Briefing for the Incoming Minister of Revenue - 2008
The policy development process
Since 1994, tax policy has been developed in accordance with the Generic Tax Policy Process. The process was introduced to ensure better, more effective tax policy development through early consideration of key policy elements and trade-offs of proposals, such as their revenue impact, compliance and administrative costs, and economic and social objectives. Another key feature of the process is that it builds external consultation and feedback into the policy development process, providing opportunities for public comment at several stages.
The tax policy consultative process
In the years immediately preceding the introduction of the Generic Tax Policy Process, the public usually had its first look at proposed tax reforms when a bill introducing them was tabled in Parliament. Likewise, the opportunity to express views on proposed changes usually came only when the select committee considering the bill invited submissions, which was almost too late in the process if affected taxpayers did not agree with the general concept of a given reform.
Major tax initiatives are now subject to much greater public scrutiny at key stages in their development - from broad proposal through to post-implementation review. As a result, we now have more opportunity to develop workable options for reform by drawing upon information provided to us by the private sector early in the process.
Consultation throughout the policy process also contributes to greater transparency of policy-making, allowing the government to set out the policy objectives of proposals and the trade-offs it has made in developing them. Therefore it helps the public to understand the rationale behind government policy proposals. It also helps to ensure that when Ministers are making policy decisions they are fully informed of different views on their merits.
The consultative process cannot, of course, be used for changes that require immediate action to protect the revenue base. It would not be possible to move quickly and, at the same time, to engage in wide consultation on changes to close a recently identified loophole, for example, or to block a scheme that is losing the country hundreds of millions of dollars in revenue.
To judge from mainly anecdotal evidence, New Zealand's tax policy consultation process has an excellent reputation internationally. For example, the Australian Board of Taxation in its 2007 review of Australia's tax consultation system, which included a multi-country survey of how consultation is handled elsewhere, made extensive reference to New Zealand's consultative process. In the course of the review, representatives of the Board visited New Zealand to talk with officials and the private sector about our process, "as it was identified as a best practice model on several occasions" in its survey.
Within New Zealand, the Generic Tax Policy Process has been so accepted as the way to make tax policy that tax professionals and professional associations have come to expect it to be used, as a matter of course. Indeed, the Australian review cited as one of the main success factors in the operation of the New Zealand system, "a view shared by key officials and external stakeholders that they all need to contribute constructively in the best interests of the New Zealand tax system and economy. This leads to cooperation, assistance and frank dialogue both on parties' contribution to consultation and other processes."
Although consultation on tax policy can take several forms, the most common medium is the government discussion document. Its use has increased considerably over the last decade, with 13 consultation papers published in 2006 and 11 papers published in 2007, compared with four papers in 2000.4
The increasing opportunity for consulting on tax policy has resulted in growing numbers of individuals and organisations making submissions on proposed changes, whether they are set out in a discussion document or introduced in a taxation bill. The downside is that submissions are becoming increasingly technical and detailed, which in turn makes the process lengthier and requires greater policy, private sector and parliamentary resources.
Developing a new tax policy work programme
One of the first steps for the new government in relation to the Generic Tax Policy Process is to develop a three-year revenue strategy that is effectively linked with the government's economic strategy. The next stage is the development of a rolling tax policy work programme that gives effect to the revenue strategy. At present, the work programme covers an 18-month period.
Developing the work programme involves scoping broad policy proposals and prioritising and sequencing the development of initiatives. We also look at budgeted resource requirements, the time needed to develop, legislate for and implement initiatives, and modes of consultation and communication to be employed throughout the process.
This stage of the Generic Tax Policy Process culminates in a joint report by the Policy Advice Division of Inland Revenue and the Treasury to the Treasury Ministers and Minister of Revenue that suggests a policy work programme. Once approved, the work programme becomes a detailed tax policy agreement between the government and the two departments.
The work programme is generally made public, attracting strong interest from the tax and business communities, to whom it provides greater certainty and an understanding of the government's direction in tax policy.
As time passes and the work programme is updated and new policy initiatives are added to it, there is a risk that there will be more items on the programme than can be progressed during the 18-month period. It is therefore important that when items are added to the work programme, existing priorities are reviewed to ensure that the government's expectations across the work programme are met.
The work programme in recent years
The focus of the tax policy work programme over the last three years has been on tax reforms that reflected the government policy goals of increasing productivity and growth, making Zealand businesses more competitive internationally, and increasing personal savings and improving the way they are used. Work programme priorities over the last three years have included:
- Business Tax Review, which resulted in a reduction in the company tax rate from 33 percent to 30 percent, an associated reduction in the tax rate for certain savings vehicles, and introduction of the R&D tax credit.
- Review of New Zealand's international tax rules for outbound investment, to align them more closely with those of most other countries. The first stage of the review resulted in the proposed exemption from domestic tax of the active income of controlled foreign companies, which was the central feature of the taxation bill that was before Parliament when it rose for the general election.
- Measures to reduce tax-related compliance costs for businesses.
- Tax changes intended to make it easier for people to save for retirement and to remove any bias against saving through collective investment vehicles, which resulted in new tax rules on offshore portfolio share investments, the advent of PIEs - or portfolio investment entities, and the introduction of KiwiSaver.
- The personal tax cuts and complementary changes to Working for Families tax credits announced in Budget 2008.
- Tax changes to promote charitable donations, which included the removal of tax rebate limits on charitable donations by individuals and the deduction limit on donations by companies and Maori authorities.
- Modernising tax rules, which included completion of the 15-year rewrite of income tax law.
- Maintaining and negotiating double tax agreements with other tax jurisdictions.
The development of a new work programme will be a top priority for both Ministers and officials.
Setting priorities
The work programme must balance the resource requirements of the Minister of Revenue's main tax policy initiatives against those required for initiatives introduced by other Ministers - for example, in the areas of social policy or sector assistance - which can have substantial tax implications. It must also allow room to meet private sector concerns when tax legislation is identified as causing unintended practical problems. Finally, there is an increasing demand for tax policy resources to be allocated to international tax areas such as OECD work and trans-Tasman tax matters, a reflection of the increasing extent to which New Zealand must take into account international tax trends in setting its domestic rules.
Given the many areas of government policy that have tax implications, the complexity of tax issues and the finite resources available to deal with them, it is essential for Ministers to discuss and set out their tax policy priorities. Since many areas of government raise important tax policy issues, the allocation of tax policy resources is likely to affect the government's ability to use tax to pursue non-tax policy objectives, especially in economic development and social policy. It is therefore desirable for Ministers in those areas to be clear about the implications for the tax policy work programme of policy developments in their portfolios.
Budgetary fiscal rules
The tax policy work programme can also be affected in very important ways by any budgetary fiscal rules the government decides to adopt.
In setting fiscal rules, it is essential to ensure that fiscal discipline on expenditure applies in an equal way to initiatives that would reduce tax revenue - otherwise there is an incentive for expenditure initiatives to be packaged as tax initiatives.
That said, unless governments want to increase tax collections over time, it is important not to focus solely on the size of the government deficit or surplus. If reducing the size of the deficit or increasing the surplus is seen as "good", there is a danger of tax reductions being seen as inherently bad and tax increases being seen as inherently good. But of course there are two ways of closing a deficit or increasing a surplus: either by increasing taxes or by cutting back on government spending. As well as making judgements about the size of the government deficit, governments need to make decisions about whether they want to see taxes and government spending rise or fall over time, and these decisions should be incorporated into the budgetary fiscal rules.
The tax policy implications of any fiscal rule proposals, therefore, must be considered before such rules are adopted.
The legislative programme
The Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which was introduced in July 2008, lapsed with the dissolution of Parliament on 3 October, in anticipation of the general election. Reforms proposed in the omnibus bill included:
- reform of New Zealand's international tax rules;
- raising a number of tax thresholds to reduce compliance costs for smaller businesses;
- clarifying the law to ensure employer payments for relocation and overtime meal allowances are tax-free;
- reform of the taxation of the life insurance business;
- introduction of a voluntary payroll-giving system for charitable donations;
- updating the petroleum mining tax rules;
- strengthening the definitions of "associated persons" in income tax law; and
- most of the necessary taxation rules to support emissions trading.
Ministers will need to consider its reinstatement when the new Parliament convenes.
Date published: 30 Jan 2009
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