As the Panama Papers leak puts a global focus on disclosure, changes in New Zealand unveiled by Prime Minister John Key are a further sign that the tide is going out for tax secrecy, says EY tax expert David Snell.
As well as announcing proposals yesterday for small and medium-sized businesses to pay as they go rather than estimating lump sum payments, the Government is looking to provide Inland Revenue with new powers to share information about tax debts with credit rating agencies.
"Tax debt will be more transparent and creditors able to make better decision about trading with tax-indebted business," Snell said.
The new disclosure provisions will be used for just "the most serious cases of non-compliance", according to the Government issues paper.
The information could include debts relating to child support, student loans and employer KiwiSaver payments as well as income tax, GST and PAYE debts.
"The lack of visibility of tax debt can have significant impact on other businesses," the issues paper says.
Improved disclosure of debts would allow companies to make more informed decision about their dealings with other businesses.
"In addition, the non-payment of tax debt can allow non-compliant businesses to unfairly compete against those who are compliant."
Credit data bureau and collections agency Dun & Bradstreet indicated immediate support.
"Tax is essentially no different to any other form of credit risk," said chief executive Simon Bligh. "The IRD rightly considers that credit reporting agencies, given their experience in accessing credit information, and the strict governance rules they adhere to in handling this sensitive information, are the most appropriate channel to disclose tax debt."
But EY's Snell highlighted the privacy risks involved.
There was a "risk that Inland Revenue will get something wrong, potentially harming the affected business: its systems are not perfect and the threat to contact credit agencies must not be used in the event of a tax dispute or audit", he said.
A second disclosure provision announced yesterday would enable IRD to share information with the Companies Office to assist in tracking companies suspected of serious criminal offences.
This measure would have similar objectives to the IRD's information-sharing regime with police.
This proposal faced challenges as Inland Revenue was not an expert in company law, Snell said.
While he accepted IRD's argument that "habitual non-compliance with other government obligations was a predictor of tax non-compliance" he argued that it might not always be clear that the "reasonable suspicion" of an Inland Revenue officer would be the right standard for assessing whether tax information related to prosecutable offences under the Companies Act.
"If the taxpayer is unaware of disclosure until the Registrar of Companies proposes prosecution and criminal disclosure obligations, it may be difficult too for the taxpayer to challenge that release and/or successfully use Inland Revenue and Companies Office complaints processes."
Meanwhile, shares in Xero rose almost 3 per cent yesterday on news the pay-as-you-go system would be designed for use with cloud-based accounting software.
The proposed changes were widely applauded by tax experts and business groups.
• At the moment, businesses with a March 31 balance day make three provisional tax payments during the year in August, January and the following May.
• These installments are most commonly worked out using the "uplift method" (where tax is calculated based on a 5 per cent increase on the previous year's profits, divided into three payments).
If this estimate turns out to be incorrect businesses pay "use-of-money interest" at 9.2 per cent.
• The Government yesterday announced a pay-as-you-go method, where new accounting software will calculate a businesses' taxable income every two months.
• Use-of-money-interest will not apply to businesses who use the new method and pay tax on time.
• If business continue to use the uplift method, use-of-money-interest will only apply from the third instalment date, when businesses know how they performed for the year.
• Inland Revenue believes almost 67,000 individuals or businesses paying use-of-money interest will no longer be liable for it.
• Under these changes, contractors are allowed to elect their own withholding tax rate.
• This doesn't limit the total amount of tax they have to pay, but means they can elect when it is paid and help ensure they only pay what they are obligated to.