Briefing for the Incoming Minister of Revenue - 2008

Administrative issues

The earlier chapters of this briefing have concentrated on tax policy issues that will be a focus of Ministerial attention. However, an overall well-functioning tax system requires this policy be delivered through Inland Revenue in a cost-effective way that:

• meets the government's revenue requirements by achieving high levels of public compliance with tax law;
• meets the government's requirements relating to non-tax programmes;
• helps make the New Zealand economy internationally competitive; and
• builds trust and confidence in the public sector.

Inland Revenue interacts with New Zealand families, individuals and businesses in a host of ways. Our ability to manage this well influences overall trust in the public sector and helps determine whether New Zealand has a tax environment of low compliance cost and certainty that makes it easy to do business.

We therefore place much store on building and maintaining public confidence and trust. We also believe that public confidence in Inland Revenue underpins voluntary compliance; people are more likely to pay the right tax and access the correct entitlements if they have confidence that Inland Revenue acts effectively and with integrity.

As noted earlier, Inland Revenue has seen a significant increase in its operations. The department has a strong track record of delivering a growing range of initiatives, including Working for Families tax credits, the R&D tax credit, and KiwiSaver, which has grown at a rate surpassing any projections since its introduction in 2007.

These initiatives have significantly increased the number of people with whom Inland Revenue interacts, and added to the variety and complexity of those interactions. This chapter focuses on Inland Revenue's priorities and the challenges it faces if it is to continue to deliver good service to New Zealanders and provide value for money in implementing the range of policies that governments ask it to do.

Delivering an efficient tax administration

Government and the public generally expect public agencies to deliver services and manage customer contacts efficiently and effectively - providing services that represent value for their money.

Internationally, New Zealand is recognised as having an efficient tax system and tax administration. In 2007, the OECD commented that New Zealand's tax system was regarded as one of the simplest and most efficient in the OECD. Figure 19 compares the administrative costs of collecting 100 units of revenue in OECD countries.¹⁵ In 2004 it cost $0.81 to raise $100 of revenue in New Zealand. That was the eighth lowest cost in the OECD. By 2007 the cost had fallen to $0.75.

Figure 19:

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Changing service profile

Inland Revenue has experienced significant changes in the nature of its services and "customer base" as it has acquired wider responsibilities.

The growth in social policy functions has been a key driver of the overall growth in staff numbers in recent years. Between 1999 and 2008, total staff numbers (measured in full-time staff equivalents) grew by 1,819, from 4,157 to 5,976. Table 4 charts staff numbers and annual growth increases and indicates the key factors behind the growth.

Table 4: Inland Revenue staff numbers (at 30 June, in full time staff equivalents)

	2004	2005	2006	2007	2008
Total staff	4,682	4,653	5,018	5,728	5,976
Change on previous year	54	-29	365	710	248
Key initiative(s)	Working for families	Working for families; increased auditing	KiwiSaver; increased auditing	KiwiSaver; business tax reform	KiwiSaver; business tax reform

Source: Corporate Services, Inland Revenue

Renewing the way we do business

While Inland Revenue has successfully managed a period of significant growth in the size of its business and implemented a range of new initiatives, it is now timely to consolidate our business platforms and plan for future demands. To manage risks and meet future expectations of the government and the public, a transformation of Inland Revenue's business platform is required. As noted earlier, the nature of our business has changed and we need to change our business practice accordingly. Increasingly, it is not cost-effective to keep delivering a range of social policy functions using a system that was designed for a pure tax function. There is an opportunity in coming years to improve the coherence and sustainability of our business platform. In doing so we need to provide better value for money, make it easier for individuals and businesses to deal with us and equip ourselves to respond quickly and efficiently to new government needs.

Inland Revenue's wide portfolio of functions has increased the diversity and complexity of interactions with the public and resulted in increasingly complex technology systems. The department's core tax processing system (FIRST) was designed for processing and administering tax requirements; it was not intended to fit social policies which have subsequently been overlaid. In simple language, successive "work-arounds" and "bolt-ons" have been added to FIRST. That is an expensive way to do business and it limits our ability to make changes quickly and simply.

To increase voluntary compliance and meet people's expectations of managing their own tax affairs - in the same way they can access and manage their bank accounts online - Inland Revenue must be able to deliver greater access to more sophisticated e-services.

The department has identified what will be required to deliver effectively and efficiently on our outcomes and to be positioned to meet future challenges. This initial work indicated that fundamental change is required over the next five to seven years to manage the risks that the department faces¹⁶ and to achieve increased agility, effectiveness, efficiency and customer service performance.

Over the coming two years, the main focus will be on standardising and simplifying our business processes, delivering value for money and making it easier for the public to deal with us. A large part of this will be making it easier for taxpayers to access their own Inland Revenue "accounts" and self-manage their interactions with Inland Revenue. From the government's point of view, it will improve our ability to collect maximum revenue, address the risks our business faces and respond more swiftly to policy changes.

The changes made in these areas will help us to develop new capabilities that include:

• simplified end-to-end customer processes;
• developing more automated processes that remove to an extent the need for manual processing; and
• building a comprehensive channel approach that provides for the greater application of e-services. Increasingly, people will be able to access and manage their accounts, requiring less manual intervention from Inland Revenue.

During 2008-09, Inland Revenue will be undertaking more detailed financial modelling of the cost-benefits associated with the transformation as we develop individual business cases and proposals.

The department will be analysing current and future capabilities to identify what needs to be done to close any gaps between the two. This will also involve agreeing relative priorities and looking for opportunities for policy alignment.

Making it easier to contact Inland Revenue

Inland Revenue receives a large number of contacts every year and has been facing year-on-year growth in these contacts. A good tax system and public confidence in Inland Revenue makes it essential that people are able to contact us and receive timely and accurate responses.

Table 5 indicates the volume of contacts and the growth between 2006-07 and 2007-08 across various contact methods.

Table 5: Summary of operations (year ended June)

	2006-07	2007-08
Correspondence	1.81 million	3.22 million
Counter enquiries	218,726	233,080
Telephone calls and referrals	4.90 million	4.67 million
Self-help service enquiries	5.99 million	8.22 million

Source: Inland Revenue Annual Report 2007 and 2008

While there has been a positive growth in the uptake of the department's self-help services, the high volume of contacts received through call centres is a concern. The large volume of telephone contacts continues to put considerable pressure on the department's ability to respond to them in a timely fashion. Telephone contacts are increasingly more complex in nature, and it is taking longer to deal with them. Despite these factors, the public continues to express high levels of satisfaction with our call centre performance (83 percent in the September quarter 2008).

Like any large call centre operator, Inland Revenue must deal with peaks in calling volumes. In Inland Revenue's case there are yearly, monthly and weekly patterns of call volumes. To fund call centres to meet maximum levels would be an inefficient use of taxpayers' money. However, at the same time, people expect their calls to be answered within a reasonable time.

Our contact with other tax administrations shows that most are dealing with similar challenges. Like other call centre operators, we continue to explore technology and workforce planning initiatives to improve our ability to meet demand. Inland Revenue is now using a technology called Virtual Hold in its call centres. This allows callers to choose to receive a phone call, rather than wait on line. These initiatives are improving our performance, but we expect the issue to be difficult for some time.

Inland Revenue's response to mitigating this pressure has partly been through supplementing traditional service channels with more self-help services (e-business) options - providing more options for people to obtain information and do transactions with us electronically. At present, they can obtain comprehensive information about many of our products, get information about their KiwiSaver accounts, file various returns electronically, and access a growing range of other services.

Even so, the delivery of more information on-line has not led to the anticipated transference away from telephone calls or reduced the public's reliance on the telephone as a way of obtaining information from us. On the contrary, many people now want to confirm information they have obtained from our website; they may have partially resolved a question through the website but want to call to take the matter to a conclusion.

Although the department will continue to make contacts as effective as possible, it is also essential to ensure that effective and realistic contact options are built into tax policy. Simply increasing resources to meet increasing public demand is unlikely to be cost-effective. Policy options to reduce the need for contacts by simplifying and automating online services will need to be considered as part of the transformation of Inland Revenue's business over the next few years.

Increasing voluntary compliance

The New Zealand tax system relies on voluntary compliance, and the vast majority of people comply with their obligations within required timeframes. Inland Revenue's intent is to create an environment which promotes compliance.

Figure 20:

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Through the use of the voluntary compliance model shown in figure 20, Inland Revenue tries to identify people's attitudes to compliance and tailor its responses to their behaviour according to the degree of non-compliance - from assistance and education through to enforcement.

The legislative framework and our public interaction and enforcement activities are directed at encouraging people to meet their obligations voluntarily. We do publicise the consequences of non-compliance, and will continue to use the full force of the law for those who do not meet their obligations.

The traditional approach to compliance has been to focus on auditing for non-compliance. We have been moving to a more comprehensive approach incorporating customer education, providing assistance and helping people claim entitlements, as well as the more traditional use of audit enforcement. Inland Revenue operates a Compliance Management Programme through which compliance risks have been prioritised on the basis of evidence, research and analysis. We respond to these risks through integrated, co-ordinated, cross-department activities that are tailored to the needs and behaviour of the groups concerned. The current areas on which we are focussing are:

• identifying common errors people make so that these can be reduced by education and assistance programmes;
• e-commerce - ensuring people understand that e-commerce trade can give rise to tax liabilities and that a reasonable level of compliance is established with respect to these activities;
• assisting employers to meet their tax obligations in areas such as PAYE, student loans and KiwiSaver;
• increasing the degree to which taxpayers file on time;
• following GST refund claims to ensure that they are appropriate;
• auditing the extent to which personal income is diverted to companies and trusts to reduce overall tax liabilities; and
• auditing property transactions to ensure that tax rules are complied with.

By prioritising our compliance activities in this way we can provide more value for our funding and minimise our involvement with low-risk areas, allowing business people to get on with the job of running their businesses.

We are also moving to a more transparent approach to compliance. From 2009-10 we plan to publish annually a document outlining the Compliance Management Programme, detailing the compliance risk priorities we plan to focus on. It will set out the patterns of compliance risks that have attracted our attention and how we plan to respond to them, along with activities we will undertake to make it easy for people to comply voluntarily.

Working in an international arena

The increasing globalisation of international commerce poses particular risks to the tax system. This is particularly true of our company tax base, which forms a significant proportion of our overall revenue.

Although Inland Revenue is a small tax administration by international standards, it faces the same risks and challenges that larger administrations do. The pace of globalisation (including opportunities presented by rapid advances in technology) continues to open up new directions for business development here and overseas. But these also increase our tax risks. These include businesses being able to shift tax liability from New Zealand, increased use of technology to shift functions off-shore and the transfer of intangibles to overseas entities. Many of these factors also add more complexity to determining tax liabilities.

It is vital that Inland Revenue is equipped to meet the full range of challenges while at the same time making New Zealand an attractive destination for investment and business. The international nature of compliance risks means we need to work closely with other tax administrations and organisations to respond to those risks. Many international businesses operate in New Zealand. We need them to comply with their tax obligations without imposing higher compliance or administrative burdens on them than they experience in other countries.

Dealing with these matters often requires a legislative approach coupled with operational approaches to maintain the integrity of our tax system. Just as tax policy is dependent on good delivery of that policy, so good administration is dependent on good tax policy. To the extent to which some of the tensions in the coherence of policy mentioned in earlier chapters can be resolved, this will assist our compliance work.

Building relationships with large businesses and tax intermediaries

Large businesses are especially internationally mobile. To attract foreign investment and be internationally competitive we need to make it as easy and cost-effective as possible for large businesses to comply with their tax obligations. Our experience is that large businesses value certainty from the tax administration. They expect timely and reliable information about their obligations, particularly in areas such as binding rulings. Following discussions with the Australian Taxation Office, its priority rulings approach may present lessons for improving the timeliness of our rulings.

In common with other OECD countries, the department is focusing on how to work with tax professionals and tax intermediaries to improve compliance. Part of this focus involves working with the OECD and its tax intermediaries project, which arose from the 2006 Seoul Declaration.

In early 2008, the OECD's "Study into the Role of Tax Intermediaries" report discussed the role of tax intermediaries within tax systems, particularly in relation to unacceptable tax minimisation arrangements. The report also recognised the need to strengthen relationships between large business, tax intermediaries and revenue authorities.

It is long recognised that tax intermediaries play a vital role in all tax systems - helping taxpayers understand and comply with their tax obligations in an increasingly complex world. However, some of them also design and promote aggressive tax planning - a role that has a negative impact on tax systems. This is one of the risks revenue bodies have to manage in order to collect the tax due under their tax systems.

Aggressive tax planning typically requires the involvement of tax professionals and intermediaries. They represent the supply side of aggressive tax planning, but large corporate taxpayers, tax intermediaries' clients, set their own strategies for tax-risk management and determine their own appetites for tax risk. They are the ones who decide whether to adopt particular planning opportunities. Taxpayers, therefore, represent the demand side of aggressive tax planning.

To maintain the integrity of New Zealand's tax system and identify and deal with risks to our revenue base, Inland Revenue needs to be as sophisticated as those tax intermediaries. Over the coming year, it will be important to harness lessons from countries (for example, the United Kingdom and the United States) that have large intermediaries actively promoting aggressive tax planning activities.

Inevitably, there will be disputes between Inland Revenue and businesses or their agents despite the fact that most business transactions are not tax-driven. As far as possible, businesses want certainty on the tax consequences of their actions and speed in getting that certainty. We recognise the need to work alongside businesses, understand their problems and respond quickly. To that end, we have recently instituted a system to provide businesses with Inland Revenue's indicative views of how tax law affects transactions, where this is possible.

Developing our people

The department operates in a tight labour market, competing with other government departments, the private sector and the international labour market to recruit and keep the best people. It is vital to develop our staff to meet existing and emerging needs and to help drive greater levels of agility and flexibility.

Planning for future workforce requirements is a strategic priority, particularly in those areas where we are experiencing shortages of specialists (such as tax technical, legal, information technology and human resources). Shortages in these areas and high turnover within the first two years of employment continue to threaten the department's ability to develop skills and experience in the workforce and to sustain capability.

While we compete with the private sector for people, we also actively recruit from private firms. Many of our people at all levels through the organisation have come from private sector roles; they bring highly valued perspectives to the organisation, helping us to understand our business taxpayers better.

Inland Revenue must have the best possible recruitment procedures. Recently, the department established a centralised recruitment function for National Office recruitment and appointed a number of preferred supplier agreements among recruitment agencies. We are about to begin a national review of all the department's recruitment procedures, with the intention of implementing an effective future recruitment model across the organisation.

The department also needs to provide strong leadership to maximise the potential and performance of our people, particularly in times of transition and change, and to achieve the behavioural change required to support our evolving operating environment.

Maintaining public confidence in the tax administration

Maintaining public confidence in Inland Revenue is critical. One of the more important underlying principles of the tax system is voluntary compliance. People more willingly comply with their tax obligations and ensure they are receiving the correct entitlements if we make it easy for them to do so and they know there will be consequences if they break the law. At the core of that model is public trust in Inland Revenue as an organisation that is efficient, effective and committed to acting always with integrity.

Inland Revenue has two core documents that seek to uphold trust and integrity. The Inland Revenue Charter - refreshed in 2008 - gives people strong commitments about how we will deal with them, and what they can do if they do not believe they are getting excellent service. Internally, the Code of Conduct, which all staff members must read and sign up to, commits all Inland Revenue people to clear and readily understood standards of integrity. There are strong disciplinary procedures in place, including dismissal, for breaches of the Code of Conduct.

In the most recent community perception research, conducted in May 2008, the department found that a majority of people were either confident or very confident that Inland Revenue does a good job (63 percent of the general public, 68 percent of small business taxpayers and 61 percent of large business taxpayers). In another indication of confidence in the tax system, more than 90 percent agree with the statements "paying tax is the right thing to do" and "by paying tax you are contributing to New Zealand society".

The department also measures satisfaction levels among people who have had recent contacts with us. In the September quarter 2008, the overall satisfaction rating achieved was 81 percent. This was up from 78 percent a year earlier. For coming years, we are developing our survey approach to give us more detailed information about New Zealanders' perceptions, in line with the State Services Commission's recently launched Kiwis Count survey, which measures people's overall satisfaction levels across many government services.

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¹⁵ OECD, Centre for Tax Policy and Administration, Tax Administration in OECD and Selected Non-OECD Countries, Comparative Information Series (2006), February 2007, pp. 110-111. Note: these figures will be updated in an OECD report planned for release in December 2008.

¹⁶ These risks include unsustainable increases in operating costs, a reduced ability to respond appropriately to government initiatives or to environmental changes, a potential for decreased service performance and levels of voluntary compliance, and the failure to collect or disburse revenue.

 

 

 

Date published: 30 Jan 2009

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