COVID-19 and tax: The implications for governance

There are COVID-19 support measures for businesses that involve the tax system or are administered by Inland Revenue.

Two cash-flow examples to illustrate this are the government allowing businesses to carry-back their tax losses to get refunds of past tax paid, while Inland Revenue administered the Small Business Cashflow Loan scheme to make additional funding available to SMEs. Even the now-expired wage subsidy had tax dimensions where Inland Revenue had to clarify the tax treatment for employers (non taxable on receipt) and employees (taxable, so subject to PAYE).

It is now trite to say that using different government COVID-19 measures (or not) may have reputational and governance consequences. Directors should not lose sight of these wider consequences.

There are several further tax changes expected which aim to help businesses that may need new capital, or require structural change, due to COVID-19.

If significant new capital is required in the business, resulting in new shareholders, tax losses may be extinguished. A “same or similar business” test has been announced to preserve those losses. A permanent tax loss carry back mechanism is also in the works. These may affect how companies look to raise new capital and/or adapt to new market opportunities.

One issue that COVID-19 has brought to the fore is the case of “stranded employees” – what happens if key employees, or especially directors, are stuck in New Zealand or other countries? This could end up creating or changing tax obligations for the company. While many countries, including New Zealand, introduced temporary COVID-19 concessions to remove the risk of unintended tax consequences, these are premised on border restrictions and the inability to travel. With such restrictions easing, the tax position may become more uncertain.

Election tax policy impacts

The Labour Party has formed the first MMP majority government so its election tax policies are worth a closer look.

Most of the attention has been on the proposed 39% marginal tax rate for individuals earning over $180,000. This will also have implications for companies. No change to the 28% company tax rate has been signalled (nor is a change to the 33% trust tax rate proposed).

An 11-percentage point difference in rates may look attractive, but we expect there to be a razor focus by Inland Revenue on ensuring that any tax arbitrage opportunities are minimised. While we expect most of the attention to be on privately owned companies there will be some implications for larger, including listed, companies.

Directors will need to consider dividend policies and how to manage shareholder expectations.

Directors should also keep an eye open for a possible Digital Services Tax (DST) for an impact on their business as a DST remains on the table.

Whilst ostensibly targeted at foreign multinationals’ New Zealand sales, this has much wider reach. The proposal may also apply to some large New Zealand companies and not just companies operating in the digital space. Potential application to local companies is necessary to ensure that New Zealand is not seen to be targeting foreign companies with what is effectively a tariff (as a DST applies to sales, rather than income). This in turn raises concerns around how other countries may react, in particular the United States, which has already threatened trade sanctions against France for introducing a DST.

The government’s preferred alternative is an OECD taxing solution that has wide global support. This, too, is not without risk. Consensus has not been, and may not ever be, reached on the question of how the global tax “pie” should be shared.

The downside risk is that New Zealand companies with a global reach may become easy targets under whatever solution emerges. Directors of exporting companies should pay close attention to where these international tax developments are heading.

Beyond these policies, wealth and capital gains taxes have been ruled out, as have further changes to income tax during this term of government.

Inland Revenue's approach and expectations

Inland Revenue has worked alongside business, as one of the lead government agencies involved in delivering financial support during the pandemic. As we’ve moved down the COVID-19 alert levels, a more business-as-usual focus has emerged from the tax authority.

Risk reviews and tax audits are returning. And with this comes questions about tax governance: Do you understand the tax risk profile of the company you are a director of, its tax strategy and importantly how management is executing this?

It may surprise some directors to find that Inland Revenue has published guidance on its expectations. This ranges from developing a tax risk control framework for larger companies (Inland Revenue’s definition of a large company, for enhanced review purposes, is one with turnover of at least NZ$30 million) to expectations that all directors will have, at a minimum, considered the following questions:

• Is there a documented tax strategy and has it been kept up to date?
• Have effective systems, procedures, and resources been put in place to manage tax risks and, if so, is a clear statement made in the annual report to that effect?
• Is annual reporting sufficiently transparent such that all stakeholders have the capacity to analyse and effectively interpret the information provided on taxes paid?

We are increasingly seeing a more sophisticated approach being taken by Inland Revenue. Its new IT and systems upgrade will add to the sources of information available to it to determine and benchmark the tax risk for different taxpayers.

While COVID-19 may have provided a temporary reprieve, with pressure on the government’s coffers, we expect Inland Revenue to have little sympathy for poor tax outcomes due to a lack of effective governance on tax matters.

Author:
Darshana Elwela - Tax Partner, KPMG

The article is featured in the December/January 2021 issue of Boardroom magazine