EY's Tori Sullivan argues introducing the modern equivalents of a town crier and the stocks so the public can throw rotten fruit at some corporate taxpayers isn't the way to improve our tax system

By Tori Sullivan*

In a move that further erodes the once-sacrosanct relationship of secrecy between a taxpayer and the IRD, the government is proposing to allow the IRD to “name and shame” a small group of large corporate taxpayers by disclosing and publishing their tax affairs. 

This follows a move by the Australian Tax Office (ATO) in December last year to publish a Corporate Tax Transparency Report, disclosing the tax affairs of more than 1,500 large, mostly multinational taxpayers with a turnover of more than A$100 million. 

The information included the taxpayer’s name, total turnover, net or taxable profit and its total tax payments in Australia. 

The ATO justified its approach by saying it would discourage large corporates from engaging in aggressive tax avoidance practices and provide more information for a public debate about tax policy, particularly around corporate responsibility within the tax system. 

Disclosure of this information by the Australian media forced several well-known companies to publicly explain their comparatively low tax payments or risk reputational damage. The lack of response or explanation from some taxpayers was, according to some media, “proof” of their guilt. The experience showed the prevailing mood of the public was strongly opposed to large taxpayers perceived as not paying their “fair share” of tax. 

Here in New Zealand, our tax systems is founded on the basic understanding between a citizen and the government that we accurately report and properly pay our tax assessments and, in return, the information we give IRD is not used against us for other purposes. 

Twenty years ago, this was affirmed in the leading case of ER Squibb Ltd v CIR where the Court of Appeal said the disclosure of taxpayer information was not permitted in any but the most exceptional circumstances. 

Explaining its reasoning, the court said: “….the tax system rests on the assurance provided by stringent official secrecy provisions that the tax affairs of taxpayers are solely the concern of the Revenue and the taxpayers, and will not be used to embarrass or prejudice them.” Although taxpayers continue to perform their part of the bargain, they can no longer be certain their information will remain secret. 

In the past two decades, the flow of taxpayer information to IRD has grown from a trickle to a flood, with taxpayers filing ever-more- detailed returns. That information now flows in many directions with little protection for taxpayers around where it goes or how it will be used. 

For example, information held by IRD is routinely shared with overseas revenue authorities and is increasingly shared with other government departments under the new “whole of government” approach. This means information held by one agency can be disclosed to, and used by, a growing list of other agencies. A current IRD proposal authorises the disclosure of taxpayer information to external credit control agencies and possibly to the Registrar of Companies. 

In this atmosphere, it is not surprising that New Zealand may soon adopt a similar disclosure strategy to that of Australia.

The Minister of Revenue Michael Woodhouse recently criticised the “deafening silence” from large multinational taxpayers in response to media accusations that they have paid too little tax in New Zealand. So it seems naming and shaming will become the norm here as it has in other countries. 

But the IRD should be cautious before taking the drastic step of forcing public disclosure on a small group of high-profile taxpayers. Once named, careful explanations by taxpayers that they have fully complied with all existing tax laws, or how exactly a “fair share” should be calculated, are often overlooked. 

Equally there is no basis assuming a lack of tax paid globally means increased tax is due in New Zealand. On the contrary, as pointed out by the IRD’s John Nash in a NZ Herald article by Matt Nippert on 18 March 2016, the value-add- based global tax system means any increased tax will, in many cases, not be payable in New Zealand because it is at the end of the value chain. Instead it would be payable in other larger jurisdictions and, even then, only if the international tax rules are overhauled. 

Corporate multinationals have a duty to comply with the international tax rules but they also have a duty to their shareholders to maximise returns. 

Simply allowing the IRD to disclosure secret taxpayer information risks causing the very kind of “embarrassment or prejudice” that our tax system is supposed to prevent. Furthermore, it has a high likelihood of achieving nothing, if the aim is to get more tax revenues into New Zealand. New Zealand relies heavily on inbound investment, and the government should be cautious about making moves that may discourage that for little or no economic gain for the country. 

Our tax regime relies heavily on voluntary compliance by taxpayers. Introducing the modern equivalents of a town crier and the stocks so the public can throw rotten fruit at certain taxpayers cannot be the solution to improving our tax system.

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*Tori Sullivan is a director of EY Law Limited.

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30 Comments

50 years ago It was standard NZ practice for the IRD to publish annually in the NZ Herald, in detail, in small print, a full list of tax felons who had not paid their dues. It often covered 2 or 3 pages of names and amounts. That was before the multi-nationals came to town

Do they still do that? Or, have they stopped doing so? What changed?

Student loan defaulters too ?

Cockroaches will scurry, this is not, nor should it be, secret info. It is publicly available for those who can be bothered. The times when you could covertly enrich yourself by shady practices are passing. The all seeing data tools detect the inequities that pen and paper shrouded. Nobody cares for your crocodile tears.

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Wellington Network was acquired in April 2008 by Cheung Kong Infrastructure Holdings for $785 million, from listed network company Vector.

As a regulated utility, Wellington Network's returns are controlled by the Commerce Commission, so there was little scope for the new owner to make more money from it than Vector could.

At the time, CKI's managing director Kam Hing Lam said: "Upon completion of the transaction, Wellington Electricity Distribution Network Ltd will bring in immediate profit contribution to CKI."

Oddly enough, since CKI took it over Wellington Network has made nothing but losses.

Of course, those losses are not real and CKI did not pay $785m for a duffer.

Wellington Network is in fact highly profitable, with an earnings margin consistently around 30 per cent before interest and tax. What drags it into "loss" is interest on its huge debts.

Under CKI's ownership, Wellington Network's debt has consistently been around 80 per cent of its total assets. This contrasts with typical corporate behaviour since the financial crisis of 2008, whereby gearing is kept below 50 per cent and often 40 per cent.

Of the network's debt, around $300m was due to related parties at a premium interest rate. In 2012, for example, the related-party debt cost 12.5 per cent, compared to the commercial rate of 6.97 per cent.

In cash terms that worked out at $54m paid in related-party interest and $31m in bank interest.

The interest payments greatly exceeded Wellington Network's earnings before interest and tax, producing a loss - and a corresponding tax benefit - every year until 2013. In the last six years, the only tax expense recorded by Wellington Network was $2.2m in the year to December. On a cash basis, it appears that the business paid no actual tax at all. Read more

Thank you Stephen H. This dodge needs to be made public, and further need to be made illegal. Publicity is a good first step.
Initially I thought that Woodhouse had grown some balls. But alas, after reading his statement in full he is still speaking with a squeak.

Stephen has reported this on at least 3 occasions that can be recalled

What hasn't been considered is whether the transaction could be unwound in the light of recent revelations and the jailing in Hong Kong of one of the Kwok Brothers who was found guilty of profligate bribery from one of the companies part owned by Li-Ka Shing .. - is Cheung Kong Infrastructure now a fit and proper person - probably not
http://www.vancouversun.com/business/Mother+Hong+Kong+billionaire+Kwok+b...

Google it up - the links are all there - if you look for them

There is a precedent unfolding now with the OIO potentially withdrawing approval for the purchase of Onetai Station by two Argentinians

Perhaps what is needed in these cases is the corporate equivalent of the FIF tax, where you have to pay a tax on the "value" of your overseas assets.

Simplest would be either a financial transaction tax or a turnover tax

Whiteware maker Haier posts $57m loss - Company yet to report a profit since buying Fisher & Paykel.

Haier took over Fisher & Paykel in late 2012 but its reported results since then have the appearance of a financial disaster as the previously profitable business plunged into the red, burdened by heavy finance costs from related party loans. Read more

why are people surprised by this, it is common practice around the world by corporations, they called it tax minimization and has been going on for years.
the USA is hampered by it as their corporates park there profits offshore and wont bring them back.
apple is a classic billions parked offshore, create debt at home and do share buy backs so the share holders benefit.

Yes, indeed - But in December, the tech company's chief executive Tim Cook told 60 Minutes: 'Apple pays every tax dollar we owe. Read more

I guess Apple also gets the best democracy money can buy.

If Tim has been completely legal, we need to change what is legal. Where are you Mr Woodhouse?

There is a difference between a Public company and a private individual and it is reported that US corporates have over $2 trillion offshore so if the IRD are simply publishing information publicly available but not readily so for the ordinary person there is no breach of privacy but it does allow their taxpaying customers to decide if they wish to support a corporate were directors receive huge salaries and share incentives but the company contributes little to the source of their revenue base.

I don't see an issue for corporates dodging tax, doubly so for public companies. The only party interested in not having the public find out they pay little or no tax but make large profits are those engaged in tax avoidance.

Public and media outrage do have an effect. When one Australian owned brand was discriminating against kiwi products talk of a boycott spread across facebook. The brand started panicking and I think the Australian executives were told to shut up before they did irreversible damage. If the same is needed to make multi-national companies pay their tax then so be it.

This also removes the excuses that they are paying tax elsewhere. If every country joined in I'm sure criminal tax avoidance would be discovered. Given that why is this article focused on protecting potentially criminal activity?

These cases above point to a measure that perhaps the IRD and Government should consider implementing. Clearly these companies are buying successful operations and using their soundness as a basis to borrow money for use elsewhere, and then reporting a loss to avoid tax. The beneficiary of any such borrowing could be required to be identified and the manner and materiality (is that a real word?) of that benefit and then a judgement made as to whether that constitutes a tax deductible expense. Could do a lot to keep businesses in NZ.

Great idea then you can see what they give back to our communities........stuff all, they use our country and don't give anything back, exploit our labour and environments.................Absolutely this information should be made public

Foreign investment is an oxymoron. At every angle where we allow foreign money into NZ we lose. They don't invest to help us out in a symbiotic relationship. They invest because they see an opportunity.

I'm glad they don't invest to help us out. That sounds like something one does with a tin pot banana republic. In our modern and affluent society we should work out a win/win for both parties surely?

How many more boxes do we have to tick before 'tinpot' applies?

I think we are heading for tinpot. Its the foreign investment in tinpot third world countries that bleeds them dry.

I choked on my cornies when I got to the "modern and affluent " bit

From Wikipedia:

New Zealand is a developed country with a market economy. New Zealand is a World Bank high-income economy and ranks highly in international comparisons of national performance, such as health, education, economic freedom and quality of life.

It is a very strange world you guys live in indeed. The above is why house prices have shot up as well as the fact we are culturally British. It's pure gold really and hugely attractive to both Chinese and Indians.

win/win, that is what symbiotic means.

How many use Facebook on a daily basis? A well known Double Irish Cream...highly addictive apparently.

Naming and Shaming should be applied but should we not have some mechanism of accountabilty of government also besides elections as it happend every three year and in between with power become arrogent and may forget that they have been voted to serve the people and not to rule the people.

"Corporate multinationals have a duty to comply with the international tax rules but they also have a duty to their shareholders to maximise returns. "

They also have a moral duty to comply with the spirit of those tax laws. If they don't, then the rest of the tax payers, who can't afford the cost of clever (but legal) accounting maneuvers are left to fill the gap.

I suggest that we not only make the information on the companies public, but we also add the details of the accounting firms those companies used.

Absolutely, we must make everything transparent, no more hiding

Deflection.
Bit easier to 'name and shame' and point the finger at some big multi-nationals to take the heat away from our fledgling trust industry.

google, apple, facebook must be the biggest culprits. when is IRD going to grow some balls and take them to task? Thin market capitalisation, transfer pricing ... IRD should set up shop at there premises and be trolling through records. Going after the little guys which appears to be the current MO is a joke.

google, apple, facebook must be the biggest culprits. when is IRD going to grow some balls and take them to task? Thin market capitalisation, transfer pricing ... IRD should set up shop at there premises and be trolling through records. Going after the little guys which appears to be the current MO is a joke.