Hon PETER DUNNE (Minister of Revenue) : I move, That the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill be now read a first time. At the appropriate time I shall move that the bill be referred to the Finance and Expenditure Committee for consideration. This bill introduces a number of important business tax reforms that are variously aimed at helping New Zealand businesses compete internationally and at reducing business tax compliance costs. They complement each other and also other recently enacted reforms, such as the reduction of the company tax rate from 33 percent to 30 percent and the introduction of the new research and development tax credit, which was designed to encourage companies to invest more in research and development. The focus of other reforms in the bill is on updating tax law to align it with today’s commercial environment, ensuring the law works effectively and as it was intended to work, protecting the revenue base, and further strengthening New Zealand’s culture of charitable giving.

The central feature of the bill is the proposed reform of New Zealand’s international tax rules to help New Zealand-based companies compete more effectively overseas. In my view this is one of the most important tax reforms to come before this House, because what is being proposed is a complete change of direction in the way we tax the offshore income of our controlled foreign companies—by which is meant foreign companies that are controlled by New Zealand residents. At present we tax all the offshore income of these companies, with the exception of income from operations in the so-called grey list of eight countries that our law at present singles out as having tax systems comparable to our own. In that respect we are completely out of step with what happens in much of the rest of the world. Many other countries, including our main trading partners, distinguish between passive income—such as that from interest, dividends, rent, and royalties—and active income, such as income from manufacturing, and exempt the latter from tax. Therefore, the fact that our controlled foreign companies are taxed in New Zealand on their active income puts them at a competitive disadvantage internationally.

The cornerstone of the proposed reform of our international tax rules is to exempt from domestic income tax the active income of controlled foreign companies of New Zealand resident businesses. That is intended to encourage businesses with international operations to remain in New Zealand, as well as to enable them to compete effectively in foreign markets. The passive income of these companies will still be taxed as it is earned, although there will be some exceptions to the rule. For example, it will not apply to passive income for controlled foreign companies in Australia, which is usually the first port of call for our smaller businesses that are seeking to expand overseas. There will also be an exemption for passive income that is less than 5 percent of a company’s total income. Other important features of the reform include exemption from tax of most foreign dividends paid to companies, as well as measures to protect our revenue base when the active incoming exemption comes into force.

The bill also introduces further measures aimed at reducing tax compliance costs for small and medium-size businesses, of which there are many in this country. Lacking the resources of larger companies, smaller businesses tend to bear a disproportionate tax compliant cost burden. Reducing tax-related compliance costs is an incremental process consisting of many small steps. There is no single solution to the problem, short of abolishing tax altogether. A measure that will help one small business may not help another, since businesses vary significantly in their needs, operating styles, and problems. Compliance cost reduction measures introduced in recent years have included, for example, the alignment of payment dates for provisional tax and GST. That change was designed for small businesses that prefer to make smaller and more frequent payments of provisional tax to help them with their budgeting. Likewise, some of the fringe benefit tax rules were changed with smaller businesses in mind—for example, the minor benefits threshold under which the tax is not payable was raised, and a tax exemption for business tools was introduced.

The changes proposed in this bill raise several other tax thresholds. They include, for example, the PAYE threshold above which employers must file and pay deductions from employees’ salaries twice a month. That threshold is being raised from $100,000 to $250,000, a change that will allow a greater number of small employers to pay their deductions to the Inland Revenue Department once a month instead of in accordance with the current procedure, thus saving them both time and money.

The bill also clarifies the law to ensure that employer payments for employee relocation and overtime meal allowances are exempt from income tax and fringe benefit tax if certain criteria are met. These changes, which were announced last year, simplify the law and remove longstanding uncertainty about the tax treatment of these payments, which will save time and money for everyone involved.

The bill also modernises the tax rules relating to the life insurance business, which date back to 1990. Since then, products and business practices have changed significantly, with the result that the tax rules are out of date in several areas. For example, many term insurance profits are under-taxed today, with profitable business often leading to tax losses. The reason is that term insurance was a very small part of the business in the late 1980s, so it was not a big consideration in developing the rules at that time. Today, term insurance is a major part of the business, and by being under-taxed it enjoys a considerable subsidy under the present tax rules. A further anomaly in the rules is that people who save through life insurance products face a heavier tax burden than do savers who invest directly or through managed funds that become portfolio investment entities. Under the proposed reform, the term life insurance business will be taxed on actual profits, as other businesses are taxed, and many of the tax benefits of the new portfolio investment entity rules will be extended to all savers in life products.

The petroleum mining tax rules are also being updated to remove potential disincentives to further investment in oil and gas exploration and development in New Zealand. At the same time, the bill introduces measures to ensure that New Zealand receives its proper share of the benefits from our growing petroleum mining industry. To safeguard New Zealand’s taxing rights on its own petroleum resources, the changes will allow expenditure on petroleum mining operations undertaken through a foreign branch to be offset only against income from petroleum mining operations outside New Zealand.

As a further measure to protect the revenue base, the bill introduces a number of changes to strengthen the definitions of associated persons in income tax law. The definitions are used primarily to counter tax practices that could undermine the intent of our tax laws because of the closeness of the relationships of the people or entities involved, whether they are relatives, trusts, partnerships, or companies. The definition relating to land sales is in particular need of strengthening to prevent land dealers, developers, and builders from circumventing the land sale tax rules by operating through associated persons. It is important to stress that the law that gains on land sold by dealers and others in the business are taxed if the land is sold within 10 years of acquisition is not new. That provision was stated in law as long ago as 1973—35 years ago—when Parliament enacted the current land sale tax rules. This bill closes the gaps in the definitions of associated persons that allow that tax obligation to be sidestepped. The bill also makes the other definitions of associated persons more robust. For example, it will no longer be possible to use certain trust structures to circumvent the tax rules. Similarly, it will not be possible for companies and shareholders to avoid being associated by fragmenting shareholdings amongst closely related people and entities.

The bill also introduces further measures to strengthen the climate of charitable giving in New Zealand. These build upon related tax changes that came into force this year, removing the caps on the dollar amounts of charitable donations eligible for tax relief. The bill introduces a voluntary payroll-giving system that will operate through the PAYE tax system. People whose employers adopt payroll-giving will be able to donate regularly to charitable and philanthropic causes of their choice through work-based payroll deductions. They will receive the tax benefit of their donations each pay day without having to present donation receipts. The voluntary scheme will be open to employers who file their employer monthly schedules with the Inland Revenue Department electronically. It is a fact that growing numbers of employers see social responsibility and good corporate citizenship as an important part of their business, and these measures are designed to strengthen them in that work and to encourage them and their employees in that regard.

On a similar theme, the bill also clarifies the law relating to the tax treatment of honoraria for voluntary work and the reimbursement of volunteers’ expenses. That will make life much easier for both volunteers and charitable organisations, which often incur unnecessary compliance costs in trying to understand their tax obligations.

These are but brief descriptions of the main reforms proposed in this omnibus tax bill. Time simply does not permit a more detailed description of every measure, so I refer members to the separate, slim, 160-page commentary on the bill, which describes the changes in more detail and has been distributed to members already. On that note, I am happy to commend the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill to the House.

Dr the Hon LOCKWOOD SMITH (National—Rodney) : In—[Interruption] What was that comment? I note the arrogance of Dr Cullen, who is very happy to let people know that he was a Commonwealth scholar and did a PhD. He should acknowledge that some other people in this House were also Commonwealth scholars.

In introducing the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill to the House just now, the Minister of Revenue, Peter Dunne, commendably emphasised the positive aspects of this bill, but he brushed over the aspects that impose very real extra compliance costs on New Zealand businesses. Despite that, National will support this legislation going to the select committee. We support it because there are a number of important moves in it that we see as being very positive. For example, we support the move to the introduction of an active income exemption in respect of the income tax treatment of controlled foreign companies or corporations. We support the introduction of tax deductibility for regular payroll donations to charity. It makes good sense. We support the increases to tax thresholds, such as the provision for once-monthly payments of PAYE instead of twice-monthly for businesses whose annual PAYE deductions are under $250,000, rather than $100,000. We support those measures because they make good sense, just like the increase in the threshold for the filing of GST returns on a 6-monthly basis does. For that process to be available in the future to businesses with an annual turnover of less than half a million dollars, rather than a quarter of a million dollars, makes good sense because it will reduce compliance costs.

Those three measures are positive moves, but it is so typical of this Labour Government that on the one hand it gives but, because it cannot bring itself to let go of any tax revenue, on the other hand it must take away. It just cannot help itself. Let me give members an example of what I mean. The Minister mentioned the active income exemption as one of the most important aspects of this legislation. That is a good move. We support it because it makes good sense and it is consistent with the way that most countries treat their controlled foreign companies. But what of the extra compliance costs for business associated with the shrinking of the grey list from eight countries down to one? I am not saying that that should not be done, but we should think about the compliance cost implications. What about the competitive disadvantage we face from repealing the conduit rules? Now, other countries that have an active income exemption still have rules like the conduit rules. Does that place us at a competitive disadvantage? What about the extra compliance costs associated with the introduction of the interest allocation rules? We know why the Government is moving to introduce those interest allocation rules, but what about the compliance costs? It is no good for the Minister to say, on the one hand, that all these measures reduce compliance costs—for some of the measures do—when, on the other hand, a whole range of other measures actually significantly increase compliance costs for businesses.

The point I am making is that members will need to listen carefully to argument at the select committee to make sure that these issues are very carefully considered, because they have significant ramifications for the competitiveness of our foreign-owned corporations and for the control of our foreign-owned corporations. I emphasise that it is not a clear-cut situation where all of this is simply reducing compliance costs. There are measures there that are increasing compliance costs and challenging our competitive position, and we need to listen to what the arguments are at the select committee.

If the interest allocation rules are complex—and they are—I invite members to have a look at the taxation of life insurance businesses that this legislation changes. One of the positive measures—and there are positive measures here as well, as I have said before—is the extending of the benefits of the portfolio investment entity rules to all savers in life products. That is a positive move. On the one hand we are giving this positive move but, on the other hand, the Government seeks to take away, because the increased tax imposition on underwriting of risk business, for example, will probably see premiums go up. People will benefit on the one hand from the portfolio investment entity rules being extended but, on the other hand, they will face higher costs because insurance premiums will probably go up. The legislation will be complex. There will be compliance issues here. If one looks at the way shareholder base income provisions and the policyholder base income provisions are defined in the legislation, and look at the way insurance businesses will necessarily require actuarial apportionment of income between those two accounts, one will see that there will be significant changes to their accounting and tax systems at a time when insurers are already dealing with portfolio investment entities and KiwiSaver legislation, as well as the changes to the financial reporting standards internationally.

We have a complex set of provisions around the income tax treatment for life insurance businesses. If anyone suggests that it will not be complex, I say they should just take a look at the provisions. They should take a look at the allocation of income between those two base accounts—the shareholder base income account and the policyholder base income account—and look at the way money will have to be apportioned between the two actuarially. That will impose compliance costs, and, again, the select committee will need to listen carefully as to how serious these increased compliance costs will be. I notice Michael Cullen, the Minister of Finance, laughs as if compliance costs are all a joke. I say to the Minister that these compliance costs are real. Business are making it very clear that these costs are real. He risks a very important aspect of New Zealand business activity if he thinks all of this is just a joke. [Interruption] It is not a joke. Compliance cost is real. Little Darren Hughes next to the Minister would not have a clue, because he has never had a real job in his life, and would not have a clue what some of this stuff actually does. We need to listen carefully at the select committee.

If some of these complex provisions are not enough to fry one’s brain, one should have a look at the new base protection provisions around the “associated persons” provision. Apparently the Government is concerned about the land sale tax rules for land dealers, developers, and builders caught by the old 10-year rule, and I suppose the Government is concerned that where one has associated persons it is possible to get soft deals minimising the tax liability that they should face. We have no problems with these issues being addressed, but we must make sure that the benefits we get out of them are not less than the additional costs that we impose over these businesses. These associated person provisions are complex. If any member does not think they are, he or she should have a look at how they will work and explain to the House how the tripartite tax associated person provision works—it is complex. We will need to look at it very, very carefully at the select committee.

If that is not enough, the new tax provisions for the emissions trading units will be interesting. The Government does not have this legislation through the House yet, but this bill contains the new tax provisions for those emissions trading units. Again, forestry interests will face some complex issues. For some reason or another some of the forestry interests will be under the provisions of the Income Tax Act 2004—not the current Income Tax Act 2007. I would not mind if one of the Government members would explain why we still have to amend the Income Tax Act 1994, the Income Tax Act 2004, as well as the Income Tax Act 2007. I thought we had rewritten all the income tax Acts and brought all the provisions together into the 2007 Act. But, no, certainly the forestry interests under the emissions trading provisions in this legislation will be operating under the Income Tax Act 2004. That is a complexity, and I would like someone to explain why on earth that is necessary. One of the positive things, though, is that at least the emissions trading units will be zero-rated for GST purposes.

So we can see that these are very complex issues. There is a balance of positive moves but there are other measures that will impose significantly increased compliance costs. The select committee is in for a lot of work on this bill.

Hon Dr MICHAEL CULLEN (Minister of Finance) : One would hate to hear the member when he is opposing a bill if that was a speech in support of one. The member certainly managed to praise with faint damns this particular measure, and he managed in the course of that to miss the entire main thrust of the legislation while focusing on some minor issues within it.

Dr the Hon Lockwood Smith: Minor issues?

Hon Dr MICHAEL CULLEN: Minor issues indeed—minor issues indeed.

Let me come to the most important part of this Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill. It follows on very nicely from the previous legislation we have been discussing. What this important part on the active/passive distinction is about is whether this country will have an outward-looking taxation system or an inward-looking one. Of course, what the member did not tell us was that this part of the legislation replaces the failed legislation that he helped put in place in 1991-92, which did not have any such exemption for active income. There will, of course, be some who will argue that what this will do—

Dr the Hon Lockwood Smith: But it did have a good grey list.

Hon Dr MICHAEL CULLEN: “Locky” has had his speech. I ask him to strap the budgie-smugglers down and listen for the next few minutes. What some people will argue about this bill—

Dr the Hon Lockwood Smith: What an arrogant Minister!

Hon Dr MICHAEL CULLEN: What is arrogant is continuing to interject when somebody else is speaking. It is high time the member learnt some manners instead of just talking in a poncy fashion. There is a difference between those two things.

What some people will argue about this bill is that it will encourage people to move manufacturing capacity offshore. The reality is—[Interruption] I knew the Greens would; they could not help themselves. As soon as the word “international” appeared in the bill we knew we would be in trouble in terms of the Greens’ vote on this bill. As soon as we had the term “controlled foreign company” they probably thought that it meant an overseas multinational. It means a New Zealand company that controls foreign companies offshore. The fact is that some manufacturing capacity will move offshore to lower-cost countries. The real issue is, firstly, whether we want New Zealand companies to internationalise or whether we believe we can make our living just by taking in each other’s washing for the foreseeable future. The obvious fact is that New Zealand companies will have to bulk up and internationalise to succeed, or we cannot increase our productivity levels within this country.

The second thing is that if companies succeed in either having some manufacturing capacity offshore or investment offshore or having very substantial parts of their business dependent upon exporting so that the majority of their income comes from offshore activity, then our current taxation system, with its lack of an active exemption, encourages those companies to move all capacity offshore, including head office, including design, and including back-office functions. That is the choice that developed economies—particularly, small developed economies such as New Zealand—face. Are we to play a long defensive game, trying to keep what little we have, instead of trying to expand and develop, to develop those international connections, and to retain the highest-quality, highest-paying, highest-value parts of the production system within New Zealand?

If we opt for the “little New Zealand” policy we will, in the end, defeat ourselves. We will, in the end, have a declining economy, not an expanding economy. If we opt for an outward-looking approach, which requires an active exemption, then there is a very real prospect that we will be more capable of succeeding economically than we have done over the last 40 or 50 years. That is the choice that a small, isolated economy in the south-west of the Pacific faces. We cannot succeed by trying to mimic the economic patterns of behaviour of the low-income, mass production countries in Asia. If we think that that is the route to success, then we have really got things profoundly wrong.

When New Zealand introduced, under the previous National Government, the current tax rules taxing New Zealand companies on their worldwide income, it was theoretical perfection. To take Dr Lockwood Smith’s point, it has lower compliance costs, because not having an active/passive distinction by itself, obviously, has lower compliance costs. But the reality is that the lower compliance cost is bought at the expense, in the end, of poorer economic performance. Once we have an active/passive distinction of any form, then, first of all, that in itself increases compliance costs. But, secondly, to buttress New Zealand’s tax base so as to not lose all that taxable income—

Dr the Hon Lockwood Smith: That’s right—you can’t afford to let it go.

Hon Dr MICHAEL CULLEN: That is right—precisely! If we want all our taxable income to move offshore so that there is no tax within New Zealand, then we do not need buttressing rules around it. Those buttressing rules create compliance costs. The member cannot have it both ways—or maybe he can; I do not know. But he needs to understand that the point about doing this is that it creates a risk. It creates the risk that we lose the tax base offshore, and that also will not be helpful for New Zealand. That cannot help New Zealand’s future in terms of its need for money for investment in infrastructure, skills, and so on and so forth.

That is the most important part of this bill. It is by sheer coincidence that that part of this bill comes in on the same day as the Committee stage of the New Zealand-China Free Trade Agreement Bill. But the two bills, in fact, have a great deal of interrelationship in terms of the underlying philosophy about having an outward-looking, growing New Zealand economy, as opposed to an inward-looking, gradually retreating, and declining New Zealand economy.

The second main part of this bill is the insurance changes. The member should support those, because, at the end of the day, the changes here merely align the rules around the taxation of insurance with those of general companies and other financial sector parts of the economy. Yes, we know that Sovereign objects to this, and we know that a former member of the National Party has been lobbying on behalf of Sovereign. But, in fact, there has been a great deal of consultation with the insurance industry as a whole, and the bulk of the insurance industry is actually reasonably happy with this—nobody is ever happy unless we simply cut their tax.

Any change will always have some degree of opposition to it, but there are long transitional provisions within this bill that protect. This particular part of the legislation is not revenue-positive for quite a large number of years to come; in fact, it is actually revenue-negative for some considerable number of years to come. But it is an important change, because it leads to a fairer taxation system around insurance and it removes the bias against life insurance in favour of term insurance, which the current taxation system provides. The taxation system should be neutral between those two options. It should not be determining a choice between those two options. The choice should be based purely upon people’s own economic and social needs in respect of term insurance versus life insurance.

Much of the rest of this bill consists of a vast range of technical changes. For those who want to get really excited, there are retrospective provisions that go back to 1986, and, to get even more excited, those provisions relate to the Parliamentary Service. In other words, the Inland Revenue Department has caught up with a problem in the law that has remained unamended for 22 years and that should have been amended, and now it is deemed to apply from, I think, 1 April 1986, or from whenever the Parliamentary Service came into operation.

The other main feature of the bill is significant reductions in compliance costs in terms of thresholds for a whole range of aspects of the tax system as they apply to small to medium sized enterprises. One could always argue that those reductions should go further. Indeed, we looked at other options that had more significant revenue costs attached to them, but these do have quite significant revenue costs.

This is not a bill that increases the Government’s tax revenue, at all. It reduces the Government’s tax revenue both in the short term and in the long term. A reduction in active exemption obviously reduces the Government’s tax revenue. The compliance cost changes around thresholds reduces the Government’s tax revenue. The life insurance changes reduce the Government’s tax revenue over the next few years.

This is well-thought-out legislation. It is large, and it is complex. The select committee will need to spend a lot of time on this legislation, and I am sure it will find reasons for changing some of its details. But let us not pretend that a tax system should not have integrity that protects the tax base of New Zealand but simply resigns all tax to offshore jurisdictions—tax rationality does not say that; that is just pure right-wing ideology. That is not a rational tax system; that is a very silly tax system.

TIM GROSER (National) : I do not think I can afford to fall back on the new MP excuse after 2½ years here. Nevertheless, I have to admit to finding it rather daunting to be given a 600-page document that includes explanatory information containing issues of vast complexity in which I have no professional background, and then to be expected to make a serious contribution on it. However, there are one or two things in the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill—that National members support being referred to the select committee for a first reading—that do some sensible things, and merit some comment. I will focus on those issues, which are very much related to the challenge of globalisation that is facing New Zealand.

I acknowledge that the bill is a multi-faceted bill, and that it simplifies a number of tax thresholds. It helps the voluntary sector in terms of the mechanisms used to make contributions to charities. That is a strong position of the National Party; we were not surprised when it was taken over by the Government, but it is the right direction from our point of view. I wish to focus, in a few brief comments, on one or two of the moves the bill makes in terms of coming to terms with the integration of the New Zealand economy, from a tax perspective, into the global economy.

I recognise that some of the terminology is formidable. Until 2½ years ago I thought CFCs were a particularly potent form of greenhouse gas; I now understand that this acronym refers to controlled foreign companies. I have to admit that one day while driving in Auckland and listening to talkback, I heard the announcer say: “After the break we’re coming back to a huge argument that’s erupted over the rules for pies.” I thought I might have to rethink my thinking on talkback radio, because I had not realised that listeners would be interested in portfolio investment entities. Unfortunately, my pleasure was very short-lived when I found they were actually objecting to the fact that the winner of the New Zealand 2007 pie contest had produced a vegetarian pie, which in the opinion of many of the listeners was something akin to the end of civilisation as we know it.

Craig Foss: It was from Hawke’s Bay, that pie.

TIM GROSER: I am well aware of that, and I am sure it was an excellent pie, but I have to tell the member the decision was deeply controversial in Auckland, however popular it was in the bay.

The challenge facing New Zealand to adjust its thinking and its policy structures to globalisation is truly formidable. I am sure that this bill takes us in a certain direction, I am sure that it is a work in progress, and I am certain that further pieces of legislation will be required, as we all adjust our ways of thinking, our behaviour, and our legislation to the fact that we no longer live in a closed economy. I remember a speech that Bill Clinton made in his first presidency—a brilliant Clinton speech—about how even in his lifetime he had gone from seeing a local economy in Arkansas to seeing the shops and services that he had grown up with start to trade more and more with other American states, and then move into an international economy. So the most sophisticated country in the world, the United States, has gone through this process; we are going through this process. In that respect, I agree with the comments that Dr Cullen has made—that there is a close linkage between this bill that we are considering for the first time and the very extensive discussion we have just had on the China free-trade area. There is a close relationship—and a need to have some coherence in our country—between the trade and the investment sides of the equation.

We have just spent a fair bit of time in this House on the trade side, so let me reflect on the challenge facing us on the investment side. I first became aware, in a personal sense, of how poorly New Zealand performs on the investment side—I am talking about outward investment here—when I read a monograph written by none other than Alan Bollard, actually, when he was with the New Zealand Institute of Economic Research. He chronicled the history of New Zealand attempts to invest successfully outside New Zealand. It does not make pretty reading. I know there are some highly commendable exceptions to that, so far be it from me or any member to criticise the pioneers who got out there and, frankly, made efforts that did not always quite succeed.

But the fundamental point is this: New Zealand is a poor investor overseas. That is a fundamental problem facing New Zealand. Although I suspect that the key to it lies within the corporate culture of this country and not the Government, it nevertheless is incumbent upon the Government to make sure that the policy framework we have in place does not get in the way of successful investment. I think, in that respect, it is very clear that some aspects of our external tax regime have done precisely that—put in place perverse incentives, sometimes in the name of what sounds like good policy, such as tax neutrality. But at the end of the day they simply do not aid corporate New Zealand in the task of coming to grips with its challenge to integrate its own operations, not just in terms of the trading of physical goods and physical services but also in terms of its own investment operations.

In case any members are thinking that this is some minor technical point I am making, let me just throw some numbers around. It is a bit of an exaggeration, but we can say that New Zealand does not have a trade problem in the sense of the current account deficit; New Zealand actually has an investment problem. I think that is overstating it, for the very reasons we have just debated in the context of the China free-trade agreement. Actually, New Zealand is not performing in line with other small, developed countries, on the trade side, and there is an enormous amount we must do. Nevertheless, the point that I think the metaphor makes—which I have heard in a number of contexts; it is not mine—has an essential truth in it.

If we analyse our current account deficit, we can see that the trade account is not in too bad a shape, but it is completely overwhelmed by a massive deficit in investment income. We measure the stock of accumulated foreign investment in our country vis-à-vis the stock of investment of New Zealand - controlled foreign companies—and I agree with Dr Cullen that the term itself suggests some appalling multinational corporation from Detroit, but actually it may mean a Kiwi company from Hawke’s Bay operating somewhere in Australia or Singapore, and these are companies we all very much wish to support—through a measure called the “IIP”, or the international investment position, which accumulates the stock of our investments in other countries vis-à-vis the stock of foreigners’ investments in New Zealand.

We have two fundamental problems. The first is the relative size of those two stocks of investment. Broadly speaking, from memory, we have something like $110 billion of assets overseas versus I think about $250 billion of assets in our country owned by foreigners, indicating an unwillingness by New Zealanders such as myself to live on a more straitened income than we might otherwise have done, so we have accessed foreigners’ savings to meet our investment needs. But this has generated a stock of investment flow that is grossly imbalanced. Worse still, the average rate of return on the stock of New Zealand investments by our controlled foreign companies is immeasurably lower, on average, than the rate of return of foreigners’ investments in our own country. If we add those two lethal elements together we have a major national problem on our hands, whereby, even though we continue to perform at least credibly on the trade front, we are bleeding on the investment account.

So we have, if you like, this fundamental challenge facing New Zealand, which is to lift our game on foreign direct investment in other countries. It is vital that we do not just take a tax minimisation account on that, but that we look at it strategically. I refer to some of the changes that are suggested in terms of the treatment of active income. The Hon Peter Dunne indicated the way in which the definitions will apply. It is the reciprocal of passive investment. I think there are some interesting starts, and I am sure that in the process of this bill being taken to the select committee we will have a lot of evidence that will need to be sifted through very carefully indeed.

SUE BRADFORD (Green) : Although there are some aspects of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill with which Green Party members have no problem, including those dealing with the voluntary sector—at least as far as I can identify those aspects at this stage—we are horrified by proposed changes affecting the offshore taxation regime for New Zealand companies. We will oppose these moves and vote against the bill every step of the way.

In exempting from tax active income earned offshore by a company where a New Zealand resident has the controlling interest, this bill is a charter for exporting jobs and closing down our manufacturing sector. The Government is acting as if the shape of the future is one in which we are nothing more than a head office and design centre for enterprises likely to be based mainly in Asia, but based in other parts of the world as well. It is insanity that at a time when the impacts of climate change, peak oil, and an incipient global recession are beginning to kick in, our Parliament should be considering legislation that provides serious tax incentives to companies to take their production offshore.

I thought it was bad enough when I heard stories in years gone by such as, for example, that of the Swazi Apparel clothing company in Levin, which was told by the Ministry of Economic Development officials that it would be best advised to shift its operations to China. It did not matter that this would mean the loss of around 90 jobs, with the resulting impact on the local economy, not to mention the workers involved. I thought it was even worse when some members of the Labour Government tried to tell us that Buy Kiwi Made should be not only about companies that make things in this country, but also about businesses like Icebreaker, which had made the decision to take its production offshore. But the bill in front of us tonight really takes the cake. It seems to be driven by a belief that we should actually incentivise people to close down their operations here, and that there is no future for manufacturing in New Zealand.

What a disaster. What a disaster after all the money, work, and commitment that have gone into the Buy Kiwi Made programme on the part of manufacturers, Business New Zealand, retailers, unions, and the Ministry of Economic Development. What a disaster after all the cross-sectoral goodwill and work that went into the long-running Manufacturing Plus project. Why on earth does Labour want to motivate manufacturers to self-destruct in this way? Was the manufacturing advisory group that came out of Manufacturing Plus happy with these new tax proposals—that is, if it still exists? The justification given is, in part, based upon fostering so-called economic transformation. Transformation to what? Being a colony of Australia, South-east Asia, and China, perhaps? Having an economy totally dependent on foreign imports, the price of which will keep going up as the price of freight increases exponentially alongside the price of fuel?

Treasury argues that the current rules create an incentive for companies to move completely offshore—head office and all, as Dr Cullen was saying earlier—and that the point of the new rules will be to allow head offices to stay here while the manufacturing part of the business goes elsewhere. Reducing the tax costs for firms looking to expand offshore will, it appears to argue, make us more competitive and more compatible with the globalised market—above all, with Australia. Behind this argument sits the underlying assumption that we should not even bother manufacturing here, because we cannot compete. It would appear that it is time for us to internationalise and globalise our jobs and our businesses out of business, apart from a few head office staff in Auckland or Wellington. Treasury also argues that the new tax exemption will make New Zealand more attractive for foreign investment, and that the fact that headquarters will stay here will create work for headquarters-type people.

Even more bizarre is the fact that if the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill goes through, companies manufacturing in New Zealand will still be taxed, while those offshore will not. So our loyal local companies will in fact be at even more of a disadvantage comparatively—as if the high dollar was not enough to contend with! The madness of all this takes me back to the early 1990s, a time many of us—including some National MPs, I suspect—might prefer to forget. That was a time when, for example, the then Minister of Finance, Ruth Richardson, took pride in hosting a conference in Auckland aimed at marketing what was left of our assets to overseas companies. That era also saw the final sell-off of rail by Jim Bolger, one of the biggest ever rip-offs of New Zealand taxpayers by a foreign company.

I do not understand Dr Cullen. On the one hand he and his Government have done a great thing by buying back and reinvesting in rail, and biting the bullet on the cost, because Labour does appear to understand on one level that climate change and peak oil mean we must rebuild our national passenger and freight infrastructure. On the other hand—and simultaneously—he is presiding over the incongruous aberration before us tonight aimed, it seems, at undermining any desire of New Zealand manufacturers to keep making things here. For a member of a party that—as Dr Cullen proudly told this House recently in response to one of my questions on employment issues—is the party of workers, it is odd in the extreme that he does not appear to care a fig for the hundreds of thousands of jobs that may well disappear as a result of the tax incentives contained in this bill. Where does he think the jobs to replace those lost will come from?

I find it odd that once again I find myself giving Dr Cullen history lessons. Does he not remember what happened when his own Government stripped out our manufacturing base in the 1980s? Can he not remember the acres of empty factories and industrial zones, or what happened when tens of thousands of people in the cities and towns ended up jobless? Some people—and, above all, tangata whenua and Pacific peoples—are still reaping the consequences of those policies of the 1980s, in places like South Auckland, Northland, Tai Rāwhiti, and the Bay of Plenty

What the Government is proposing will give Icebreaker a tax cut for making lovely outdoor wear in China, but not Earth Sea Sky for making lovely outdoor wear in Christchurch. Norsewear—that formerly iconic brand—will reap a financial benefit for having taken its jobs to Asia, while Swazi Apparel, staunchly staying local, will miss out. The bill will give tax cuts to large firms that send fish to China for filleting and packing, but not to small-time fishermen who process locally and who create environmental and social benefits by not carting fish back and forth across the planet. The bill will give Fisher and Paykel a tax cut for the whiteware it makes in Mexico, but not for the whiteware it makes in Auckland.

To all those companies, business organisations, and trade unions that have been involved in Manufacturing Plus, the Buy New Zealand Made campaign, and Buy Kiwi Made, I call on them to join the Green Party—and any other parties who oppose this madness—to help persuade Labour to change its mind on this one. Globalisation does not have to be about giving up on our manufacturing sector. We simply cannot afford to lose our ability to make things here, either for local use or for export. Nor can we risk losing tens—if not hundreds—of thousands of jobs at a time of increasing global, economic, and environmental insecurity.

The other aspect of the bill that I feel constrained to address briefly tonight is that dealing with petroleum mining. The first aspect is that the bill prevents petroleum companies from deducting overseas expenses from their New Zealand income, and thus ensures that New Zealand will get the tax benefit of mining here, rather than having the profit hidden behind expenses incurred overseas. That is fine with the Greens. However, looking beyond this, the bill will also remove disincentives that may affect investment in oil and gas exploration and development in New Zealand, adding up to a huge tax cut over 4 years in the petroleum industry.

The Green Party really questions why we are giving major tax cuts to these companies at a time when even those who would not normally follow the oil markets can see the massive profits being made. The bill somewhat disingenuously describes these changes—for example, allowing development costs to be amortised over the life of the mine, and repealing the current distinction between onshore and offshore development—as being necessary to safeguard tax revenue. However, in reality what the changes mean is less, not more, tax income from petroleum mining. Secondly, through these measures the Government is manifestly encouraging more mine exploration and development, with apparently no regard for the environmental and climate change consequences.

The parts of this huge bill that deal with manufacturing and the tax cuts for petroleum mining are sufficiently outrageous that, from our point of view, they totally negate the other beneficial changes that are being promoted. The Green Party will therefore do everything we can to oppose the bill and to warn people of the danger it poses to our economy, our workers, and our environment.

CRAIG FOSS (National—Tukituki) : As my colleague Dr Lockwood Smith said previously, National will be voting for this bill to head to the Finance and Expenditure Committee—with some trepidation. But on the whole, it is a very good, positive move in the right direction, notwithstanding some of the interesting interpretations the Minister of Finance made of his lack of action over the last 9 years, trying to pretend they did not exist.

But one thing was missing from the speeches earlier of both the Minister of Revenue and the Minister of Finance that I fully expected to be part of this bill. There are about 130-odd pages of explanatory note and 450-odd pages of detail, but there is no summation of the fiscal numbers here. This goes from changes to charities, changes to the controlled foreign company rules, the active and passive income rules, the petroleum mining rules, etc., but putting all that aside for a moment, there are some huge implications here. The Minister of Finance particularly made note, and tried to convince us, that tax revenue would actually go down as a result of this bill. Perhaps it will; perhaps it will not. We would like to see the numbers.

I have had a quick discussion with the Minister of Revenue’s officials and I believe that those numbers will be forthcoming tomorrow. So that will be beneficial, particularly with such a wide-ranging bill because we will need to pick it apart as it goes through the Finance and Expenditure Committee. I understand from the various discussion papers that this bill is formed from that there have been individual summations for costings, etc., but it would have been good to hear that in the Minister’s introductory speech. I look forward to hearing about that tomorrow.

I look forward to this bill going to the Finance and Expenditure Committee and I am certainly looking forward to the expertise around the table from the officials. I have read parts of the bill quite a few times and I freely and openly admit that I still cannot work out parts of it, but I enjoyed the Minister’s earlier speech and the stuff about the various changes to “term insurance” and “life insurance”. I need to sit down and read some of those technical changes, and digest them over a nice Hawke’s Bay red wine.

There is a good point about this bill: it seems to follow a good and solid process. There has been a discussion document and representation from various expert groups prior to its getting to this stage. We are talking about it here and it will ease into the select committee process as we go through the end of this parliamentary session, unlike the changes to KiwiSaver part 1 and part 2, the fair dividend rate changes, and, goodness gracious, the Climate Change (Emissions Trading and Renewable Preference) Bill that has roared through the Finance and Expenditure Committee without good, fair, and transparent submissions, consultation, etc. We are reaping the reward for that because we are bound to see some more Supplementary Order Papers on those measures. In fact this bill, deep down, includes amendments to some of the fair dividend rate changes and even the KiwiSaver changes, and if the Government had taken a bit more time on those, consulted a bit more widely, and not looked at the electoral clock but instead looked at a good and solid procedural clock, then perhaps the bill would be a few pages thinner.

The bill forms a bit of a suite of bills, and I am surprised that the other two Ministers did not mention that, because there is some good, solid, cross-party support for most of the other bills—the Reserve Bank of New Zealand Bill (No 3), the Financial Advisers Bill, and the Financial Service Providers (Registration and Dispute Resolution) Bill.

• Debate interrupted.