wide spectrum of Inland Revenue’s policy and operational processes. Later this week the Government will table in Parliament its response to that report.

As a member of that Finance and Expenditure Committee, I was part of the inquiry, and I fully accept the need for improvement in Inland Revenue. It was also clear to me that there are areas where Inland Revenue operates well.

I would also like to state publicly that Inland Revenue has made good progress in considering and implementing the committee's recommendations since the report was released.

The Government supports most of the committee's recommendations. We are still to form a view on the issues of a specialist tax adviser position within the Office of the Ombudsmen, and moving the responsibility for drafting tax legislation back to the Parliamentary Counsel Office.

The committee suggested a further inquiry into the issues that it did not have time to consider in its report, which was tabled just before the election. In my view, a second inquiry into the department at this stage would not be appropriate. The department should be able to implement the current recommendations without the threat of a second inquiry hanging around its neck.

Once those recommendations have had time to bed in, then it may be appropriate for the select committee to begin another review.

Most of the committee's recommendations were of an operational nature and are in the process of being implemented. Some will be implemented in the coming months, while others will take a little more time. The department is making good progress on the development of a new complaint management process and taxpayers’ charter, and is consulting with various interested parties on these matters.

The implementation of these two recommendations will, in my view, go a long way to resolving some of the tension between taxpayers and the department.

Some of the recommendations that relate to the operation of the compliance and penalties legislation in the Tax Administration Act are being included in the wider, post-implementation review of the legislation that was announced last week.

Two legislative amendments inspired by the committee's recommendations have been included in a taxation bill introduced earlier this month.
They introduce greater flexibility and leniency into the administration of the compliance and penalty legislation, and into Inland Revenue's debt management process.

Amongst the changes are the reduction of the incremental penalty for overdue tax from 2 percent to 1 percent a month, and extension of the relief provisions to all types of tax. At present they apply only to income tax and fringe benefit tax.

The review of the compliance and penalty legislation, which came into effect in 1997, has been planned for some time, in keeping with the Generic Tax Policy Process. Businesses and tax advisers will have ample opportunity to participate in this review.

It is timely to review the legislation, since it has had three years to bed in and for people to become familiar with it. The review will look at how well the legislation is meeting its objectives.
They are to deter non-compliance, be understandable and fair, be flexible yet consistent, and be consistently administered.

In a similar vein, the continuing review of GST is looking at where improvements can be made and where the law needs updating as a result of changes that have occurred in the 14 years since the tax was introduced.

The review has already resulted in proposed legislation, now before Parliament, that improves the workability and effectiveness of the tax. It also lowers compliance costs and removes opportunities for avoidance of GST.

The next stage of the GST review will look at the tax treatment of imported and financial services, a key part of updating the tax system to cope with developments in electronic commerce.

Over the next year or two you will see a number of discussion documents setting out policy proposals in a wide variety of areas:
the taxation of Maori Authorities, small business tax simplification, compliance and penalties legislation, and electronic commerce, to name a few.

This Government is committed to the Generic Tax Policy Process, which builds in opportunities for consultation -- through discussion documents and the like -- at key points in major tax policy reform.

Reforms such as the GST review and the compliance and penalty review will be fully subjected to the formal consultation process. Obviously, however, any government is unlikely to consult widely on every issue, and there will be times when it may not consult at all -- for example, in relation to base maintenance issues and tax rate changes.

I am aware that many of you here today are from organisations that regularly contribute their views on policy proposals, whether it is a submission on proposals set out in a discussion document or to the select committee considering a bill.

Therefore I would like to take this opportunity to say that I appreciate the effort you make in participating, and am aware of the time and commitment that go into these submissions. I hope that you will continue to take part in the tax policy process with such enthusiasm -- and I am certain that it will help to make for more effective tax policy.

I wish you well for your conference.


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