Gordon Campbell on yesterday’s IRD victory against tax avoidance
by Gordon Campbell
The double standard on how we treat tax avoidance (leniently) as opposed to how we treat welfare fraud (very harshly)
came under the spotlight again yesterday. The good news is that our courts seem to be cracking down on the tax avoidance
problem, and are closing a few of the more glaring loopholes. The Court of Appeal finding in favour of Inland Revenue on
the Aleseco tax avoidance case is a genuine cause to celebrate. Basically, here’s how the tax avoidance deal worked:
Inland Revenue won the case against Aleseco of Australia in the High Court in 2011, arguing that the kitchenware
supplier avoided tax by using a form of interest-free loan from its parent in the early 2000s, called optional
convertible notes. The notes were a common cross-border way to convert debt to equity and minimise tax. The High Court
ordered Alesco to pay $8.6 million in tax and penalties.
The Court of Appeal has supported the High Court's view, saying the only reason Alesco advanced $78 million to its New
Zealand unit interest-free for 10 years under the convertible notes was to avoid tax by claiming expense deductions for
interest payments that did not occur.
Other firms with foreign parents have been using the same ruse, including Telstra, MediaWorks and Qantas. Yet another
way in which the transformation of our economy into the branch office of a set of offshore firms is causing this country
grief. It is not simply that the bulk of the profits are being repatriated offshore. Clearly, these parent/subsidiary
relationships have also exposed us to tax avoidance scams as well, which have raided our revenue base and fuelled the
austerity cuts in jobs and services felt by ordinary New Zealanders. One of the really interesting features of this
situation is the scale of it:
The tax department estimates more than $300 million in tax and penalties is at stake.
OK, now compare that to the alleged scale of welfare fraud, which according to Victoria University research by Dr Lisa Marriott last year, is costing us $39 million a year – or about one seventh of the estimated revenue loss caused by this one version of tax avoidance alone.
Last year, tax evaders cheated the country of between $1 and $6 billion, while welfare fraud cost $39 million. “The
problem of tax evasion is at best case scenario 25 to 50 times the financial amount of welfare fraud, and at worst case
scenario potentially 100 to 150 times the amount,” says Dr Marriott.
The problem is not simply that the amount being lost – and subsequent damage done to our ability to fund public services
– is far, far greater from tax avoidance. For a bizarre set of reasons, tax avoidance by relatively affluent white
collar tax specialists doesn’t seem to carry anything like the same social stigma as when poor people cheat on welfare -
even though the behaviours are immoral in both cases. Tax evasion is not giving government the money one rightfully
owes, while welfare fraud is taking money from government to which one is not entitled. Anecdotally, one could theorise
that tax avoidance is less likely to be driven by primal needs for food and shelter than in many instances of welfare
fraud. Yet for some reason, the courts are usually far tougher on those who cheat on welfare than those who fiddle their
tax obligations. As Marriott says:
“For tax evaders, the average offending is about four times as much, but have about a third of the likelihood of
receiving a custodial sentence.”
The numbers tell the story. For tax evaders, the average offending is $270,000, and those found guilty have only a 22
percent, or one-in-five chance, of being jailed. For welfare fraudsters, the average offending is $70,000, and those
found guilty have a 60 percent chance of being jailed.
Presumably, this crackdown on welfare fraud is meant to deter les autres. Belatedly, the courts now seem to be grasping the notion that it is important to deter tax avoidance as well – given
that this kind of activity does more damage to the economy, compromises the ability of government to deliver adequate
social services, and feeds public cynicism. Bet your bottom dollar…if it was welfare recipients who had devised a
complex ruse to deny circa $300 million of what was legitimately owed to New Zealand, it would be front page news.
Talkback radio would be running red hot. So far though, this story has been largely confined to the business press on
RNZ and elsewhere, amidst the usual whining that this time IRD and the courts have gone too far – and that this legal
ruling in favour of IRD will deter foreign investment. To which most of us would reply “Great!” Because we need this
kind of foreign investment like we need a hole in the head.
Thankfully, RNZ located tax consultant Grant Macalister of the WHK business services, who shot down the “This will deter
foreign investment” argument, and his comments are included in this RNZ podcast, which is pretty essential listening.
What the courts are beginning to do – in accord with guidelines laid down by the Supreme Court – is create a climate
that will limit the ability of foreign firms to rip New Zealand off with the impunity of yore. What we now have to
ensure is that the current government doesn’t change the tax laws back again, in order to frustrate the courts and
restore business as usual - under the guise, say, of “clarifying the will of Parliament in these matters.”
ENDS