Hansard and Journals
Taxation (International Investment and Remedial Matters) Bill — First Reading
Taxation (International Investment and Remedial Matters) Bill
Hon Dr JONATHAN COLEMAN (Minister of Immigration) on behalf of the Minister of Revenue: I move, That the Taxation (International Investment 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. The bill before us today introduces a number of important business tax reforms that are variously aimed at helping New Zealand businesses to compete internationally and at reducing business tax compliance costs. They complement 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 to compete more effectively overseas. In my view this is one of the most important taxation reforms to come before this House. 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 New Zealand taxes all the offshore income of those companies, with the exception of income from operations in the so-called “grey list” of eight countries that our law singles out as having taxation 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 those 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 want 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 an exemption from tax for most foreign dividends paid to companies, as well as measures to protect our revenue base when the active income exemption comes into force.
The bill also introduces further measures aimed at reducing tax compliance costs for small and medium sized businesses, of which there are many in New Zealand. Lacking the resources of larger companies, smaller businesses tend to bear a disproportionate tax compliance 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 taxation. A measure that will help one small business may not help another, since businesses vary significantly in their needs, problems, and operating styles. 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 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, thus saving them time and money.
The bill 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. Those changes, which were announced last year, simplify the law and remove longstanding uncertainty about the tax treatment of those payments, which will save time and money for everyone involved.
The bill 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. 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 entities 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. In order 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 in order to prevent land dealers, developers, and builders circumventing the land sale tax rules by operating through associated persons. It is not new 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. That was clearly stated 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 introduces further measures designed to strengthen the climate of charitable giving in New Zealand. The measures build upon related tax changes that came into force this year that removed the caps on the dollar amounts of charitable donations that are eligible for tax relief. As a result, individuals can now claim tax rebates for donations up to the level of their taxable income, and companies and Māori authorities can claim deductions for donations up to the level of their annual net income. 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. Growing numbers of employers in New Zealand see social responsibility and good corporate citizenship as an important part of their business. I have met many of them, including some who have already adopted a form of payroll giving for employees who want to participate. They will undoubtedly be interested in the payroll-giving scheme introduced in this bill.
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 easier for both volunteers and charitable organisations, which often incur unnecessary compliance costs in trying to understand their tax obligations.
These are brief descriptions of some of the main reforms that are proposed in this omnibus taxation bill. Time does not permit a description of every measure contained in the bill, so I refer members to the separate 160-page commentary on the bill, which describes the changes in detail and has been distributed to members. I commend the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill to the House.
Hon DAVID CUNLIFFE (Labour—New Lynn) : I raise a point of order, Mr Speaker. I hesitate to interrupt proceedings. The Opposition’s understanding is that we are currently debating the Taxation (International Investment and Remedial Matters) Bill. Without being able to be conclusive about this, it appears that the Minister has been addressing a different bill. Would it be possible to request the Minister to table his notes, so we can ascertain—
The ASSISTANT SPEAKER (Hon Rick Barker): That is not a point of order. A point of order is about the procedure of the House. What the Minister says in introducing the bill is what the Minister says, and that is on the record.
Hon DAVID CUNLIFFE (Labour—New Lynn) : The Taxation (International Investment and Remedial Matters) Bill is a most interesting bill, and it is a complex bill. I will state Labour’s position in respect of this bill in three parts. In the first part, I will briefly summarise the key provisions of the bill; in the second part, I will outline Labour’s position on the bill; and in the third part, I will outline some of the reasons for Labour’s position.
Let us first summarise the objective of the bill and its key provisions. We believe the objective has some merit, which is that it is timely for there to be an overhaul of the controlled foreign company and the foreign investment fund regimes. There is merit in encouraging further outbound investment by New Zealand companies. The reason for that is, as everybody knows, we have a very substantial international investment deficit in respect of New Zealand’s balance of payments that feeds into and, indeed, is the largest part of the financial deficit that is responsible for our persistent and deteriorating current account. There is merit in examining the issue of whether the playing field can be levelled so that New Zealand companies operating overseas do not find themselves in the position of paying tax twice: once in the jurisdiction in which they and their foreign competitors are operating, and a second time in respect of New Zealand tax on the active income part of those transactions. It, therefore, may make sense to restructure the law in the way that is proposed in this bill.
Second of all, it is timely for there to be a further examination of the old “grey list” exemption. The “grey list” is a bit of an anachronism, in the Opposition’s view. It is made up of eight countries, mainly the old Commonwealth countries, that were deemed to have similar tax laws once upon a time, which were carved out from the international tax rules and for which equivalence is deemed. We are willing to explore in the Finance and Expenditure Committee whether this bill adequately deals with any residual issues with regard to the treatment of the “grey list”.
Certainly, it is appropriate to remove competitive disadvantage for New Zealand companies in respect of their active income through a range of trading structures. However, we are concerned, firstly, about the exemptions that are carved out of this bill in respect of the Australian market. As the Minister said, the Australian market is the jumping-off point for many small New Zealand businesses, and it is the Opposition’s concern that a blanket exemption for the Australian market may be too wide. We look forward to hearing submissions on that point at the select committee. Secondly, we would expect to see submissions upon the issue of whether the de minimis threshold of 5 percent is appropriate. Thirdly, we would also expect to see submissions upon the blended hybrid approach that this bill encapsulates between having either an entity base or a transaction base to the tax rules, and we will be very interested in those submissions.
Those, being fair and charitable to some extent, are the reasons why the substance of this bill merits consideration and why the Labour Opposition will be supporting the bill’s referral to a select committee in the first instance. We believe it is appropriate that the Finance and Expenditure Committee calls for submissions and hears from the public and from the professionals on the proper way that the tax process works.
Labour has two overriding objectives in respect of policy. The first is, of course, to grow the export economy. Our criticism of the Government is that it is been like a deer caught in the headlights of the global recession. That growth is not returning to the New Zealand market, and the Government is caught somewhere between wanting to cut its way out, like ACT would have us do and like the Conservatives in Britain are doing, or to perhaps leverage or spend its way out, like the US Government is doing. But it is taking neither of those courses and is showing no new ideas. The Government is stuck and our economy is stuck, and as the weeks pass and successive rounds of data come out, we all understand that the recovery has not come to main street New Zealand, to the towns and villages of our country.
But the greatest reservation we have—and why we are not at this stage able to confer support for the bill beyond its first reading—is that we have learnt, unfortunately, to be very sceptical of the intentions of this Government in respect of taxation measures. History shows why. I think that is made clear to anyone listening in to this debate if they cast their minds back over the last 2 years. National came in and immediately, under urgency, passed tax reform to drop the top tax rate and to deliver gains to the top end of income earners. Then, in Budget 2009, it admitted that it could not afford the fiscal cost. Having passed $8 billion worth of tax remission to the top income earners in the first year, it then decided it could not go through with years two and three.
In Budget 2010, however, while the recovery was still nowhere to be seen, the story changed again. The Government broke its promise not to bring in an increase in GST, which has been absolutely punitive to lower and middle income New Zealanders, who see their small tax breaks washed away in inflation and who are still short at the checkout queue. They are struggling. But in Budget 2010, the Government dropped the top tax rate again—all the way to 33c in the dollar.
No sooner was the ink dry on that $14 billion tax transfer, mainly to the upper end, than we saw a little thing called gift duty was coming up. When the Government, on its own admission, is already running a cash deficit per year of $13.5 billion or so, obviously having broken its promise to be revenue-neutral on the tax package, I ask why it would be a priority to then find other taxes it can cut that specifically benefit the top end. The Minister would say, in fairness, that there is not much money in gift duty—only a few tens or hundreds of millions. Well, in real New Zealand, that is real money. The point is that it would be a lot more if it were not for the protections that gift duty places upon high-wealth individuals transferring income to lower tax structures, like those that might be in their children’s names, were they not facing some compliance cost and some additional duty for doing so.
The point is that in the history of this Government, it has had two rounds of upper-income tax cuts and it has abolished gift duty. Is it little wonder that the Labour Opposition has a healthy scepticism about its real intentions in regard to maintaining the tax base and protecting Government services from yet another loophole for high-wealth individuals?
The principle on the Labour side of the fence is very, very simple. In these tough times, when money is scarce and every penny counts, everybody pays their fair share. That is the decent thing to do. That is the Kiwi way, and that is what we call for. That means no avoidance structures for high-wealth individuals. It means send away the army of trust lawyers and fancy corporate lawyers who are dreaming up tax-avoidance structures for the few while the many bear the load. The burden of proof is on the Government to show precisely why the measures in this bill will not make those avoidance loopholes worse.
How bad are those loopholes? I will give but one example. Loss attributing qualifying companies—the much loved or hated LAQCs—which result in $2.3 billion per year of tax avoidance, are one of the key reasons why half of the top income earners are not on the top tax rate. Half of the top 100 income earners are not on the top tax rate because they use structures like loss attributing qualifying companies. Why, if the Government was sincere about fairness, did it not simply ring-fence loss attributing qualifying companies so that nobody could write off on his or her personal income the losses made on a company? Instead, it has brought in some fancy new structure called a look-through company, which allows the lawyers yet another round of field days, yet another round of high fancy-pants pricing as they dream up new structures to stay one jump ahead of the taxman for their high-wealth clients.
We will be putting the ruler over this bill to make sure that it does not make the problem worse—that it does not create another exemption set where a high-wealth individual can create a company, call it a controlled foreign company, place income or assets in that company, and then make use of a tax exemption to avoid paying tax in New Zealand. We will be looking at the exemptions. We will be looking at the Australian exemption. We will be looking at the 5 percent threshold. We will be looking at why the Inland Revenue Department’s recommendation of a 20 percent threshold was not followed under lobbying pressure from business. This is a bill that has some merit but which deserves close consideration.
STUART NASH (Labour) : I raise a point of order, Mr Speaker. I know this is a little bit retrospective, but I ask whether the Minister who put the question to the House on this bill could please clarify the bill he mentioned. I do not think he spoke on the correct bill.
The ASSISTANT SPEAKER (Hon Rick Barker): I have already ruled on that matter. I ruled on the matter when the Hon David Cunliffe raised it. The member is relitigating a point I have already ruled on. I say to the member, in generosity of spirit, that I take a dim view of that. Once a matter has been ruled on it is final; that is the end of it. But having put that one down, there is something else that has been brought to my attention by the Clerk. The Minister, in moving the first reading of the bill, appears to have made an error in the title of the bill in relation to that on the Order Paper. He did not correctly state the title of the bill as the Taxation (International Investment and Remedial Matters) Bill. Before I put the question on the bill I ask the Minister to confirm that we have the exact title.
Hon Dr Jonathan Coleman: It is as printed on the Order Paper.
The ASSISTANT SPEAKER (Hon Rick Barker): That is correct. It is just a minor technical detail and it is nothing of substance.
Hon DAVID CUNLIFFE (Labour—New Lynn) : In view of the clarification that you have just made, Mr Assistant Speaker, I seek the leave of the House for the Minister to table his speaking notes from the first reading speech so that we might reflect upon whether the substance was—
The ASSISTANT SPEAKER (Hon Rick Barker): I say to the member that that is exactly the same matter that the member raised—
Hon DAVID CUNLIFFE: No.
The ASSISTANT SPEAKER (Hon Rick Barker): The member shakes his head, but in substance he asked for the information to be tabled. I said it is in the member’s speech. The member is traversing exactly the same ground again. The member can shake his head but that is my impression, and I say to him that my impression is the only one that counts on this.
CRAIG FOSS (National—Tukituki) : It is a pleasure to speak to the Taxation (International Investment and Remedial Matters) Bill. [Interruption] Obviously I have found some more Twitter followers over there. I acknowledge the previous two speakers in this debate, Dr Jonathan Coleman and David Cunliffe. I am sure that this bill will be sent to the Finance and Expenditure Committee. The issues raised by the previous speaker do, of course, deserve a lot of attention. The Finance and Expenditure Committee will work through some of the key changes in the bill. There are not too many—there are a lot of remedial matters—but there are some and we will give them fair due, and the sector will submit on them, as normal.
This bill must be seen as part of a journey. To be fair, much of that journey started under the previous administration. These changes—the foreign investment fund changes, the portfolio investment entities, the tidy-ups, the fix-ups, the clarifications, and the widening—all reference back to previous tax changes that came about mostly under the previous administration. So I welcome the magnifying glass that Opposition members have said they will be putting over this bill to make sure that it is in tune with where the original bills started out, and with some of the issues that have arisen after they have come in. In particular, foreign investment fund stuff has arisen since about 2007, I think. It brought in the 5 percent rate of return, which is not quite the risk-free rate of return. It is all those changes around the “grey list” and the Aussie-listed companies—Aussie is essentially the one “grey list” country—and all those kinds of things. To be fair to the sector, there has been a huge change and there has been quite a large impost of administration and compliance around those changes. I am glad to see that that has been acknowledged in the lead-up to this bill. The very good commentary, which is about 80 pages, goes on to explain many of the key aspects of the bill.
As I noted, the bill builds on and extends earlier legislation, in particular the international tax reforms and reforms around passive and active income—what might be interest and what might relate to the ongoing activity of the business. The whole mission here is to create and encourage an environment where New Zealand companies that may be doing well around the globe can feel comfortable that they can stay tax resident in New Zealand, particularly for earnings that would apply under New Zealand taxation law, and not to put them at a disadvantage in some other jurisdiction, which may have slightly different tax arrangements from ourselves. At the end of the day, New Zealand will not change tax law in other countries, but we can acknowledge the differences in the various tax treaties we have.
This legislation will put “New Zealand Inc.” on a fair playing field with other entities. New Zealand has a sad track record of New Zealand companies moving offshore, basically to chase capital and to get closer to the capital they require to grow. This bill starts to address that, alongside other changes that came through in 2007; in particular, in the large tax bill we passed in 2008; and in a recent bill that, again, clarified a lot of the issues.
I want to concentrate on one thing in particular because I think it might get the attention of some members. I am looking forward to discussing this particular part at the Finance and Expenditure Committee. It is in relation to the zero rating of the approved issuer levy on bonds. The monetary policy inquiry that began under the previous administration in the Finance and Expenditure Committee, and which was delivered in September 2008 just before the election, spent a bit of time on this issue. As a headline, everyone would often think that those who are issuing bonds into New Zealand should be subject to the same tax rates, the same interest rates, the same resident withholding tax, etc. as others. In one sense, that is fair enough. But if we tunnel down into the issues around it, we see that at the end of the day this makes the interest rates that New Zealanders pay higher than they need to be. I will touch on some of the caveats related to that later. If the offshore investor who is issuing into New Zealand is asking for some returns of 6, 7, 8, 9, or 10 percent—or whatever it might be; let us just use 10 percent—and if the approved issuer levy is two points, 20 points, or whatever it might be, then that is added on. Therefore, the end borrower in New Zealand is facing 10.2 percent as opposed to 10 percent.
That must be seen in the context of where New Zealand is at. We are a debtor nation, unfortunately; I think we all acknowledge the many issues to do with a lack of savings. But the reflection of the fact that we are a debtor nation is that we need to welcome foreign capital, at least for the moment, to help get us through this current situation and to put our economy on a better footing that may allow us to become a creditor nation and to start to deliver on some of our wants for this new millennium.
I will just touch on some of the caveats. They are very tight, but I see that they are getting the first cut analysis, or one-dimensional analysis, if you like. The approved issuer levy will be at zero percent. Issuers will still have to file a return on the 20th of every month to make sure that they qualify, but it will be rated at zero.
I will quickly touch on some of the caveats just to allay any fears that something untoward is going on. Among the key features of the changes to the approved issuer levy is that the security—that is debt, by the way—is denominated in New Zealand dollars. The security is offered to the public for the purposes of the Securities Act 1978, which is another catch. The security is not issued as a private placement, so nothing untoward is going on with dodgy partnerships or anything like that. The security is not an asset-backed security, so there is no double leverage out of New Zealand, or some equity funding something offshore. The registry and the paying agent activities for the security are conducted through one or more fixed establishments in New Zealand—that is, it stays within these borders. And the security is listed on an exchange registered under the Securities Market Act 1988, such as the NZDX Debt Market, or satisfies a widely held test, because we do not know what might develop as far as exchanges go in the future. I particularly wanted to concentrate on that feature in my last few minutes because the amounts involved are huge. At the end of the day the $180 billion or $200 billion that New Zealand owes offshore all came through vehicles such as the Eurokiwi, the various issuances out of Japan, etc.
This bill is essentially remedial. It makes it cleaner and better in recognition of New Zealand’s place in the world. It ties up with all the other tax agreements that New Zealand has signed to help New Zealand. Regardless of whether we acknowledge that we have to borrow the capital—we do—the intention is to at least try to make it as cheap and crisp as possible for “New Zealand Inc.” as we try to fund our way and build our way out of the economic quagmire that we are currently in. I look forward to discussing this bill further at the Finance and Expenditure Committee, if the House so wishes.
STUART NASH (Labour) : I rise to take a first reading call in support of the Taxation (International Investment and Remedial Matters) Bill. But before I do, I would challenge Minister Coleman, who brought this bill to the House, to show me the clauses that talk about payroll giving, associated persons, insurance companies, and all those sorts of matters that he brought to the House in his first reading speech. I would not mind knowing where those clauses are. But I know, members all know, and everyone in this House knows that there are no such clauses, because the Minister gave the wrong speech. We all know that Jonathan Coleman will not have written that speech. This is not Jonathan’s area. Jonathan was the Minister in the House at the time, and he was told: “Here is the speech on the bill you have to introduce.” Someone on that side of the House is trying to stitch up Jonathan Coleman. I say to Jonathan that if I were him, I would watch my back. One of his colleagues over there has stitched him up. It might have been Amy Adams. She wants his place. It could have been Craig Foss, but someone gave you the wrong speech, and you—
The ASSISTANT SPEAKER (Hon Rick Barker): No one gave me the wrong speech.
STUART NASH: I am sorry, Mr Assistant Speaker. Someone gave the Minister the wrong speech, and he spoke for 10 minutes about a bill that was passed 12 months ago—12 months ago.
Hon David Cunliffe: Did he notice?
STUART NASH: He did not notice. But with all due respect to Jonathan, it is not his portfolio area. I do not expect Jonathan to know this, but someone did know. Someone handed that Minister the wrong speech, and that person is sitting up there, saying: “Ah, look what we have done to Jonathan Coleman.” I wonder which of the Minister’s colleagues gave him the wrong speech. I know that Jonathan will get to the bottom of that.
I would like to make two points. The first is that Labour supports any tax legislation that reforms and streamlines our tax system, that promotes equity, and that closes off tax avoidance opportunities. Labour has always supported such legislation. The second point is that we will support this bill’s referral to a select committee. However, at the Finance and Expenditure Committee, Labour members will scrutinise this bill very closely, and the reason we will do so is that the National Government’s track record on recent tax bills has been very poor in terms of promoting fairness and equity. As mentioned, Labour supports any reforms that streamline our tax system, close off tax avoidance opportunities, and build on fiscal equity. This bill, on the surface, does appear to do this. It builds on recent changes to the tax treatment of international investments that were contained in a substantial tax bill that has been considered—a bill that was passed about 12 months ago, I say to Mr Coleman.
Specifically, this bill changes the rules relating to foreign investment income by aligning it with the current method for calculating attributed controlled company income. The bill means that New Zealanders holding stakes of 10 percent or more in offshore companies will not be subject to New Zealand tax on interest, unless the companies earn passive income such as interest, royalties, and rents. The bill replaces the current exemption for non-portfolio foreign investment funds in the eight “grey list” countries with an exemption of non-portfolio foreign investment funds that are resident and subject to tax in Australia. The bill makes changes to the thin capitalisation rules. Just for clarification, a company is said to be thinly capitalised when its capital is made up of a much greater proportion of debt than equity—that is, its gearing, or leverage, is considered high. I understand that what has been happening is that overseas companies have been gearing up to high levels in New Zealand and then claiming back deductions against interest payments. On paper, as an individual entity, the company may look a little shaky. However, on a global basis, the company is in no trouble at all, and although I would not go so far as to say that this is a tax rort, but it is certainly a way that multinational companies minimise their global liabilities. The bill provides for the delayed abolition of branch equivalent tax accounts for companies and the abolition of conduit tax relief accounts. It also makes some remedial amendments to the changes already made to controlled foreign company rules, as mentioned in the big bill that the Hon Jonathan Coleman talked about tonight and which we passed last year. As mentioned, Labour does support legislation that improves the integrity of the country’s tax system as well as closes down loopholes through which people are able to freely jump and avoid paying their fair share.
My second point is that we in the Labour Party will support this bill’s referral to a select committee. However, at the Finance and Expenditure Committee, we will scrutinise this bill very closely, because the National Government’s track record on recent tax bills has been very poor in terms of promoting fairness and equity. I will outline a couple of examples highlighting what I mean by this. The first example of a Government tax bill that pulled the wool over New Zealanders’ eyes was the bill that increased GST. John Key stood in front of New Zealanders, looked them in the eye, and said: “National will not increase GST.”, and he did. National increased GST after he told New Zealanders that he would not. That Government raised GST when that Government’s leader had said that he would not do that, and that is simply wrong. It is an example of a tax bill put forward by the National Government that is not good for the people of New Zealand. To tell New Zealanders that the price of items would rise by only 2.2 percent was always going to be wrong. Even the cost of Government-owned Lotto tickets has increased by around 10 percent. Another piece of tax legislation put up by this Government that was completely wrong in terms of promoting fairness and equity was the revision to the personal income tax rates.
I do not think there is any doubt that as a country we are in the middle of a recession. No matter what the figures show, one has only to talk to businessmen and businesswomen, to the retailers, and to the workers around the country to understand that the economy is suffering. So what did the National Government do? It did what no other OECD country has done, and that is provide tax cuts to the most advantaged at the expense of the majority. The few did very well, at the expense of the great majority. Someone earning a million dollars, and there are about 650 people in this country who earn over a million dollars, has just received a tax cut of $1,000 a week extra in the hand. It is $1,000 a week. Someone on the medium wage in Napier gets a tax cut of about $5 a week. It is $1,000 versus $5. Is that fair? It simply is not fair. This tax bill in Budget 2010 cost about $14 billion, and the National Minister of Finance, the head of Treasury, and the Governor of the Reserve Bank have all said that these tax cuts are not stimulatory. That means that the National Government has just spent $14 billion, in the middle of a recession, on a package that will not create economic growth at all. In fact, it will have no impact whatsoever on economic growth. That is why this Government is the only Government in the world that has done this. The Minister said it will not stimulate the economy, yet he spent $14 billion. We all know that in the last 3 months tax revenues have been down by a billion dollars. I ask the National Minister of Finance what he was thinking. I ask Treasury where the hell it got its forecasting from.
In conclusion, Labour will support any tax legislation that reforms and streamlines our tax system, promotes equity, and closes off tax avoidance opportunities. However, we will scrutinise this bill very closely because the National Government’s track record on recent tax bills has been very poor in terms of promoting fairness and equity. Thank you.
Dr RUSSEL NORMAN (Co-Leader—Green) : I rise to speak on the Taxation (International Investment and Remedial Matters) Bill. If people have been listening to the debate, they may be somewhat confused as to which bill we are talking about. The reason they might be confused is that the Minister, when introducing the bill, read the wrong speech. The Minister, the Hon Jonathan Coleman, for 10 minutes gave a speech about a bill that we are not currently considering before the House. That bill has gone through the whole process and been referred to the select committee. We are sitting here tonight discussing the Government’s technical competence to run taxation policy, but the Minister, in a 10-minute speech, introduced another bill, not the bill that is before us tonight. Can we be confident that the National Government knows what it is doing about taxation policy when the Minister does not even check that the bill name at the top of his speech notes matches the name of the bill that he is supposedly introducing into the House? He read a 10-minute speech about a bill that he is not introducing into the House.
What we are actually considering tonight, even though the National Government is completely unaware of it—even though it is a Government bill—is a bill called the Taxation (International Investment and Remedial Matters) Bill. If people want to look at the bill in more detail I suggest they go online, because they will not get any information from the Minister’s speech. The Minister gave a speech about a different bill, not the one that is before us tonight.
I turn to the bill before the House tonight. The Green Party will support the bill being referred to the select committee, but we have a lot of reservations about it and we will seek to redress those concerns at the select committee to see whether we can improve the bill. The bill does a lot of things. It is a pretty complex bill. I could have understood if the Minister had been confused about the bill. It is a complex bill; there is no question about it. But it was not that the Minister was confused about this bill. He thought he was introducing a different bill. It was not that he was a bit confused about the detail of this bill, because it is a complicated bill; I give members that. He actually thought he was introducing an entirely different bill, not this bill. Jonathan Coleman stood and gave a 10-minute speech about a different bill, not the one we are looking at tonight.
The bill we are considering tonight is a complicated bill, but the long and short of it is that it is a trade-off. Basically it says we will effectively cut some of the corporate taxes in order to try to encourage New Zealand businesses to stay here, rather than relocate overseas. That is the long and the short of it. There is a lot more to the bill. It is a long bill, but basically it says that there is a bit of a trade-off in that we will accept some lower company tax revenue in New Zealand in the order of tens of millions of dollars. This will be done on the basis that by doing this we are more likely to keep these New Zealand businesses in New Zealand, rather than their locating themselves overseas.
The Green Party accepts that we live in a globalised world with a globalised economy. We have to be competitive, and that means looking at the tax system. However, the measures that promote tax equity with other countries and encourage New Zealand - based companies to stay here bring jobs and they keep expertise here, but there is a trade-off in terms of loss of tax revenue. The problem for us is whether this is a clever response to the challenge of globalisation; that is the real question. It seems to us that this bill is a pretty blunt response. It is largely ideological, in fact. There is very little evidence that these tax changes will stop companies from moving offshore.
The regulatory impact statements—of this bill, I say to Mr Coleman; not another one—prepared by Treasury and the Inland Revenue Department are very thin on hard evidence of the threat of companies moving overseas. In fact, the Inland Revenue Department says in one of its regulatory impact statements on this bill: “A key gap in the analysis is that it is not possible to quantify the economic benefits of fairer tax treatment. Quantification would require knowledge about the sensitivity of business-location choices to tax, which is not directly observable.” That is, we are not exactly sure what would happen if we did not introduce these tax changes. Would any New Zealand businesses relocate overseas? We do not know. The Inland Revenue Department and Treasury are saying that there is very little hard evidence to know.
The other thing about this bill is that it does nothing to promote better business outcomes through tax treatment that backs winners. This legislation will do nothing to drive the New Zealand economy to deliver more sustainable outcomes. Although there is a hope—and it really is only a hope, because there is no hard evidence that this bill will help to keep businesses in New Zealand—it does not actually drive us towards what the Greens think we should be embracing, which is the green economic wave.
The next economic wave is the green economic wave, and if New Zealand wants to prosper we must write our laws in a way that prioritises the development of sustainable industries like renewable energy, sustainable agriculture, green technology, high technology, green design, and energy efficiency. Those are the kinds of tax measures that could be introduced if we want to be competitive in a globalised world, in order to make sure that the kinds of businesses that will prosper in the future base themselves in New Zealand. We could have tax law that targets tax breaks to those kinds of businesses. This bill has a generic tax break, in the hope that by giving away a few tens of millions of dollars we will keep these New Zealand businesses here. It would be much better, in our view, if we were to target those tax breaks towards the kinds of industries that we want to encourage and have prosper in New Zealand.
This bill adds about another $30 million to the Government’s $1.5 billion corporate tax cut package. None of the package that the Government has promoted picks winners, and none of it promotes more sustainable economic outcomes. We think there is a strong argument for supporting and targeting tax breaks towards the industries of the future, which will be the cleantech and greentech industries. Obviously the Green Party’s approach is to reform the tax system to encourage those kinds of industries.
So although the detail is complex, the majority of the tax measures in the bill involve a similar trade-off: lower company tax revenue versus the risk of company emigration offshore. This creates a problematic tension between racing to the bottom with company tax breaks—a race we simply cannot win in the long term—and the losing of tax revenue and jobs as companies move offshore, motivated by tax reasons.
The labour law that we recently saw passed through the House under urgency to secure the filming of The Hobbit was a disturbing example of this kind of bidding war in a race to the bottom. The danger with this kind of tax legislation is that sovereign nations all around the planet compete with each other to have lower and lower corporate taxation in order to try to keep businesses or get them to locate to a certain country. We do not think that this race to the bottom is a very clever strategy in terms of trying to support New Zealand businesses and encourage sustainable New Zealand businesses that embrace the green wave here.
Each tax measure in this bill is slightly different. There is a whole bunch of them, and we may support some measures, while not supporting others. However, as a Parliament we should not in principle support the slow erosion of our tax base for these kinds of unquantifiable theoretical gains, and, as the regulatory impact statement states, it is very hard to quantify. New Zealand would do much better to understand our natural advantages and play to them while simultaneously extending our efforts abroad in international forums to agree to satisfactory environmental, labour, and tax standards. We would do much better to work with other countries to agree on some minimum standards around tax, labour, and environmental standards so that we do not compete with each other on environmental standards, labour standards, or tax rates. This is a relatively small sum in this bill—maybe $30 million a year. So it is small compared with the nearly $100 million that was given away to encourage The Hobbit to be filmed here. But it is still part of the overall trend of the race to the bottom.
So for these reasons the Green Party will be supporting the bill’s referral to the select committee. We understand the basic intent of the bill, and the bill has a lot of components that we do support, but we do raise a flag and we are not guaranteeing our support further, because of the whole problem of the race to the bottom that is encapsulated in this bill.
TE URUROA FLAVELL (Māori Party—Waiariki) : Tēnā koe, Mr Assistant Speaker. Kia ora tātou katoa. I am pleased to take a short call on the Taxation (International Investment and Remedial Matters) Bill on behalf of te Pāti Māori. Three weeks ago the Minister of Finance told the House that New Zealand’s economic recovery is vulnerable to any kinds of price shocks, including oil price shocks. At the moment there is evidence of increases in commodity prices, which suggests that there could be risks in the future, and, of course, we come to this bill aware of the impacts of what many economists consider to be the worst financial crisis since the Great Depression of the 1930s. We have been through a time marked by a failure of key businesses, declines in consumer wealth estimated to be worth hundreds of trillions of US dollars, and a significant decline in economic activity. In this context, then, we are interested in the impact of the proposed introduction of an active income exemption for foreign investment funds.
Basically, this bill aims to reduce compliance costs by offering transparency in the current law by streamlining the process around the taxation of income from foreign investment funds. It does this in an attempt to encourage New Zealand investment in offshore investment funds. In terms of the extent to which such a proposal may incentivise small businesses to grow by reducing compliance costs, the Māori Party is definitely interested in seeing how this plays out over time. The Māori Party places particular priority on the need to support the development and innovation of small businesses, including minimising taxation and compliance costs. In this bill that goal will be achieved by simplifying the number of calculation measures. Apparently, six different measures are currently available. Under the act of income exemption for foreign investment funds, only passive income, such as interest, royalties, and rents derived by New Zealand shareholders in offshore companies, will be subject to New Zealand tax.
The key problem the bill is seeking to address is the inequity experienced by foreign companies offshore in having to pay New Zealand tax as well as comply with the tax rules of their particular country. New Zealand’s international tax rules can often impose higher tax or compliance costs on offshore operations than those faced by competing businesses operating in the same country. Any New Zealand business that invests in a foreign company must not only comply with the tax rules of that country but also attribute income and potentially additional tax in New Zealand. Such a situation can tend to create an incentive for New Zealand companies seeking to establish business ventures outside of Aotearoa to relocate their headquarters to countries that have far more favourable tax rules.
So a very clear benefit in the proposal in this bill is that although we are unable to stop the seemingly unstoppable drive to expand offshore, at least we will not be threatened by the possibility that New Zealanders will sell up and leave Aotearoa for good because of an unforgiving tax regime. The Māori Party is happy to support this bill at its first reading to enable the kōrero to be had. Kia ora tātou.
H V Ross Robertson: Sure you’ve got the right bill, David?
DAVID BENNETT: I am sure I have the right bill, and members on the other side of the House should take note of this bill. It shows that the Government is working effectively to provide the economic base that will deliver this country the brighter future it was promised.
H V Ross Robertson: Tell that to Jonathan Coleman. He needs to know.
DAVID BENNETT: Members of the Labour Party get a bit interested when they hear those words about a brighter future, as those words put them in their place in this Parliament.
This bill is an important taxation bill. It extends the active income exemption introduced in 2009 to offshore subsidiaries. Essentially, controlled foreign companies, or CFCs as they are known in taxation terminology, are the subject of this bill. The other name that is used is foreign investment funds, which also are part of this bill. It applies to joint ventures and other significant shareholdings in foreign companies that are not controlled by New Zealanders—non-portfolio foreign investment funds. Effectively, this means that the active income exemption is now being extended to joint ventures and other significant shareholdings. That is in contrast to the other form of income, known as passive income, which is typically interest, royalties, and such like. Under the rules only passive income derived by New Zealand shareholders in offshore companies will be subject to New Zealand tax.
For those looking at the bill for the first time, I say that the point of difference with this bill is the active income and passive income distinction. Active income would be a company that is earning money from producing a product—for example, manufacturing it overseas—and passive income means income that one receives without actually having to do anything to get the money, except to have it invested through something like interest, royalties, or rents. That is the important first distinction the bill applies to. The second part of it is the nature of the ownership and the taxation of that ownership. Essentially, for active income, the point of taxation will be in the country where that active income is earned rather than being treated as taxable in New Zealand, but passive income will be taxed in New Zealand. That is the general thrust of what this bill is about.
The reason it is being done in that way is that passive income is typically seen as investment income, so New Zealanders would be taxed on it. That is a choice that investors have when making those investment decisions. Active income is seen as probably needing to be on a more level playing field taxation-wise in the countries in which one is earning that active income, because one has effectively got a manufacturing or other kind of service site there. With the measures in this bill we are giving a stronger and more sustainable tax system to New Zealand, and we are providing an impetus for growth. We are putting New Zealand taxpayers on a level playing field with their international competitors. It is important for the economic growth element of a better future for New Zealanders that we make these changes.
There are some other changes in the bill, as well. The bill extends and rationalises the 2007 international tax reforms so that there is consistency between types of foreign investments. There is a percentage that is used as a threshold to determine the 5 or 10 percent thresholds for taxation, whether the bill will apply to the form of income or not. Another big part of the bill is the exemption for Australia. Previously, we used to have a foreign investment fund that had a “grey list” of countries. Typically, the eight “grey list” countries were ones that were typical New Zealand trading partners. This bill is taking that down to just Australia as the exemption. That is in line with modern practice within this country. There are also some rules on capitalisation to avoid the incentive for people to stack debt against New Zealand operations overseas. That is part of stopping any taxation or tax planning where people try to avoid taxation by taking advantage of these rules. There are a few other minor amendments in the bill, as well.
Essentially, this bill will create a level playing field for a taxation base—and active-passive income is a huge part of that—and to make sure that controlled foreign companies and foreign investment funds are treated in a manner that enables New Zealand investors and businesses to grow. Thank you.
RAYMOND HUO (Labour) : I rise to take a call in support of the Taxation (International Investment and Remedial Matters) Bill. Labour supports this bill’s referral to a select committee. Deloitte published in March of this year an article on proposed further changes to international tax regimes. I would like to borrow part of the title of that article: “the good, the bad and the ugly”. It is very fitting that I borrow that title to describe the various aspects presented by this bill and the priorities the Government has taken.
The Minister responsible for the bill, the Hon Peter Dunne, in his recent speech at the 2010 New Zealand Institute of Chartered Accountants tax conference explained that the bill was a good bill. He said the bill “provides consistency of tax treatment between similar types of foreign investment by extending the active income exemption and active business test (with some small modifications) to non-portfolio foreign investment funds (FIFs). It also extends and rationalises the portfolio FIF reforms so that those investors who are unable to use the active income exemption (due to having an insufficient shareholding or access to information) will generally be taxed on an assumed 5% rate of return (fair dividend rate method).”
I also note his statement that his Government intends to make New Zealand a more attractive place to invest by lowering withholding taxes through double tax agreements. From the Government’s point of view, this bill means that New Zealanders holding stakes of 10 percent or more in offshore companies will not be subject to New Zealand tax on those interests unless the companies earn passive income, such as interest, royalties, and rents. The bill replaces the exemption for non-portfolio foreign investment funds in the eight “grey list” countries with an exemption for non-portfolio foreign investment funds that are resident and subject to tax in Australia.
As I said, Labour supports this bill’s referral to a select committee. This bill is large and complex, and it reminded me of the days when I was at the Finance and Expenditure Committee. It is a large and complex bill that warrants careful consideration, and the scrutiny of a select committee is necessary and most appropriate. Concerns such as those raised by Deloitte are good examples. Commenting on the discussion document that gave rise to this bill, Deloitte stated that the removal of the “grey lists” would expose investors to income attribution when they have previously been exempt. The corresponding tax compliance burden and possible inability to access the required information to meet the alternative exemption may make some New Zealand investors comparatively worse off. This is amplified when we consider that a number of other major trading nations have, or are in the process of introducing, a form of “grey list”.
I will remain very interested in the development of this bill, and I wish that the Minister would take a call at some later stage and enlighten us as to what he believes to be the best way to address those issues. From a technical perspective this bill follows the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009, which the Government kindly, and inadvertently, reintroduced tonight. That legislation changed the way in which a resident’s attributed controlled foreign company income is calculated.
This bill aligns the method for calculating foreign investment fund income with the current method for calculating attributed controlled foreign company income. It also makes two changes to the thin capitalisation rules. This bill introduces an optional test based on the ratio of deductible interest expenditure to net cash flow. It also changes the rules relating to the grouping for the purposes of the thin capitalisation rules of a registered bank owned by the Crown. Further, the bill introduces a zero rate for the approved issuer levy on payments made by approved issuers to non-residents under some debt instruments. The bill introduces other measures, as well.
Although I commend the Minister of Revenue for his obvious contribution towards this bill, I cannot help but note a report released yesterday that stated that tax revenue was over $1 billion lower than expected. The Government knew, or must have the required knowledge to know, that the upper-income tax cuts were unaffordable, meaning the Government is having to borrow even more to make up the shortfall for its tax cut to the highest-income earners. That meant the Government broke its promise not to raise GST. It meant huge cuts to our health system, to adult education, and to early childhood education. Huge cuts to early childhood education funding mean that parents with young children will have to find extra each week. The $1.2 billion hole in health spending over 4 years will hit the elderly and the sick very, very hard.
The National-ACT Government does not seem to be interested in investing in our future, either. It is turning students away from universities and polytechnics, and it is cutting research and development investment. It even cut the much-needed refugee study grant. I attended the Māngere Refugee Resettlement Centre annual general meeting last Saturday. One could feel that this cut will be felt very hard in the refugee community. Since National has been in office, the migrant and refugee community in New Zealand has taken a number of blows. The fact that the unemployment rate amongst the ethnic community has skyrocketed in the past 2 years has been compounded by a number of short-sighted, negligent decisions from the National-ACT Government.
Funding has run out for the refugee study grant, and it was axed in the 2009 Budget. The grant was established by the Labour Government in 2003. It created a direct pathway for many hundreds of refugees to get into work. [Interruption] Politics is all about priorities. From this move we can see that the National-ACT Government is focused on delivering tax breaks for the privileged few at a time when the majority of ordinary New Zealanders are struggling. A tax switch is no substitute for a real economic plan.
I support the bill’s referral to a select committee. I look forward to more debate on the various aspects of the bill and the priorities of the Government, which will reveal the good, the bad, and the ugly. Thank you very much.
- Debate interrupted.