Archive of Speeches and Presentations

Inland Revenue's challenges and priorities
26 October 2007

Address by Robert Russell to the New Zealand Institute of Chartered Accountants

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Intro NZICA Relationship

Thank you for the opportunity to talk to your conference today.

I want to use this time to give you some insight into Inland Revenue's challenges and priorities. And I want to be very clear about the value we place on working even more closely with NZICA and its members.

Let me say in my first address to this conference as Commissioner: of all our many relationships, the one with NZICA is clearly among the most valuable to Inland Revenue.

Effectively, NZICA members make possible the cornerstone of our tax system - voluntary compliance.

It is your members who educate and work with individuals and businesses throughout the country to make the tax system work.

NZICA is a crucial source of feedback and information for Inland Revenue, and a valuable intermediary enabling the compliance of many of our customers.

At the last meeting David Butler had with NZICA he said he was very proud of the development of the relationship with NZICA. As the new Commissioner I will work hard to continue this approach.

We are currently redrafting the Memorandum of Understanding between Inland Revenue and NZICA, which will be signed off in December. This will be a principles-based document that conveys the depth of the relationship we have built up. It will address ways we can work together to uphold the integrity of the tax system, and make it easy for our customers to comply, and hard for them to get things wrong.

We are also working closely with the tax team to re-establish local area liaison meetings between Inland Revenue and NZICA throughout the country, to ensure that your voice is heard, and that we can continue to refine our systems, get your feedback and address the issues that crop up between us.

Today I will talk to you about the key challenges I see for Inland Revenue for the years ahead; about our performance in 2006-07; our business strategies, with emphasis on our compliance strategy; and some of our immediate priorities. But, please bear in mind that my perspective is that of a Commissioner five months into the job, and only a year in the country.

Some of our challenges we share with tax administrations around the world. Some are unique to Inland Revenue. These are some of the key ones.

Challenges

Delivering key Government initiatives - we have a big and growing workload. Consider the 2007 Budget initiatives - the enhanced KiwiSaver scheme, the business tax review, and some fundamental changes to international tax.

Alongside those are many other initiatives, from bedding in Working for Families to the tax implications of the emissions trading scheme. Inland Revenue plays a central role in the New Zealand economy and society. We are a key delivery agent for Government policy, not just in taxation.

Maintaining the revenue base - this will always be a key priority. I will talk in some detail later about our Compliance strategy and the work we do to collect revenue in an environment of growing complexity.

As a small, open economy, our tax base can be threatened by many global trends and changes in business practices, so we must be vigilant to address new issues in a timely manner.

Contributing to New Zealand's international competitiveness - a key goal for Inland Revenue and the Government is maintaining our international competitiveness. We need to keep down compliance costs, and make New Zealand a great place to do business and to invest.

How do we guarantee that? A good tax system comes down to good tax policy backed by good tax administration. Of course we are here to collect revenue - but we have to do it in ways that are agile and responsive. We have to work to understand the needs of business.

Businesses want as much certainty, and as few surprises, as possible from the tax man. That means working closely together to understand each other.

As an example, transfer pricing is an extremely important issue in international tax. I am very pleased with progress we have made in this area. We have tried to be practical and flexible, and taxpayers and their professional advisers have responded positively. There is general recognition that trench warfare through long drawn-out audits is not a good way to resolve transfer pricing cases. The best solution is getting it right upfront. The preparation and regular updating of transfer pricing documentation ensures our audits are shorter and more sharply focused, reducing costs to all concerned. Further, we have invested a great deal of effort in our advance pricing agreement (APA) programme. We have completed about 30 APAs, and will continue to encourage taxpayers with complex issues, such as those which involve intangibles and supply chain restructures, to consider the APA path.

New initiatives - the world never stands still, nor does our business. We are continually developing and delivering on new initiatives, in areas as diverse as the new charities rules, or the tax implications of the carbon emissions trading regime. These are important and sensitive matters, so our policy work must be first class, and our consultation processes must be robust.

Improving productivity - we have to keep a tight rein on our costs, and deliver our services as efficiently as possible. Like any government agency we must ensure we spend as little taxpayers' money as we can, as effectively as we can.

Developing our people - in a very tight labour market, we work hard to attract and develop the right people. For a tax administration, we are small by international standards, but our team has to measure up to the best in the world.

As you may know, over the last year we have put in place a new operating model at Inland Revenue. Essentially, it is all about aligning ourselves more closely to the customer segments we deal with; and managing our programme activity efficiently across all of our offices in New Zealand. We now have:

• a new operating approach to realign our resources by function, rather than by geography;
• a new set of business strategies; and
• several customer perspectives that we will use to develop our services.

These are some of our key challenges for the future:

• delivering Government priorities;
• protecting the tax base;
• staying internationally competitive;
• new initiatives;
• productivity; and
• human resources management.

Now I will talk a little about how we are doing.

Performance

We are a busy operation by any measure.

During 2006-07 we had over 20 million interactions with our customers:

• approximately 5 million telephone enquiries
• approximately 2 million correspondence items
• over 200,000 office appointments
• over 6 million visits to our website
• over a million customers who made tax payments online
• more than 8 million returns processed

We continually try to track how we are going and lift performance. We have over 70 performance objectives, across our programmes. As some of these change a bit from year to year, it can be hard to be sure we are comparing apples with apples, but overall there was approximately a 5% uplift in performance over the last year.

In our largest business group, Service Delivery, 87% of performance targets were met; about 16% more than last year. We do set ambitious objectives, so it would be a surprise if we met them all.

Areas of improvement included:

• Overall customer satisfaction;
• Average time to answer on high demand days (telephone service);
• Collecting Child Support assessments;
• Administrative review timeliness (Child Support); and
• Volume of returns finalised.

That said, there were areas where we fell short of meeting our targets, and these include telephone service at certain times of the year, and rulings timeliness. We will continue to work hard to improve in the programme areas which are not meeting objectives.

In terms of productivity, we are now spending about $0.71 to collect $100, which compares favourably with other OECD countries. It is also interesting to note that our budget, adjusted for inflation, is lower now than in the early 1990's.

Inland Revenue Strategy

A couple of years ago Inland Revenue established "Our Way Forward", as a five-year roadmap for our future. To make it a reality, we have developed a set of strategies to focus our efforts over the next five years.

Three strategies have a business focus:

• Compliance - to help all New Zealanders pay tax and receive their entitlements;
• Service- to deal with our customers in the best way possible; and
• Operations- to provide excellent systems and processes.

To support these business strategies, we have four capability strategies which focus on:

• Ensuring effective communications with customers and stakeholders;
• Having the right people with the right tools;
• Using information technology to lift our game; and
• Excellence in financial management.

Compliance strategy

Today I will focus on just one of those strategies, the Compliance Strategy. In simple terms, one could say that our business is compliance. The New Zealand tax systems would not function without a deep-seated, long-standing confidence in voluntary compliance.

We are working towards an evidence-based, whole of Department approach to improving customer compliance. For us, compliance occurs when customers:

• register with Inland Revenue as intended;
• report or provide complete and accurate information;
• file returns or other information on time;
• claim only what they are entitled to; and
• pay correct amounts on time.

In order to allocate our resources effectively, we assess compliance risk, or the extent to which customers will meet these obligations. At Inland Revenue, we are strengthening our risk assessment capability every year. For example, there has been a shift to a risk-based approach to audit since 2003-2004. We do an annual review of key and emerging risks relating to SMEs, resulting in a sharper strategic focus on risks and the deployment of more resources to important areas. A similar approach has been followed for large enterprises, where we develop risk assessments on an individual company basis, and use these to decide where to expend our effort.

To strengthen our risk analysis capability, we have set up a Strategic Compliance Risk group, which has engaged experts in mathematics, statistics, risk management, database management and data-mining.

Enhancing compliance is about much more than audit. We will address priority risks through a cross functional, co-ordinated approach which may involve customer education, process changes, audit, law changes, proactive telephone calls or other customer contacts, and media communications. Our interventions will also involve working with third parties such as tax agents. In this regard, I would reiterate our desire to work closely with NZICA, and others who have a keen interest in New Zealand's tax system.

This cross-functional approach will be used in 2007/2008 in the areas of property, GST refund fraud, and common return filing errors. I will illustrate that by pointing to the work we are doing in property.

Our Property Compliance Improvement Programme has been developed using the principles of our new Compliance Strategy. Its aim is simple but profound - to bring about a lasting improvement in compliance in relation to property transactions. This would include helping New Zealanders understand their obligations in this sector, ensuring that property speculators pay their fair share of tax; enforcing existing law effectively; and managing compliance through a structured programme of tailored responses.

Our three-year property programme was approved in the May 2007 Budget. While it is still in its early stages, we are identifying risks and examples of speculative activity that we believe are taxable. This analysis will help us identify the causes of non-compliance, and to decide how to allocate our resources.

Our response will not automatically be an audit. We plan to use a variety of approaches and interventions, including taxpayer education, publicity, leverage activities and audit.

Other examples of how we can use this approach include:

• We provided information about property transactions for the current series of Business is Booming on television.
• We are producing a property brochure that will bring together key information on the tax implications for buying and selling property.
• We will work with intermediaries such tax agents and legal advisers who work in conveyancing to help us communicate key messages on property and tax.
• For the 1000 people identified with extreme high volumes of files we will use leverage activities, such as direct mailing and calling, so that people can reconsider their position, which may lead to voluntary disclosures.

In other words, in this area as in others we plan to use a wide and well-planned range of approaches to encourage sustainable changes in behaviour.

With regard to GST refunds, we see that there is evidence of high risk in respect of certain types of refunds. To counter fraudulent claims, evasion through failing to account properly for GST, and simple errors by customers, we are developing a range of responses. We are also reviewing departmental processes for checking refund claims. The aim is to improve our chances of identifying incorrect or ineligible claims, meaning sharper focus on non-compliance and a smoother process for refund release in low or no risk cases.

We note that there are also commonly made errors in reporting income. By evaluating patterns in these errors and identifying their causes, we are aiming for lasting improvements in compliance through:

• targeted guidance on how to avoid errors;
• clarification/change of form design and/or law changes if appropriate, to remove the causes of the error; and
• focusing investigators on persistent failures in respect of the same matter, to deter future non-compliance.

Of course property, GST refunds and common filing errors are not the only areas of focus in our Compliance Strategy.

We recognise that international non-compliance is a significant and challenging problem which requires responses both by individual governments and the OECD. In this regard, New Zealand has taken an active role in the establishment of the OECD's Aggressive Tax Planning Directory, to identify international schemes and trends, as well as detection and response strategies to counter such schemes. We are active participants on OECD working parties covering hybrid financial instruments, high wealth individuals, low/no tax jurisdictions, and multinational restructurings.

We have also been intensifying and improving our international exchanges of information, especially with our major treaty partners (Australia, the United States and the United Kingdom). Global collaboration in tax administration, through multinational forums and by way of our ever-widening network of tax treaties, is not a passing trend. For a small country like New Zealand, it is a vital element in ensuring we keep up with emerging risks and apply best international practices.

Risk assessment for 2007-08

Building on our involvement with the OECD, we have increased our ability to identify our national risks. Each year we work to be very clear about what our national risk issues should be. As an example, we ensure that at least 65% of our small and medium size business audit cases come within an identified national risk framework. This is totally in line with the OECD Centre for Tax Policy and Administration best practice. This year, we will be working on cases in these risk areas:

• Aggressive tax planning
• Evasion
• Fraud
• High wealth individuals
• Large businesses
• GST
• Property transactions

Large enterprise audits are an important part of our compliance work. The taxpayers in this sector typically have tax affairs that are complex and sophisticated, and our approach is to identify risks specific to each taxpayer, rather than general risks across a particular sector, as is the case with (SMEs). We have one-on-one account manager relationships with these organisations, which facilitates this approach.

Our risk areas for audit focus include:

• Aggressive tax issues - We have ongoing compliance projects where the application of the tax avoidance provisions are the key factor. The projects cover complex financial transactions (in particular the use of hybrid financial instruments), lease provisions (including the use of cross border leases), and intangible property.
• Transfer pricing enforcement program - The overall goal of this programme has been to maintain New Zealand's share of multinational tax in accordance with our tax law, acceptable income recognition principles and accepted international practices. We maintain wide coverage of the top 150 large enterprises, and key industries where there is a concentration of foreign ownership. Consequently, it is generally understood that those pushing the boundaries will be identified and closely scrutinised.
• Advanced Pricing Agreements (APAs) - We have made steady progress with APAs covering multinationals with large associated party transactions. Through APAs, we effectively arrive at an answer today for tomorrow's difficult transfer pricing issues, thus reducing unproductive disputes and creating certainty going forward. We have now completed 30 APAs, and have APAs under negotiation with the US Internal Revenue Service for two major New Zealand exporters, the completion of which may encourage more exporters to come into the programme.

This shift towards the more serious/high risk casework is leading to an increase in prosecution activity. There has been a 373% increase in the number of prosecutions over the last four years, from 26 in 2002-03, to 97 prosecutions in 2006-07.

Along the way, perhaps in part because of the media attention that successful prosecutions attract, we are getting more voluntary disclosures. For us, this is very good, as it increases compliance without much extra cost. Also, we have been pleased with some of the comments from the judiciary that have come out of recent prosecutions, including:

"Stealing from the Inland Revenue Department is really stealing from the community. Everyone in society who pays their tax does so as a community levy expecting it to be utilised for the benefit of the country and the community as a whole. It is not for filling the private pockets of somebody like you." -- Judge Blackie, Auckland, March 2003, sentencing Richard Frost to seven years in prison for 55 charges of using a document with the intent to defraud.

And another: "Despite some people's viewpoint, there is no victimless crime - particularly ones which involve ripping off the taxpayer and the rest of society. It is becoming far too common." -- Judge Bidois, Tauranga, March 2007, sentencing Roydon McLaughlin to two years and 10 months in prison on 44 charges of using a document with the intent to defraud.

Of course we were pleased when the Court of Appeal upheld a ruling in the High Court in relation to the Trinity Forestry Investment Scheme saying it was designed to evade tax - The Court of Appeal ruling said the Trinity Scheme was clever, "But this cleverness should not be allowed to obscure the reality that this particular emperor has no clothes". (President William Young of the Court of Appeal in Accent Management Ltd v CIR [2007] NZCA 230 11/06/07)

Having said that these are good results for Inland Revenue, we would far prefer to avoid situations in which tax disputes must proceed all the way to the courts. Both taxpayer and tax collector are better off when we work together to avoid these expensive and sometimes unpleasant experiences.

Intermediaries

In common with most OECD countries, we are putting a lot of focus into how we work with tax professionals to improve compliance. Our Customer Insight group has officers who work with tax agents every day. Also, we are involved in the OECD tax intermediaries project, which grew out of the Seoul Declaration in September 2006, following a meeting of OECD tax commissioners. This project is examining the role of tax intermediaries (such as law and accounting firms, other tax advisers and financial institutions) within tax systems, including in relation to unacceptable tax minimization arrangements.

The tax intermediaries project objectives are to increase understanding of the role intermediaries play in tax administration, and to identify strategies for strengthening the relationship between them and revenue bodies.

An OECD report from this project is due next month, and it will examine:

• The arrangements revenue bodies have put in place to manage their relationships with tax intermediaries, to minimise the risks and to develop a climate of mutual trust and confidence.
• The role of tax intermediaries in promoting compliance and reducing non-compliance by their clients, and the risks they sometimes pose in developing tax minimization arrangements.
• The responsibilities of tax intermediaries and taxpayers with regard to those risks.
• The role of international co-operation between revenue bodies in managing those risks.

To put it simply, we want to harness the lessons from other countries, such as the United States and the United Kingdom, where some big intermediaries have been very active in promoting aggressive tax planning. As already mentioned, New Zealand Inland Revenue is a small player on the world stage, but as a revenue authority, we need to be as sophisticated as the intermediaries in identifying and dealing with risks.

Immediate priorities

Several changes were introduced by the Government in the 2007 Budget and among these some key priorities for Inland Revenue:

• KiwiSaver, including compulsory employer contributions, made the scheme more compelling for many New Zealanders. As a result, the numbers of people enrolled in KiwiSaver are considerably ahead of projections. In effect, the Budget changes to KiwiSaver meant we found ourselves rebuilding the plane as it was hurtling down the runway preparing for take-off.
  
  Without doubt, the KiwiSaver initiative has put serious pressure on our main IT systems. We have delivered the two first big milestones - the opening for enrolments on 1 July and the handover of funds to providers from 1 October. Now the work is focused on the next milestone - the 1 April start of employer contributions.
  
  
• Company tax rate - a cut in the company tax rate from 33 per cent to 30 per cent, for all companies and some savings vehicles, will take effect from 1 April 2008. The new tax rate cut applies mostly to companies, although it may also apply to other entities defined as companies by the Income Tax Act. From July 2008 the way the provisional tax rate is calculated will also change, to ensure companies will not pay more than they need to. As tax agents you have a key role to play in assisting your clients to understand and apply the new rate and the provisional tax calculations.
  
  
• R&D Tax Credit - under the 15% R&D tax credit, businesses doing qualifying research and development (R&D) will be able to claim a tax credit in conjunction with their normal tax return process. I know that there is a keen interest in the proposed R&D tax credits. Many of you will have attended this afternoon's session on this, so I will not go into the detail now. I do want to mention a few things about how we will implement the new regime.

To develop our understanding of the R&D sector, so that our processes and guidance materials are relevant, we are currently undertaking a programme of 'fact finding' visits with businesses doing research and development.

Building the capability of our people and processes to ensure effective end-to-end administration of the regime is important. We are currently looking at how we will recruit and organise a dedicated team of people to integrate R&D into Inland Revenue. That includes hiring people with backgrounds in science and R&D - a departure for Inland Revenue!

This is new territory for us. We know the eligibility of some R&D will be crystal clear from the outset while other areas will have shades of grey. We will work with you to get clarity on issues as they arise.

You will have an opportunity to comment on the draft R&D guide as soon as possible after the legislation is enacted. We are planning to put the draft on our website in December 2007, and you will have until mid-February 2008 to give us your feedback.

The legislation setting up the R&D tax credits is still with the select committee, so there remains a lot of detail to be sorted including eligibility criteria. Essentially we are developing an end-to-end electronic model. The programme will be administered online, not using paper forms and manual processing. Through the Inland Revenue portal businesses will be able to access an overview of the R&D process, applications and claim forms, and linkages with other relevant agencies such as Ministry of Research Science and Technology and Foundation for Research Science and Technology.

It is important to understand the intent of this new programme. Not all R&D will qualify for the tax credit, only expenditure that meets the criteria. At this point, we are forecasting about 2500 claims a year, worth approximately $630 million over the first four years of the scheme. We want to make it easy for businesses to self-assess. Our initial focus will be on education where we see that businesses are making errors or are not understanding the programme: of course, we will follow that up with compliance action when it is appropriate.

Services online

Our work with various customer groups tells us that we should deliver more services online, and that this is a particular need for the SME sector. We are looking to use technology to better share information, align our processes with customer needs, and provide more self-service options.

For tax agent services to small businesses, we call these developments 'Look - Link - Do'. Tax agents should be able to:

• Look at client information
• Link new clients, and
• Do certain actions themselves.

Tax agents have been able to 'look' at client information for some years, using our "Look at Account Information" online service; have been able to 'link' (and delink) clients in real time since July last year, using the new "Client Maintenance" service; and the 'do' part is what will come next.

The "Client Maintenance" service has proved quite a hit with tax agents, with nearly 300,000 links and delinks made via that service during its first year in operation - a substantial proportion of the total number of links and delinks.

An upcoming enhancement to our systems will give tax agents and businesses the ability to directly control their access to Inland Revenue online services. Tax agents and business owners will be able to use an online facility to give their staff members access to the Inland Revenue online services they select, for set, or unlimited, periods of time. Plus they will have the ability to suspend or cancel users' access, view reports detailing the agency's online activity with Inland Revenue. Also they will have the ability to delegate these administration rights to other key personnel within the organisation. This will considerably streamline the existing arrangements, and enable tax agencies and businesses to self-manage their Inland Revenue online services access. Early user testing has been going well, as we develop the necessary systems and processes, and we expect to have this new functionality in place during the first half of 2008.

From July this year, the online registration service through the Companies Office gave customers the ability to register for GST and obtain an IRD number for their business electronically, in real time. That is a good example of the Companies office and Inland Revenue working together to make life easier for businesses.

Other work underway includes scoping improvements to the online GST filing process, to make it quicker, easier, and fully online from start to finish. There is much more, potentially, on the drawing board, but this will give you an idea of what is in the pipeline.

Our big push for online services is all about making it easy to comply - and reducing the costs of compliance.

In that respect, I was glad to see that in the latest compliance cost survey, conducted by KPMG and Business NZ, that compliance costs are down on recent years. That is a very welcome trend. I do acknowledge that the compliance burden is relatively higher for small businesses than for large businesses - which is why we need to keep getting better at delivering services online.

I note the comments made by Business NZ about the added compliance costs that KiwiSaver will bring - in that area also we are committed to online services that will be as straight-forward as possible.

Finally, I fully endorse the comments made by Paul Dunne of KPMG who said that the priority coming out of the compliance survey is the need for government agencies to talk to each other and deal with customers in a more co-ordinated way. That call is spot on - and it is precisely what initiatives such as the Companies Office-Inland Revenue joint initiative is all about.

Fair dividend rates - we have placed a high priority on the new tax rules for offshore portfolio investments, and I think that our efforts in this area are a good example of the generic tax policy process in operation.

After a long, and sometimes difficult consultation process, the fair dividend rate, or FDR, method emerged. As most of you are aware, this method essentially taxes offshore portfolio investments on a deemed 5% return.

The law gives Inland Revenue the power, in certain situations, to determine whether FDR can be used for a particular investment. This is necessary to prevent people setting up structures to provide investors with guaranteed returns in excess of 5%, while only being taxed on5% under FDR.

We want to ensure that the process of applying for and getting these FDR determinations is as efficient and streamlined as possible. I am confident that we can achieve this - the determination is essentially a judgment call on whether an investment comes within the policy intent of FDR. While we are still in the early days this process seems to be working well. I'm confident we can turn around applications in a month or less.

Conclusion

In short, we have a lot of challenges on our hands.

Though a big organisation in New Zealand, we are small by international standards. We have to deliver a full and growing range of services, and we must do our part so New Zealand can play at the major league level. Our many strands of work in the economy and social arenas mean that we directly affect New Zealand's well being and growth. We take that responsibility very seriously.

We don't expect to be loved - we are the taxman, after all. But we do want to be respected for the way we do our job.

We want to work more collaboratively, especially with people such as you, who share many of our interests. The New Zealand Institute of Chartered Accountants is a force that can make our tax system work better for all of us. We want to be ever more transparent in working with customer groups, and again, that includes NZICA. That will mean more pro-actively flagging taxpayer behaviours that are of concern to us.

We are committed to doing our work with integrity, transparency and flexibility, and these concepts are embedded in our Customer Charter. We will work hard to understand what customers need and to use that knowledge to meet their needs. In short, we will do our best to ensure that New Zealand has one of the best administered tax systems in the world.

And, we will do all that while keeping our costs down.

So, we have our work cut out for us, but if there is one thing I have learned in my first year at Inland Revenue, it is that the organisation is serious about delivering what is expected of it.

So, let's get on with the job.

 

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Corporate Communications
Inland Revenue

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Phone: (04) 890 1936
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Date published: 26 Oct 2007

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