Taxation (International Investment and Remedial Matters) Bill

It is my privilege to speak on the first reading of the Taxation (International Investment and Remedial Matters) Bill. This bill is another demonstration of the Government’s focus on lifting New Zealand’s economic performance. It has been 2 years, yesterday, to the day since this Government took over the Treasury benches and it has been a busy Government. It has been a busy Government that has taken on a number of pieces of legislation, particularly in the area of enhancing the tax system and promoting economic growth. The Government has been busy promoting better, smarter public services and lifting the education standards of young New Zealanders. The Government has also boosted infrastructure in those 2 years, through spending on roads, warmer homes, and the broadband plan.

This bill builds on and extends earlier international tax reforms. Some of them, as has already been acknowledged in this House tonight, first came to this House under the last Labour Government, but a substantial number of them have come in under this Government in the 2 years since we took office. The main proposal in the bill is to extend the active income exemption, introduced in 2009, to offshore subsidiaries. As has already been stated, they are controlled foreign companies, or CFCs in the tax parlance that is used within the Finance and Expenditure Committee. The proposal also applies to joint ventures and other significant shareholdings in foreign companies that are not controlled by New Zealanders.

The act of income exemption brings New Zealand’s tax rules into line with other countries, and in terms of best practice it is something that the Government is here to promote. Although our colleagues across the benches have said that they will scrutinise this bill in the select committee, it intimates to me that they do not scrutinise other legislation that has been put through the House. All three speakers from the Labour Party used the word “scrutiny” and that indicates that they are all reading from the same research notes that were handed out prior to their coming to this House. We thank them for their contributions on that subject.

💬 Grant Robertson: Wrong message.

Yes, Mr Robertson. This bill also helps New Zealand - based businesses to compete more effectively in foreign markets by freeing them up from a tax cost that similar companies in other countries do not face. So it is about competitiveness, and about promoting New Zealand companies and promoting our industries in foreign lands.

We heard the arguments from members opposite that they do not see the promotion of exports through a number of our tax policies, yet for 5 consecutive years under the Labour Government export volumes decreased. That shows Labour’s commitment to the promotion of exports, the promotion of jobs and opportunities, and the promotion of our industries. We also heard from Mr Cunliffe about the possibility of reforming loss attributing qualifying companies. I find that rich coming from the Labour spokesperson on finance, given that Labour had 9 years within which to regulate such companies. Those members sat on their hands and knees and failed to do anything about it.

In terms of productivity we will be deliberating on the New Zealand Productivity Commission Bill in the Commerce Committee and that is another change that we expect will promote productivity, and exports from this country. We know that under the 9 years of the Labour Government productivity increased by 1 percent, year on year. Labour’s track record is nothing to be proud of. The Government has had to turn round this economy with the policies that I have outlined, in terms of infrastructure, innovation, and cutting red tape and regulations. I look forward to the select committee process where we will discuss the details of this bill. I commend the bill to the House. Thank you.

I rise to speak in the first reading of the Taxation (International Investment and Remedial Matters) Bill. It is important to pause briefly to note the name of the bill—the Taxation (International Investment and Remedial Matters) Bill. The bill is not called the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which was the title given in the speech that Jonathan Coleman gave to open the first reading. He gave the same speech that the Hon Peter Dunne gave when he introduced the Taxation (International Taxation, Life Insurance and Remedial Matters) Bill. So Dr Coleman gave the wrong speech, but I ask whether members know what makes it more interesting. The speech that Peter Dunne gave, which Jonathan Coleman read out again tonight, was given on 23 July 2008 when Mr Dunne was, in fact, a Minister in a Labour Government—

💬 Carol Beaumont: An oldie but a goody.

An oldie but a goody, indeed. I have Peter Dunne’s speech of 23 July 2008 in front of me and can clarify for Dr Coleman that it is word for word.

💬 Hon Dr Jonathan Coleman: I’ll have to have a word with him about that.

I think Dr Coleman probably delivered it with slightly less enthusiasm than Mr Dunne, certainly when Dr Coleman worked out that the speech was not actually about the bill we are debating tonight. I certainly will table that speech at the end of my speech, just to make sure that we can all see that Dr Coleman read out the same speech that Peter Dunne did, except it was about another bill.

💬 John Hayes: It’s consistency for you.

Mr Dunne is the one who has been inconsistent, I say to Mr Hayes. He was a Labour Minister when he gave the speech the first time, anyway. I say to Dr Coleman that I am sure that we are all grateful for hearing that great speech from Mr Dunne from July 2008 once again in the House tonight, even if it is not about the bill that is before us tonight.

As Labour colleagues have said, we certainly are supporting this bill to go to the Finance and Expenditure Committee. It is a dense taxation bill; it is not a bill that I would normally have much time to focus on, but I have been pleased to look at it tonight. I can see elements in this legislation that look like they will be worthwhile, and will make reforms in the way that New Zealanders are taxed for income from interests in overseas entities and the gains of foreign residents from interest in New Zealand companies. That is a difficult area of taxation and a complicated area of taxation, and it therefore deserves select committee scrutiny. It aims to provide consistency of tax treatment between similar types of investment and it achieves that by extending the active income exemption and the active business test with some small modifications to non-portfolio, foreign investor funds. This side of the House can certainly understand that the bill will be welcomed by a number of investors and that it deserves the attention of a select committee, but some of the questions we will be asking on this side of the House are around just who will benefit from the changes.

We have become suspicious over time about the way that National constructs its taxation programme and its taxation legislation. We certainly saw that when the tax switch—or the tax swindle, as some people have called it—was brought into this House, essentially tilting the tax system in favour of the top earners in this country. We heard from the previous Government speaker, Sam Lotu-Iiga, about the great programme that National has had in office and its fantastic track record when it comes to taxation. But all this side of the House sees in terms of a track record on taxation is taxation policy that favours the wealthy in our society. Although National might be prepared to go back two decades to trickle-down economics and hope for the best that that will lead to an economic recovery for New Zealand, we do not believe that is so on this side of the House. We believe that when we look at the overall economic programme—and taxation policy is part of that—we have to adjust ourselves to a modern world; we will not go back to failed economic policies like trickle-down economics. We need a taxation system and an economic policy that will deliver for the exporters of New Zealand, that will deliver high-quality jobs for New Zealanders, and that will deliver high-tech, clean, green industries.

Mr Lotu-Iiga stood up and talked about the changes that National had made. One thing that he did not talk very much about was the change to the research and development tax credits—the removal of the research and development tax credits. There are varying views about tax credit systems around the world, but one thing is absolutely clear when it comes to research and development tax credits: Australia has a tax credit system, and many people I spoke to when Labour brought in our tax credit system said that the best thing about it was that we were matching the Australians. It meant that the incentive to take their business—the research and development part of their business—offshore had gone. But National came into office and got rid of the research and development tax credits, and that was a negative moment for businesses in this country. It took away an incentive to improve what most people acknowledge has not been a great record on research and development in this country. Mr Lotu-Iiga might be proud of National’s tax record, but the truth is that National walked away from an opportunity to enhance investment in our businesses and increase research and development, which is so vital for New Zealand.

When Labour members look at this bill, we are concerned about the way that National has gone about some other major elements of its tax policy—GST being the obvious one. On 1 October GST went up by 2.5 percent, and it is worth reminding the House that John Key went into the 2008 election saying that GST would not increase. He said that GST would not increase. The video is out there for anyone who wants to watch it. Mr Key has stood up in this House and said that it all depends on what context he was talking in. The context he was talking in was whether GST would go up under a National Government and he said that it would not.

💬 David Shearer: You can’t get around it, really, can you?

He cannot get around it, and that kind of broken promise on taxation policy is the very reason why people on this side of the House look very closely at all taxation bills that come before this House to see who will benefit from them. We know that the people who will be most affected by the increase in GST are those on the lowest incomes. They got the least out of the tax cut package and they are most affected by the increase in GST. It is a double whammy and we know from talking to families all around New Zealand that the impact of this Government’s tax policy has been negative for those on the lowest incomes. Families who thought that they would be better off because the National Government had promised them tax cuts are actually finding themselves worse off—in some cases up to $50 a week worse off when we build in the impact of ACC levy rises and the cuts to funding for early childhood education. Those families are already struggling with cost of living increases.

Here in Wellington, people have come to see me about something as simple as bus fares going up. When bus fares go up, it puts huge pressure on people who rely on buses as their mode of transport. In Wellington, bus fares effectively went up for some people by $40 a month if they caught the bus every day—$40 a month. That is a big chunk out of people’s disposable income. Their power prices may have gone up; here in Wellington, customers of two or three of the power companies have had letters telling of a 6 percent increase in power prices. That is an added increase for families who are struggling and not benefiting from the tax policy of this Government.

I do not claim to be any kind of expert on taxation, but, as my colleague Raymond Huo said before, it is about priorities. It is about the priorities this Government gives in terms of where it wants to take New Zealand into the future. I ask whether the priority is investing in people, in skills, in training, in supporting people into work, and making sure that all New Zealanders can achieve their potential, or whether the priority is making decisions about trickle-down economics, hoping for the best, and rewarding the privileged few, rather than developing the potential of the many.

It is sad for me that we have a taxation bill here. Jonathan Coleman has nearly caught up now with which bill we are actually debating. But this taxation bill is fine, it should go to the select committee, and it should be discussed. But when it comes to tax policy, this Government has, sadly, broken its promises as part of an economic plan that it has not provided to New Zealanders. What we see is a Government without vision, and, in the case of tax policy, favouring the privileged few over struggling New Zealanders who need support.

It has actually been a little while since I have risen to take a call in this House. I have been sitting here hoping that it is like riding a bike and that I will remember how to do it.

It is an interesting time to take a call on the Taxation (International Investment and Remedial Matters) Bill. The first trick with this legislation is not to get it confused with the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which of course went through the House earlier last year and is now law. I tell Mr Robertson how much I enjoyed sitting through the Finance and Expenditure Committee when we worked through the detail of that bill. In actual fact, the process of working through that earlier bill has been quite helpful for me in framing the debate around this legislation, because it looked at the same core issues that this bill is addressing: in essence, the proper way that we tax in New Zealand income, both passive and active, from foreign entities.

With that bill, the select committee worked through the process and saw the wisdom of moving away from the old “grey list” test by which we exempted income earned in certain qualifying countries, but which was very unfair and unclear as to how everything else was taxed. We moved instead to a much simpler test where Inland Revenue would look at whether the income was actively earned in that country and whether the company was actively trading, in which case it made sense to put them on a similar footing to local companies in that jurisdiction, or whether that revenue was earned on a passive basis, in which case fairness suggested that it should be taxed here in New Zealand according to New Zealand rules. That made sense to the committee, it was subsequently passed by this House, and, as far as I know, it is working very well.

With this bill before us tonight we see the extension of that regime to non-controlled foreign entities owned by New Zealand residents. On the face of it that extension seems to make a lot of sense to me, but, of course, if this House approves the first reading tonight, we will have to work through in select committee exactly what impacts that extension will have, why those entities were originally left out of the regime, and what any unforeseen aspects might be.

I will touch very quickly on two other matters in my contribution tonight. One is around the changes to the thin capitalisation rules, which are probably a little-known, pointy-head aspect of taxation law but are actually rather important. This bill proposes changes to the thin capitalisation rules for non-residents. One important change is providing an alternative test, which on the face of it seems to be a very sensible alternative allowing an assessment of interest expenditure as a proportion of income for companies that are not State-owned banks. That seems to make a lot of sense in ensuring that those thin capitalisation rules work well; again, I will be very interested to hear from officials and submitters as to the impact of that change as we work through the process.

The final point I want to pick up on is about looking back into the dark old ages. Reading through the explanatory note I saw a reference to the Stamp and Cheque Duties Act 1971. I have to say that in my early days of practising—and Minister Wilkinson will remember those days—we had to collect stamp and cheque duty in all conveyances. I was surprised to see that it is still active. But, yes, we indeed have a requirement under that Act that for approved issuers there is an exemption from non-resident withholding tax and that the rate for those approved issuer levies is set under the Stamp and Cheque Duties Act. This bill would see that rate reduced from the current 2 percent to a robust rate of zero percent. I am very pleased to see that my old friend the Stamp and Cheque Duties Act still breathes life. Again, I will be very interested in talking to officials about how reducing that rate to zero percent will affect the situation.

I support the bill. It seems to be a sensible extension of the regime previously approved by this House, but, of course, until we hear from submitters and until we work through the process, we will not know exactly how it will apply. At this stage, I am very happy to commend the bill to the select committee. Thank you.

I seek leave of the House to table the speech made by the Hon Peter Dunne on 23 July 2008 on the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which is the same speech that Jonathan Coleman gave at the start of this first reading.

💬 Mr DEPUTY SPEAKER: I cannot accept that because it is already in Hansard. [Interruption] I think the member has made his point.

Bill read a first time.

Bill referred to the Finance and Expenditure Committee.