Dunne Speaks – Panama Papers highlights unintended consequences

New Zealand’s tax system is generally well-regarded. In part that is because of our focus on a broad base, low rate approach to personal and corporate taxation, and in part it is because our system is relatively easy to comply with as a consequence.

While businesses can offset some of their expenses against their tax liabilities, and individuals can claim rebates for certain types of expenditures (such as charitable donations) to reduce their tax bills, as is customary tax practice in most countries, the opportunities for doing so have been reduced considerably over the last 30 years in a further effort to simplify the system. This has been despite the constant and continuing pressure on successive governments for tax breaks to encourage this or other business or community activity.

The concept of minimising tax liabilities is not new. For example, tall, windowless buildings are common in certain parts of old Dublin as a reminder of the way people in the 18th century sought to thwart the dreaded Window Tax, and the infamous Hearth Tax dealt to the fireplaces in many of the stately homes of England in the same period. Even the greatest tax revolt of all – the Boston Tea Party – was about minimising tax obligations and ensuring that where they were imposed, the taxpayers had effective opportunity for redress, hence the slogan, “No taxation without representation.” Taxing incomes is relatively new – New Zealand’s first Income Tax Act was passed in 1913, and it was not until after World War II that income tax became universal in the United States.

However, there are now clear signs that the comparative simplicity and transparency of the New Zealand tax system, under which we have basked for so long, may not be the advantage we once thought it was. Recent events like the global revelations about the tax paid by certain multinationals who are everywhere when it comes to their operations, but seemingly nowhere when it comes to their tax liabilities, and the release of the Panama Papers make it clear that New Zealand’s tax system with its emphasis on self-assessment, is being used in a way that was never intended to shelter various forms of international income. For the first time, we are having to confront the label of “tax haven”, and it is uncomfortable.

Now, the solutions to these issues are not easy, nor limited to any one country, and it would be the height of idiocy to believe that New Zealand can simply draw up its ramparts, and all the problems will go away. In a global environment, with capital flows occurring in the twinkling of an eye, it is just not that simple, and any politician who suggests otherwise is simply a liar. Any lasting solution has to be an international one, which it is why it is important we continue to work alongside the OECD and like-minded countries to achieve a viable outcome.

But that is not to say we are without steps we could take internally now, to complement the international discussions. We are justifiably proud of our network of Double Tax Agreements and Tax Information Exchange Agreements built up in the main since 2005, which give us the opportunity to share and obtain information with and from a range of countries to reduce opportunities for tax evasion. Maybe we need to apply the same disclosure principles within the New Zealand tax system, to give our tax authorities better information about who is investing money here and why, to ensure that all the relevant local tax laws are complied with fully. Our self-assessment system has generally worked well as far as local taxpayers go, but we may be a little naïve in assuming that large, foreign investors seeking a tax bolt-hole will be just as genuine in playing by our existing rules.

Tax is essentially the price we pay to belong to civil society. Implicit is the assumption that we pay our share, according to our means. In return, the state provides certain key services from which we all benefit: health, education and welfare services; public security and national defence, for example. Any perception that some are not paying their share, or worse, are actively subverting the system to their advantage, which may have nothing to do with New Zealand, other than we are a convenient shelter for income, starts to tear at that implicit national contract.

I still believe in the basis of our broad base, low rate tax system, with its relatively easy levels of compliance. Our challenge now is to ensure that in a rapidly changing set of international circumstances our ability to enforce our tax rules and ensure compliance; gather all the tax revenue properly due; and, ensure everyone pays their fair share, is not compromised. The Panama Papers’ disclosures are a sobering and timely wake-up call in that regard.

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