The great tax con

In previous weeks we have considered the fairness of our tax system, and with the recently passed legislation to write off taxes owing before January 1, 2010, why the integrity of our tax system fails. We then considered the legislation around late-payment penalties (additional tax), the write off of amounts deemed irrecoverable by the Collector, and the policies that the Revenue Management Division (RMD) have adopted over the years in relation to the reduction of additional tax. The ‘fresh start’ incentive and more recently the June 2017 tax amnesty were detailed. The comment has been made to me that it is a strange time when an accountant is batting for RMD. Strange times indeed! Even stranger times when Parliament passes legislation to legalise both tax evasion and tax theft! Taxpayers who have failed to file and those who have resisted paying (both being tax evasion), have been rewarded by the recent legislation. Those that have deducted PAYE from their workers (which is money held in trust to be paid to RMD on behalf of the workers) don’t have to pay it anymore, if taken from their workers before January 1, 2010 (that’s commonly called theft). The reasons (excuses) given by the government for the latest tax writeoff have been varied. Firstly, they wanted the tax liabilities off the Crown’s books. Then good taxpayers shouldn’t complain because they have enjoyed the recent good economic times, they said it was irrecoverable anyway, then it was to increase efficiencies as it was too time-consuming to follow up, then most was additional tax ($14m) so core tax was a small amount (only $5m), then the opposition didn’t care in helping people, and lately it included government departments owing. As everyone knows, if reasons for actions are changed, inconsistent or illogical, the truth is not being told. Few people are fooled by such excuses. Let us briefly consider each of these excuses. Firstly, to get rid of liabilities off the Crown’s book. Clearly wrong – receivables to anyone are assets not liabilities, so tax owed to the Crown is an asset to the government. Who wants to reduce their assets? Yes, the good compliant taxpayers have enjoyed the recent good economic times. But this is also due to their own investment in time and money. But the taxpayers that haven’t filed and haven’t paid have also benefitted from the recent good economic times. And still they haven’t bothered to pay their taxes. Next, it was irrecoverable debt. This is a real con. It appears the Chamber of Commerce has been fooled by this excuse. As noted in an earlier article, the Collector does write off any unpaid tax that is considered irrecoverable (pursuant to section 191 of the Income Tax Act 1997). The government should know, and the public needs to know, that the Collector regularly meets with senior management at RMD, reviews progress on tax arrears, and if there are valid reasons to do so, will write off any core tax. Nevertheless, it is important for RMD to have a long memory when it comes to tax arrears. For example, just because someone leaves the Cook Islands, their tax debt will not necessarily be written off straight away. Have no doubt – there are large amounts of tax dating from pre-2010 that were collectable. These debts were not too time-consuming to collect. With the June 2017 amnesty a number of these core tax debts would have been paid. It is well-recognised by governments that each dollar spent on resources in a tax department is returned many times over. Additional resources were needed, not a tax writeoff. Not only is the core tax paid, other taxpayers are dissuaded from getting into arrears. A few cases to the High Court sends a strong message to tax evaders. Then the excuse that most of the $19m was additional tax, so we should not worry about a “mere” $5m on core tax. This is quite illogical. Firstly, under the June 2017 amnesty all additional tax (not just the pre-2010 portion) would have been reversed. Secondly, $5m is a substantial sum that could have been put to good use. And thirdly, the figures quoted are only those known by RMD. There were still pre-2010 returns to be filed, and under the June amnesty these would have been filed, and the associated tax paid. When the opposition opposed the recent legislation in parliament, the reported government response was that the opposition didn’t care that people were leaving for overseas. The opposition “don’t care about those people”. That is an admission that some tax was collectable and that some people were going to benefit. But really, how many people do you know that have left the Cook Islands saying it was because the RMD was chasing them for their tax arrears? People leave for a number of reasons, but primarily because the cost of living is too high. Lowering the personal tax rates to benefit everyone would have been far better than benefitting a favoured few. The comment that government departments also owe tax is a poor reflection on those departments. While RMD chases the taxpayers in the private sector, what is done to make the negligent government departments comply? But wait, no, this week we are told they are up to date in paying, it was simply reconciliation errors. Seems like multi-choice here, and a mere smokescreen. Two facts are very clear. Most of the core tax was recoverable, and a few taxpayers are being let off massive amounts of core tax. There has been much comment in the media about why the core tax writeoff is wrong. Let’s consider a few major reasons. Firstly, it is a wrong against all employees. For all workers, salary and wages have PAYE deducted by their employer – no chance for a tax break there. Then they pay Value Added Tax (VAT) on almost all goods and services – power, telecom, food, petrol, etc. No tax breaks there. They pay 100 per cent of their tax. Next it is a wrong against all businesses that pay their taxes on time. By the 20th of each month they file their PAYE and VAT returns, and pay the tax. Income tax returns are filed regularly. Both provisional and terminal tax payments are made on time. No tax breaks here. They pay 100 per cent of their tax. Then it is a wrong against all the taxpayers that have made efforts to pay their arrears over the past few years. They have paid some additional and all their core tax. They have caught up with their obligations over the past few years. No writeoffs there. It is also a wrong against the government’s own employees, the RMD staff that have tried to get as many taxpayers compliant as possible. On February 6 I sent an email to the minister of finance and amongst other things said, “This (the writeoff of core tax) undermines years of work by RMD. What we need is strong tax administration, both now and going forward. Most of those with historical tax debts have ‘gamed the system’, and the public know this”. This week three senior employees have left RMD. More than 35 years of experience walked out the door. The timing is a coincidence? I think not. Finally, the tax writeoff is wrong as it rewards bad behaviour. Anyone who has any understanding of human behaviour, including most parents, will know that you will get more of the behaviour that you reward. Not only from the people rewarded, but also from the people that see the rewards. During the Global Financial Crisis, the term ‘moral hazard’ was coined. This was mainly in relation to the behaviour of the banks. The banks took risks, the owners pocketed the profits, but when things went pear-shaped, governments bailed them out. The ‘moral hazard’ was that by having governments save them, the banks were encouraged to continue to take risks. We have a similar situation here. Income tax is a percentage of profits. The taxpayers have made and pocketed the profit, and now the government has wiped out their associated tax. This sends a clear message to more than just the delinquent taxpayers. In a further email to the minister of finance dated February 7 I stated, “The writeoff benefits a few. A better response would have been to reduce the individual tax rates again, or increase the $11k exemption – that way everyone would have benefitted and, dare I say it, would have been politically smart. While many complain that market vendors, holiday homes and the construction industry are getting away with not paying, that pales into insignificance given the millions of dollars that are now being waived, of both assessed and yet to be assessed tax”. In closing, I recently mentioned to a senior government official that, given the obvious opposition to the write off of core tax, and being contrary to RMD’s advice, there must be significant political gains for the government to proceed with such legislation. The reply was, “or personal gain”. Indeed! - Mike Carr

In previous weeks we have considered the fairness of our tax system, and with the recently passed legislation to write off taxes owing before January 1, 2010, why the integrity of our tax system fails. We then considered the legislation around late-payment penalties (additional tax), the write off of amounts deemed irrecoverable by the Collector, and the policies that the Revenue Management Division (RMD) have adopted over the years in relation to the reduction of additional tax. The ‘fresh start’ incentive and more recently the June 2017 tax amnesty were detailed. The comment has been made to me that it is a strange time when an accountant is batting for RMD. Strange times indeed! Even stranger times when Parliament passes legislation to legalise both tax evasion and tax theft! Taxpayers who have failed to file and those who have resisted paying (both being tax evasion), have been rewarded by the recent legislation. Those that have deducted PAYE from their workers (which is money held in trust to be paid to RMD on behalf of the workers) don’t have to pay it anymore, if taken from their workers before January 1, 2010 (that’s commonly called theft). The reasons (excuses) given by the government for the latest tax writeoff have been varied. Firstly, they wanted the tax liabilities off the Crown’s books. Then good taxpayers shouldn’t complain because they have enjoyed the recent good economic times, they said it was irrecoverable anyway, then it was to increase efficiencies as it was too time-consuming to follow up, then most was additional tax ($14m) so core tax was a small amount (only $5m), then the opposition didn’t care in helping people, and lately it included government departments owing. As everyone knows, if reasons for actions are changed, inconsistent or illogical, the truth is not being told. Few people are fooled by such excuses. Let us briefly consider each of these excuses. Firstly, to get rid of liabilities off the Crown’s book. Clearly wrong – receivables to anyone are assets not liabilities, so tax owed to the Crown is an asset to the government. Who wants to reduce their assets? Yes, the good compliant taxpayers have enjoyed the recent good economic times. But this is also due to their own investment in time and money. But the taxpayers that haven’t filed and haven’t paid have also benefitted from the recent good economic times. And still they haven’t bothered to pay their taxes. Next, it was irrecoverable debt. This is a real con. It appears the Chamber of Commerce has been fooled by this excuse. As noted in an earlier article, the Collector does write off any unpaid tax that is considered irrecoverable (pursuant to section 191 of the Income Tax Act 1997). The government should know, and the public needs to know, that the Collector regularly meets with senior management at RMD, reviews progress on tax arrears, and if there are valid reasons to do so, will write off any core tax. Nevertheless, it is important for RMD to have a long memory when it comes to tax arrears. For example, just because someone leaves the Cook Islands, their tax debt will not necessarily be written off straight away. Have no doubt – there are large amounts of tax dating from pre-2010 that were collectable. These debts were not too time-consuming to collect. With the June 2017 amnesty a number of these core tax debts would have been paid. It is well-recognised by governments that each dollar spent on resources in a tax department is returned many times over. Additional resources were needed, not a tax writeoff. Not only is the core tax paid, other taxpayers are dissuaded from getting into arrears. A few cases to the High Court sends a strong message to tax evaders. Then the excuse that most of the $19m was additional tax, so we should not worry about a “mere” $5m on core tax. This is quite illogical. Firstly, under the June 2017 amnesty all additional tax (not just the pre-2010 portion) would have been reversed. Secondly, $5m is a substantial sum that could have been put to good use. And thirdly, the figures quoted are only those known by RMD. There were still pre-2010 returns to be filed, and under the June amnesty these would have been filed, and the associated tax paid. When the opposition opposed the recent legislation in parliament, the reported government response was that the opposition didn’t care that people were leaving for overseas. The opposition “don’t care about those people”. That is an admission that some tax was collectable and that some people were going to benefit. But really, how many people do you know that have left the Cook Islands saying it was because the RMD was chasing them for their tax arrears? People leave for a number of reasons, but primarily because the cost of living is too high. Lowering the personal tax rates to benefit everyone would have been far better than benefitting a favoured few. The comment that government departments also owe tax is a poor reflection on those departments. While RMD chases the taxpayers in the private sector, what is done to make the negligent government departments comply? But wait, no, this week we are told they are up to date in paying, it was simply reconciliation errors. Seems like multi-choice here, and a mere smokescreen. Two facts are very clear. Most of the core tax was recoverable, and a few taxpayers are being let off massive amounts of core tax. There has been much comment in the media about why the core tax writeoff is wrong. Let’s consider a few major reasons. Firstly, it is a wrong against all employees. For all workers, salary and wages have PAYE deducted by their employer – no chance for a tax break there. Then they pay Value Added Tax (VAT) on almost all goods and services – power, telecom, food, petrol, etc. No tax breaks there. They pay 100 per cent of their tax. Next it is a wrong against all businesses that pay their taxes on time. By the 20th of each month they file their PAYE and VAT returns, and pay the tax. Income tax returns are filed regularly. Both provisional and terminal tax payments are made on time. No tax breaks here. They pay 100 per cent of their tax. Then it is a wrong against all the taxpayers that have made efforts to pay their arrears over the past few years. They have paid some additional and all their core tax. They have caught up with their obligations over the past few years. No writeoffs there. It is also a wrong against the government’s own employees, the RMD staff that have tried to get as many taxpayers compliant as possible. On February 6 I sent an email to the minister of finance and amongst other things said, “This (the writeoff of core tax) undermines years of work by RMD. What we need is strong tax administration, both now and going forward. Most of those with historical tax debts have ‘gamed the system’, and the public know this”. This week three senior employees have left RMD. More than 35 years of experience walked out the door. The timing is a coincidence? I think not. Finally, the tax writeoff is wrong as it rewards bad behaviour. Anyone who has any understanding of human behaviour, including most parents, will know that you will get more of the behaviour that you reward. Not only from the people rewarded, but also from the people that see the rewards. During the Global Financial Crisis, the term ‘moral hazard’ was coined. This was mainly in relation to the behaviour of the banks. The banks took risks, the owners pocketed the profits, but when things went pear-shaped, governments bailed them out. The ‘moral hazard’ was that by having governments save them, the banks were encouraged to continue to take risks. We have a similar situation here. Income tax is a percentage of profits. The taxpayers have made and pocketed the profit, and now the government has wiped out their associated tax. This sends a clear message to more than just the delinquent taxpayers. In a further email to the minister of finance dated February 7 I stated, “The writeoff benefits a few. A better response would have been to reduce the individual tax rates again, or increase the $11k exemption – that way everyone would have benefitted and, dare I say it, would have been politically smart. While many complain that market vendors, holiday homes and the construction industry are getting away with not paying, that pales into insignificance given the millions of dollars that are now being waived, of both assessed and yet to be assessed tax”. In closing, I recently mentioned to a senior government official that, given the obvious opposition to the write off of core tax, and being contrary to RMD’s advice, there must be significant political gains for the government to proceed with such legislation. The reply was, “or personal gain”. Indeed! - Mike Carr