Thomas Pippos: Get tougher on chasing anti social tax dodgers

Under-the-table deals entail stealing from those who pay their fair share. Photo / Getty Images

Last summer I wrote about the growing concern over the level of tax paid by multinational corporations, an issue exacerbated by the global reach of businesses and their ability to operate in a virtual world.

It is a debate that is continuing with the OECD's "base erosion and profit-shifting" initiative, which is the centrepiece of global work on this topic.

But that was Christmas past; now to a more systemic issue that has existed from the first introduction of tax regimes, the so-called hidden economy.

It is also referred to as the "shadow economy" or "black economy", and it is hard to pinpoint the exact size of economic activity taking place outside the tax system.

Estimates vary but are anywhere from $10 billion to $20 billion in New Zealand, accounting for significant lost tax revenue.

Putting this into context, the amount of lost tax revenue from "under-the-table" activity is likely to be roughly the same size as the 2013 Government deficit, more than the proceeds of the asset sales programme, and significantly more than any revenue that could be generated by a capital gains tax on property.

An extra $200 million was allocated to Inland Revenue in the 2010 and 1012 Budgets to strengthen their compliance activities.

Inland Revenue estimates it is achieving a return of $6 for every extra dollar spent. But this is a drop in the bucket compared to the total size of the likely revenue leakage, and begs the question of what more can be done and whether, with such a return, more should be spent.

It has been suggested that the "cash job" is ingrained in the Kiwi culture, but surely that is more something from the past when tax rates were set at prohibitive levels. Now, it is no more than greed that, in the extreme, rips through the fabric of society.

There is impassioned global debate over how much tax multinationals are paying or whether there should be a capital gains tax on property - in nearly all cases issues that arise from Governments having allowed, and sometimes encouraged, taxpayers to structure their affairs to fall within their ambit.

But the same public interest, let alone venom, is largely absent in respect of the revenue lost through the hidden economy. Unjustifiably so given the magnitude involved and the context - an unequivocal total disregard of legal obligations.

This is not about a regulatory arbitrage - using a company and paying tax at 28 per cent or using a trust and paying tax at 33 per cent, for example.

There is no grey area here; those who evade tax are stealing money from those who pay their fair share.

Inland Revenue has publicised several tax evasion prosecutions, collected tens of millions from hidden economy initiatives, undertaken some targeted education campaigns, experimented with amnesty and started to publish benchmark data for different industries. It is difficult to judge whether the message is getting through.

It is also hard to see how one could ever over-invest in this area, or how anyone could complain if it were an area of even more zealous focus, as the gains could materially shift the dial without affecting those who already pay their share.

This may be worth reflecting on next time someone offers you a discount for an under-the-table transaction.

Thomas Pippos is chief executive of Deloitte New Zealand.

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