IRD pushes into data matching to tackle black economy

This article was current at the time of publication.

The IRD will have considerably extended powers of data matching from 1 April, 2023 following the enactment of the Tax Administration (Regular Collection of Bulk Data) Regulations 2022.

According to the legislation, the new regulations, “enable the department to ensure business taxpayers comply with their obligations by identifying those who may not be paying the correct amount of tax”.

They require payment services providers (PSPs) – defined as “a business that participates in a payment system by facilitating payments” – to report six-monthly aggregate monthly merchant transactions.

Banks and other PSPs – including “online payment gateways” – will be required to provide “all or any” of a list of information types about a merchant on behalf of whom the PSP processes payments.

These include the merchant’s legal and trading names and contact information and, if held, the merchant’s IRD number, GST number, NZBN and Companies Office Information number.

The IRD has previously had the power to collect this information on an “ad hoc” basis, by issuing the PSP with a request under s17B of the Tax Administration Act.

However, the IRD said this was “a resource-intensive way” to collect required datasets. They will now have to be provided regularly by those notified by IRD that they are a PSP.

Similar regulations are in force in Australia.

Fighting tax evasion

Angus Ogilvie FCPA, CPA Australia’s New Zealand President, says the change was “quite a significant development. Tax evasion is never right, so it’s a sensible measure. IRD needs to use every resource it can.”

However, Ogilvie notes, “in an age where we capture most of our electronic transactions anyway via Xero or MYOB, maybe it’s a sledgehammer to crack a nut.

“I’m not sure that there’s a great pool of dollars that will be discovered by this exercise.”

Maintain vigilance

Ogilvie says practitioners will need to ensure their clients are aware of the vast amounts of data that will be caught.

The payment information PSPs will be required to provide about each merchant must show, for each month in the relevant six-month period:

• The total value of all payment processed
• The total value of all payments processed in each “transaction category,” including the categories debits, credits, cash-outs, reversals, and refunds
• The total number of all payments processed
• The total number of all payments processed in each transaction category

A return to the cash economy?

Ogilvie believes the change would create incentives for some businesses – “if they’re determined to defraud the IRD” – to conduct cash transactions.

IRD had had a strong focus on the cash economy for at least a decade and had identified various industries as problematic – for example, construction supplies and other forms of retail in which cash is one of the predominant ways in which participants conduct business.

Ogilvie notes: “If IRD can pull data from all the banks, the obvious foil is not to put transactions through the banking system at all.

“It’s almost a Newtonian ‘equal and opposite reaction,’ but I’d be surprised if IRD hasn’t considered that.”

The change would have some value as a psychological exercise, buttressing tax compliance by heightening fear of detection.

But the “enormous” quantities of data gathered might also allow IRD, through data analysis, to construct benchmark ranges for “normal” transaction numbers and values within an industry or sector.

“Then they can look at those who fall outside it.”

The New Zealand Banker’s Association in its 2021 consultation submission, supported the move from ad hoc to regular collection, noting that the regulation “has the potential to enhance transparency and efficiency in the data collection process, which will enable our members to reflect these data collection practices more accurately in terms and conditions for customers”.

This contrasted with the argument from other PSPs, detailed in a Cabinet Paper, that IRD’s original proposal to publicise the names of PSPs reporting under the new regime “could potentially create ‘unfair market competition’ by international payment providers not captured by New Zealand rules.

IRD will not publicise PSP’s names.

Another win in the consultation phase was the dropping of an IRD proposal that PSPs be required to supply data only for merchants with annual revenue of less than $30 million.

Submitters argued the proposal – intended to limit compliance costs – would have the opposite effect.

PSPs have one month and seven days to report their datasets to the Commissioner and the first dataset will be available to IRD on 7 November 2023.