The web helps the taxman chase cheats

Deloitte managing tax partner Thomas Pippos says the IRD are using electronic payments and websites to pursue tax cheats

Budget-conscious tax collectors are increasingly turning to popular websites and other e-channels to chase undeclared taxable income, a top accountant says.

Inland Revenue Department no longer had capacity or interest in “Russian Roulette” tax investigations, Deloitte New Zealand chief executive Thomas Pippos said.

Instead IRD was trying to make the most of a growing body of electronic records, like Trade Me posts, to identify the most likely sources of unstated taxable income.

The department had administrative reasons for its actions, Pippos said.

Government was asking agencies to cut their operating costs but IRD had extra financial pressure as it introduced a costly new computer system.

“A lot of the resources of the department are focused on the computer systems (replacing them) which means there’s more pressure on the day-to-day compliance.”

It meant that while IRD had been “upping the game” with better use of people and technology, it was doing what it had to in a “world of limited resources”.

Working on social attitudes to tax also seemed to be reaping a return, Pippos said. New Zealand had high voluntary tax compliance by world standards but IRD was keen to ingrain that tax-paying culture, Pippos said.

IRD this week started an advertising campaign discouraging “cashies” in Auckland’s residential sub contracting market. Pippos said this was part of IRD’s “evolution” from an agency that randomly targeted offenders, to one that looked at high-risk areas for tax offending.

The electronic age was helping the cause. The department probably had fewer investigators than it used to but people were leaving IRD a growing number of digital footprints to follow, Pippos said.

“So, what the department is trying to do is use your information, where it can, to identify behaviour that it is not comfortable with.”

As a enforcement agency it was also trying to extend its reach overseas, with a focus on large global companies trying to shrink their New Zealand tax obligations.

IRD was particularly interested in multinational corporates using a method called Base Erosion and Profit Shifting (BEPS).

The BEPS treatment was not new in business but the general public had become more aware of it and tax authorities were acting on the feeling, Pippos said.

Governments and the Organisation for Economic Cooperation and Development (OECD) were acting more visibly to make sure multinational companies paid their fair share of the total tax take.

“New Zealand had always had extensive power to collect tax but they are now tightening up the mechanisms, focusing on either corporations or high net-worth individuals,” Pippos said.

IRD international revenue strategy manager John Nash said it was getting easier to audit tax records in an era of “big data”.

IRD also had good power – backed by the courts – to access information from third parties like banks.

“The more electronic it gets and the more machine-readable it is, the easier it gets for us,” Nash said.

Within New Zealand it had various analytical tools that could match EFTPOS and Paymark information, for instance.

The “perceived” gap in IRD systems was off-shore, but the agency was trying to plug these with the use of cross-country information sharing. Australia and New Zealand, “divvied” up the right to tax each other’s residents.

A Kiwi resident in Australia might find Australia taking withholding tax, in exchange for New Zealand giving that person a tax credit. It meant the tax-payer did not face a double-whammy.

IRD had also been striking information-sharing deals with “finance centres”, or tax havens, and had recently signed a global tax assistance treaty called the Multilateral Agreement. Up to 40 finance centres had made an information-sharing promise, Nash said.

Overall IRD was getting greater voluntary tax compliance from New Zealanders, he said.

“It’s something that flows from having a natural deterrent to not reporting. It’s people knowing that the financial information is being analysed in far more depth, and with far more expertise, if you like.”