18 May, 2010

Government ignores systemic tax crime

John Key’s Government is ignoring systemic income tax evasion choosing to reward tax avoidance rather than enforce tax law, the Green Party said today.

Papers released under the Official Information Act show that there has been no correspondence between IRD and the Ministers of Revenue and Finance to deal with the high levels of income tax avoidance reported by the Tax Working Group through the use of trust and company vehicles.

“Instead of enforcing current tax law, the Government plans to actually reward tax evasion by reducing top levels of income tax,” said Green Party Co-leader, Dr Russel Norman.

“I have news for John Key: Wealthy people who exploit tax loopholes to avoid paying tax at a fair rate will try to avoid paying tax at any rate. The best way to control tax avoidance is to police it, but this is a route this Government is not interested in taking.”

Staffing and budget trends at the Inland Revenue Department’s Assurance & Litigation units — the unit responsible for policing tax law — have actually been in decline. As of January 2010, 1,549 staff worked in the Assurance & Litigation unit, down by 102 full-time equivalents from June 30, 2008. Its budget has remained virtually unchanged since 2005. The number of Small & Medium Enterprise audits has fallen dramatically from 44,484 audits in 2000 to 12,707 in 2009.

“Enforcing tax law is one of the best ways to ensure the tax system is fair and resilient. If there is systematic avoidance, the Government is forced to raise additional taxes to make up for the shortfall, like GST, and cut essential services like health and education spending,” said Dr Norman.

“IRD estimates that for every $100 million spent on tax enforcement, an additional $500 million will be raised in Government revenues. Recent enforcement led the IRD to uncover an additional $1.6 billion in lost revenues from the major trading banks ANZ National, Westpac, ASB, and BNZ.

“Aligning top levels of income tax with the company or trust rates this Budget will send the perverse message that, if you're wealthy and avoiding tax, we'll reward you by reducing your tax.

“National plans to get tough on crime but is happy to turn their back on the crime of tax evasion,” said Dr Norman.

Background on the Official Information Act (OIA) Request
The Green Party lodged an OIA request in April this year asking for all correspondence from the IRD to the Minister of Revenue, the Minister of Finance, and the Tax Working Group to do with tax minimisation, income shelters, tax avoidance, income diversion — any kind of behaviour to reduce tax or increase benefit entitlement.

The extensive request asked for all material dating from January 1, 2009. The only work currently being undertaken by the Government on tax avoidance deals with property developers avoiding GST ($50M/year), scrap metal dealers and souvenir retailers using cash payments to lower their tax liabilities ($15M/year and $10M/year respectively), and contractors in the horticulture industry.

Copies of the response are available on request.

IRD revenue estimates of returns given greater investment in compliance:
http://www.victoria.ac.nz/sacl/cagtr/twg/Publications/3-tax-administration-changes-ird.pdf

Use of companies and trusts for tax avoidance is illegal:
Income tax law currently uses an objective test to determine whether a tax avoidance scheme is in place. If trusts or companies are being used with a dominant purpose of avoiding tax, under Section BG1 of the Income Tax Act they can be overturned by the IRD and deemed to be tax avoidance schemes.

ENDS

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