The government plans to name and shame corporates
Is greater corporate tax transparency on the way for New Zealand corporates?
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.
Publishing tax information shifts the playing field
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.
Last week the Minister of Revenue 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.
Will ‘town square’ public humiliation backfire?
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.