Over the weekend the Inland Revenue Department praised a decision made by the Australian Tax Office (ATO), the UK HM Revenue and Customs (HMRC), and the US Internal Revenue Service (IRS) to share leaked data regarding taxpayers using entities registered in tax havens in order to evade their tax obligations.

The group manager of compliance planning and development at the IRD Raju Budhia explained that the Department would soon begin working in close cooperation with the ATO in order to obtain information on any New Zealanders which have used offshore structures to evade their tax obligations in New Zealand.

The data jointly held by the ATO, IRS and HMRC contains over 400 Gb of files and information on taxpayers around the world who have used entities registered in tax havens as part of their corporate structures.

The IRD’s investigations into the information will not only revolve around the individuals who are actively using offshore structures to skip out on their taxes, but also on the providers and specialists who offer their services to help taxpayers to evade their obligations.

The IRD expects that the intitial investigations into the tax affairs of taxpayers mentioned in the dataset will begin within the next few months, and Raju Budhia issued a warning to taxpayers to come forward and disclose their evasion now “before we come knocking on your door.”

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On May 8th the IRD released a new issues paper calling for public opinion on the treatment of GST for bodies corporate.

According to the IRD, a body corporate “makes supplies of services to owners of a unit title”, and discussions are now being held on whether body corporates carry out taxable activity and whether such entities qualify as body corporates may register for GST.

Explaining the purpose of the issues paper, the chief tax counsel of the IRD Martin Smith said that “…the paper sets out an initial interpretative position for consideration and also raises some alternative views. It invites submissions from interested parties on both the legal position and the appropriate policy outcome.”

The sets out the IRD’s initial assumption that body corporates do carry out taxable activity and should be liable to register for GST if their activity exceeds NZD 60 000 per annum.

The deadline for submissions on issues raised in the paper are due in June 2013.

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On May 6th the Treasury of New Zealand released the Financial Statements of the Government of New Zealand for March 2013 and the Tax Outrun Data for March 2013, showing the taxes collected over the last nine months.

According to the Statements, the unconsolidated tax revenues for the nine months ending March 2013 reached NZD 937 million, approximately 2 percent above the government’s forecast detailed in the 2012 Half Year Economic and Fiscal Update, and nearly 6.3 percent higher than during the same period last year.

Commenting on the better than expected results, the Minister of Finance Bill English said ” …the financial statements show that continued spending restraint is important as we remain on track to surplus in 2014/15, as the Budget next week will confirm… ongoing spending control will allow the Government to build up sufficient surpluses to provide choices around repaying debt and investing more in priority public services.”

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On My 5th the Cabinet approved in principle a new project to redevelop and improve the IT system of the Inland Revenue Department.

According to the Minister, the project to upgrade the ageing system could cost as much as NZD 1.5 billion and may take up to ten years to complete.

The Minister explained that the computer system originally implemented by the IRD was originally designed to handle a simpler tax system, and, at the time, did not need to take into account student loans, child support payments, Kiwisaver or Working for Families, and while all the changes have been implemented into the current system, the IT infrastructure is stretched beyond its intended limits.

Over the next few months the IRD will release a proposal for the updated system, and will include details of the new system and a timeframe and estimated cost for the update.

Emphasising the importance of launching the upgrade, the Minister said that even since 2010 the IRD system has been “fully stretched” and “systems and processes were not able to sustain or improve tax collection or social policy disbursement”.

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In a press release issued in April 18th the Revenue Minister Peter Dunne has hit back against some recent criticism from members of the Labour Party, which claimed that the National Party is too soft on tax evaders and disproportionately harsh on welfare scammers.

The Minister claimed that over the last two years the Inland Revenue Department has successfully closed 1170 investigations into tax evasion, which has directly led to the recovery of more than NZD 200 million in previously unpaid taxes.

He reiterated his position by saying “…now if that is the Government being soft on tax evaders, I will eat my hat.”

Hitting back at the accusations from the Labour Party the Minister said that “…labour needs to start dealing in facts, and the Arderns and the Cunliffes need to rethink the rubbish they are spouting on tax and welfare.“

Explaining the government’s position in regards to tax evasion and welfare fraud, he said “…New Zealanders want fairness. They want beneficiaries to receive what they need when they need it, and they want people to pay their fair share of tax … [and] this Government is clearly making that happen on both fronts.”

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On March 20th the Treasury of New Zealand released the report of the Taxation of Savings and Investment Review, which investigated the potential repercussions of various changes to the tax system, finding that New Zealand would benefit the most from reductions to the rate of personal income taxes.

The conclusions in the report were based on whether changes to the tax system would increase the overall levels of savings and investment in New Zealand, and whether the change would reduce macroeconomic vulnerabilities of New Zealand or boost overall economic efficiency in the country.

The Review suggested that deceases to personal income taxes would provide the most benefits to New Zealand as it would have the greatest positive impact on encouraging New Zealanders to save or invest their money.

Further, drops in the rate of personal income taxes would also increase the labor supply in the country.

The Treasury indicated that decreases to the rate of corporate income taxes could also have a net positive effect on the New Zealand economy, but noted that a significant portion of the benefits from the tax cut might actually be shifted to foreign investors, thereby reducing the difference between boosted economy activity and the arising tax losses.

Another option which was considered was instating a dual income tax system, but this idea was deemed to be implemented on the current systems of the Inland Revenue Department.

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In a speech given late last week in Wellington the assistant governor of the Reserve Bank of New Zealand John McDermott explained the importance of economic forecasting for making decisions when setting the country’s monetary policies.

He said that there is no single “correct way to look at the economy”, and emphasized that the Reserve Bank analyzes data from several different sources when making a policy decision.

While describing the Bank’s forecasting procedures, John McDermott said that currently some of the most significant issues faced in New Zealand are the “…treatment of the persistently high exchange rate, high household debt and accounting for the substantial Canterbury rebuild.”

He went on to give an example, saying “…it may seem there is room to cut interest rates, given we are below our inflation target. But we have had to weigh up that such a cut would also probably exacerbate the current strength in house prices, resulting in higher debt levels and potentially raising financial stability issues.”

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In a press release issued on March 6th the Inland Revenue Department has reminded taxpayers “…who may have reduced their income tax obligations through an income diversion arrangement have until the end of this month to take advantage of Inland Revenue’s concession to make a voluntary disclosure.”

Under the terms of the current disclosure program, any taxpayers coming forward to willingly disclose information about their income diversion structure will only be required to reassess their incomes for two years during which they used such a structure.

Any taxpayers who choose not to take advantage of the disclosure program and come forward with information about their income diversion structure may be required to reassess four years of income instead of two.

The program is aimed primarily at taxpayers who reduced their tax liabilities using a “Penny and Hooper” style income diversion structure.

As at the end of February this year, the IRD has been contacted by 271 taxpayers to make a disclosure since the initial Penny and Cooper ruling in 2011.

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In a ruling by the Court of Appeals on March 5th the Inland Revenue Department won its case against Alesco New Zealand regarding claims that the businesses’ use of optional convertible notes was tantamount to excessive tax avoidance.

Explaining the position of the IRD, the director of litigation management at the Department said “…when Alesco New Zealand issued OCNs with zero percent interest coupons attached, to its parent company to fund the purchase of Biolab Limited and Robinson Industries Limited in 2003 and claimed a deduction for ‘interest’ expenditure, it acted outside the intended scope of financial arrangement rules and the relevant Inland Revenue Determination”.

The total amount of taxes owed and penalties payable from the dispute is equivalent to approximately NZD 8.6 billion.

The optional convertible notes under dispute are a form of financial instruments which have debt and equity components, allowing the holder to convert the debt they are owed into shares of the issuing company.

The decision of the Court of Appeals has already sparked heated debate amongst tax professionals, with some claiming that the ruling will reduce the number of foreign businesses coming to New Zealand, while supporters of the IRD claim that the decision further clarifies the line between legitimate and illegitimate tax structures.

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According to a new report published by the accounting firm Grant Thornton, owners of businesses in New Zealand are unlikely to shift their affairs overseas in order to reduce their tax obligations in New Zealand.

Approximately 94 percent of all New Zealand business owners participating in the survey claimed they would not move their business overseas in order to reduce their tax liabilities, while on average only 67 percent of business owners in other countries gave the same reply.

According to Murray Brewer, partner at Grant Thornton, said that New Zealand’s geographical isolation and the small size of an average New Zealand company were both deterrents from moving business overseas.

Further, he said that “…many New Zealand businesses are domestically focused and migration of head office is not commercially viable”.

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