Taxation (International Investment and Remedial Matters) Bill

I move, That the Taxation (International Investment and Remedial Matters) Bill be now read a second time. The measures that this bill contains continue the reform of New Zealand’s international tax rules that has been under way for some years now, to help New Zealand-based businesses compete more effectively overseas by removing undue tax obstacles to their overseas-based operations and by bringing our tax rules into line with those of other countries.

This bill was introduced late in 2010, and the reforms themselves kicked off in 2009 with the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act, which introduced an active income exemption for foreign companies controlled by New Zealand investors. The term “active income” refers to income from activities such as manufacturing, while the term “passive income” refers to income such as interest, royalties, or rent.

The reform has been designed to encourage businesses with international operations to remain in New Zealand, while enabling them to compete on an equal tax footing with their competitors in foreign markets. Previously, a New Zealand company’s active income from its offshore subsidiaries was taxed by New Zealand, whereas other countries would not impose such a tax on their companies. So the current bill takes this process one step further ahead by reforming our international tax rules through a number of further measures to remove tax obstacles to business and investment by New Zealanders operating offshore.

The first of these changes extends the active income exemption to joint ventures into other significant New Zealand shareholdings in foreign companies that are not controlled by New Zealand firms. Under the provisions in the bill, New Zealanders with stakes of 10 percent or more in offshore companies will not be subject to New Zealand tax on those interests unless they earn passive income such as interest, royalties, or rents. To minimise compliance costs for these businesses, an active business test will apply, and that test will remove the need to calculate and to attribute small amounts of passive income.

Other changes in the bill further rationalise or extend the earlier international tax reforms. The current exemption for non-portfolio foreign investment funds in the eight so-called “grey list” countries is being replaced with an exemption for non-portfolio foreign investment funds—or FIFs—that are resident and subject to tax in Australia. The “grey list” is probably the final hangover of the tax reforms in the international arena from the 1980s. I well recall at the time when changes were first being mooted the Hon Dr Michael Cullen as the then Minister of Finance making the comment to officials and others that this was an instance, in a parody of Star Trek, where New Zealand had gone where no one had chosen to follow. In many senses, what this legislation is doing is carrying through on that change and rationalising the concept of our international tax structure to more accurately reflect where a number of major New Zealand investments occur.

There is one other area where the bill also makes a significant change with regard to a potential barrier for non-resident investment: the area of New Zealand corporate bonds. In 2009 the Capital Market Development Taskforce recommended that the approved issuer levy—or AIL, as it is commonly known—be reduced from 2 percent to nil for corporate debt that is publicly issued. This bill achieves that recommendation by providing a nil rate of approved issuer levy in respect of interest paid on corporate bonds that are widely traded in New Zealand and that meet other criteria.

The bill does contain some other technical amendments. These are largely remedial in nature, aimed at removing certain unintended consequences of following the earlier reforms. On that note I wish to advise the House that I will shortly be releasing a Supplementary Order Paper to correct some minor drafting oversights in both Budget 2010 and Budget 2011 legislation that did not update some numbers and some dates.

In bringing this bill back before the House for its second reading, I am grateful to the previous Finance and Expenditure Committee for the detailed consideration that it gave the bill, and for the recommendations that it made at the time for further refining and clarifying its content. In that respect I note particular changes that have been made to the active business test to make it easier to apply by using accounting information.

The changes in this bill, on the whole, are very positive news for New Zealand companies with overseas interests, and for investors generally, and that in turn will help play its part in New Zealand’s overall economic recovery. It is therefore with a great deal of pleasure that I commend the Taxation (International Investment and Remedial Matters) Bill to the House.

This bill, the Taxation (International Investment and Remedial Matters) Bill, makes a minor change to tax rules that will be beneficial overall to the New Zealand commercial community. I would note that I would not want to overstate the importance of it. I think that is borne out by the fact that it was reported back by the Finance and Expenditure Committee on 9 May last year and it did not make it up the Order Paper before the election, so it is hardly the most important piece of business in terms of the future of the New Zealand economy.

I will make one or two comments. I do agree with the Minister of Revenue that it is important that we do not allow New Zealand ownership of offshore operations to be undermined by uncompetitive tax rates in New Zealand on overseas income. If we do that, we create a perverse incentive for those companies to move their operations from New Zealand to a low-tax jurisdiction, and we have to guard against that.

If we are looking, then, at areas where we have residual concern, I think more work needs to be done in respect of offshore royalty income. The Labour Party took to the last election a proposal that we consider whether there should be a reduction in tax on overseas royalties earned by intellectual property - rich companies based in New Zealand. Those companies, more than almost any other company, can base themselves in just about any other jurisdiction in the world, because they are not reliant on manufacturing facilities in New Zealand. They are not reliant on New Zealand land for production of primary produce. They can locate themselves where it is most beneficial to their shareholders. We need to take care that if we want to encourage the growth of some of those clever technology companies, we do not encourage their early transition out of New Zealand in order to chase a lower tax rate on their royalty income.

I heard from one of the senior partners of one of the Auckland accounting firms. I will not name the firm to identify the individual, but he acts for many of the successful technology companies. I went to see him in the course of my responsibilities as the then spokesperson for Labour on economic development. I asked him what changes he thought were necessary in New Zealand to stimulate the growth of that sector. He thought that a review of the treatment of taxation on royalty income from intellectual property rights held by New Zealand companies in respect of their offshore operations was necessary, which is why we took that to the election. I think that is unfinished business, Minister, and I would hope that that is under consideration by the Inland Revenue Department.

One area where I disagree with the import of this legislation—the Labour Party, notwithstanding that opposition, will be supporting the legislation, because overall it is good legislation—is the removal of the approved issuer levy. The minority report from Labour in the report back from the select committee noted that we had submissions from a number of submitters that the proposals outlined, which reduce the revenue to the Crown, will not, in their opinion, help increase liquidity of loans flowing into New Zealand.

There is no other reason to do this. Why should we be reducing the tax burden on effectively overseas lenders into New Zealand if there is going to be no difference in liquidity or lower interest rates in New Zealand? Already the overseas lenders to New Zealand face a very low tax burden compared with a domestic earner of interest in New Zealand. If interest is paid to a non-resident by a New Zealand enterprise, the non-resident withholding tax rate is much lower than that paid by a resident.

There is a reason there is a tax rate differential. One reason is the fact that if you are a non-resident, you do not enjoy all the services that we enjoy as residents. You do not get your share of health services, and you do not get education services, so, in a fairness sense, you would not expect them to be paying as high a rate of tax. But it is also true that they do get the benefit of a stable democracy and the things that are paid for by taxation, so they should be paying some taxation on the interest that is earned from New Zealand borrowers, be they corporate or private borrowers.

Already in New Zealand we have granted increasing exemptions over the years to reduce the tax burden—I should not call it the tax burden—the tax paid by those overseas lenders into New Zealand who are earning interest from their investments in New Zealand. We have done that by exempting people from non-resident withholding tax, which they have been able to get around through—and the Minister can tell me if I have got this wrong—the approved issuer levy process. So if they come through the approved issuer levy route, they can, on occasions, avoid non-resident withholding tax. Already the substitute, if you like, for non-resident withholding tax—the approved issuer levy—is at a considerably lower rate, not only than the tax that would be paid by a New Zealander being paid interest if they were a resident in New Zealand but also than the non-resident withholding tax rate.

Yet the proposal here is not to move to equalise that and perhaps garner a bit more revenue for the Crown. You know, the Government is running an enormous deficit at the moment; it needs to get some money from somewhere as well as trim its expenditure and grow the economy. It needs some more revenue. Why would we be giving revenue away through abandoning the small amount of revenue that we get from the approved issuer levy, rather than actually making it more robust? I do not think that would be causing an unfairness. If we have substantial evidence that there would be threats to the ability of New Zealand to fund its offshore borrowing requirements or for our banks and other corporate borrowers to fund their borrowings, then maybe there would be a substantial case for reducing the costs of overseas lenders through taxes and approved issuer levies. But that case has not been made out.

For that reason, Labour is critical of this part of the legislation, which effectively, again, seems to serve the interests of the big end of town, to the detriment of the New Zealand tax base, and yet there does not seem to be a proven need to do it. Rather, we would have thought there would be a desire to get an appropriate balance between those different actors in the economy who pay tax.

Plainly the people who invest money in New Zealand get an interest benefit from the interest that is paid by New Zealanders. They do get a benefit from New Zealand. They in part get that because of the things that New Zealand funds through taxes that are collected, such as an educated population that can work and be productive, and therefore afford to pay interest to those overseas lenders into New Zealand. They are benefiting from police, and they are benefiting from the enforcement of the rule of law, which means that their contracts are enforceable in New Zealand and they will get repaid.

These are all things that are sustained by the New Zealand institutions that are in part funded by taxation, and I think it is fair that we expect the recipients of those rewards—that interest that has been paid from New Zealand to those overseas people—to bear a tax burden. Yet this legislation goes in the opposite direction. Not that it was a heavy burden through the approved issuer levy, but rather than actually trying to equalise things in a way that is fair, it has just said “Look, we’ll just give up and we won’t charge any.” I do not think that is good policy, I do not think it stands scrutiny, and that is why Labour has opposed this part of the bill, which is the removal of the approved issuer levy.

I have just about run out of time; I would say in closing that if we want to get right the investment signal into New Zealand businesses, it is much more important that we do things like get a neutral tax signal through a capital gains tax so that people invest on the basis of the profitability of the investment, rather than the tax treatment of it. If it is good enough for the Minister of Revenue to come here and say that it is important that we have these changes in order to have a relatively level playing field about where people invest overseas, why can we not have similar logic applied to our tax system in New Zealand so that we encourage the more productive use of capital in New Zealand, discourage the over-investment in the speculative sector, and encourage investment in the productive sector? Through that we would reduce our current account deficit and get wealthier, as well as improve the tax base.

The Taxation (International Investment and Remedial Matters) Bill, as a main proposal, extends the active income exemption introduced in 2009 to offshore subsidiaries so that it also applies to joint ventures and other significant shareholdings in foreign companies that are not controlled by New Zealanders. The active income exemption brings New Zealand’s tax rules into line with the practice in other countries. It will help New Zealand - based businesses to compete more effectively in foreign markets by freeing them from a tax cost that similar companies in other countries do not face.

In plain English, effectively what this bill does—and I have to say I did not have the pleasure to be on the Finance and Expenditure Committee when this bill passed through it and was considered—is ensure that businesses remaining in New Zealand compete on an equal footing when they go overseas. They are not double taxed. I appreciate there is some simplification in what I say. There are distinctions, for example, between active and passive income, which the Minister has spoken of, but we do have a system, broadly speaking, and we are extending the system so that when businesses here go overseas and face tax costs in their business, they are not double taxed here. I think David Parker put it well when he said we are not having uncompetitive tax rates in New Zealand for those overseas interests. Again, without having sat on the committee as this bill went through, one can see many instances where that would be of benefit to New Zealand businesses abroad, whether manufacturing in Taiwan, or whether attempting to set up agricultural and horticultural businesses in South-east Asia and the like.

Can I also just say that on the Finance and Expenditure Committee today we in some ways considered the other side of the coin on this aspect. Russel Norman when questioning the Commissioner of Inland Revenue, whilst I disagree with his conclusions, made some interesting and valid points, I think, about our corporate tax rate and whether or not its level is conducive to investment, and whether it puts people off. Winston Peters had a very different view, and I take a different view again. It is in many ways like a situation with the bear, I suppose, where you do not want the porridge too hot or too cold. If we have the tax rate too high we are turning off business, and if we have it too low we cannot pay for the social services we want and need in this country. But I think what it does show is that robust views on the select committee are to be welcomed, that there is room for them, and that the Finance and Expenditure Committee will be able to deal with them in a cordial way.

I come back to the bill. I think it is a good step. David Parker may well be right when he says it is not huge and it is not going to change the world. Nevertheless it does go towards the Government’s programme of making for a more productive and competitive New Zealand economy.

Tēnā koe, Mr Assistant Speaker Robertson. I want to acknowledge Simon Bridges as the new chair of the Finance and Expenditure Committee. Actually, he follows the efforts of Amy Adams, Shane Jones, Clayton Cosgrove—I am not entirely sure whether I can accord that status to David Cunliffe—and even Peter Dunne. For reasons that escape me, my colleague David Parker said that Simon Bridges chaired the meeting very well. I am not entirely sure whether he is ready for a CSI test or something like that, but I am prepared to follow the words of my senior colleague and wish Simon Bridges well as he steers that committee, which, after all, is the all-important Finance and Expenditure Committee.

It is a committee, I might say, that was bedevilled during the period of time after Air New Zealand’s private equity shrank, as a consequence of a financial collapse, to somewhere near 20 to 30 percent. The Crown picked up the rest, but, for reasons that were never fully understood, the power and fears of the private shareholders in that company meant that it was very difficult for the Finance and Expenditure Committee to exert a level of surveillance over the investment the Crown had in that entity. Unfortunately, no doubt we will hear about that issue a great deal more frequently as the year unfolds.

We will support the Taxation (International Investment and Remedial Matters) Bill. For a mercifully short period of time I sat on the committee and heard a number of submissions about this bill. I enjoyed the company of David Bennett and others, and I could see that one did not need to read legislation in order to advance in the National Party, unlike our side of the House where we were virtually reduced to candles as we studied hour upon hour into the twilight.

That causes me to remind myself about Dr Cullen’s attempt to regularise and to improve how we taxed investments held and enjoyed by Kiwis overseas. It has led to, arguably, one of the most successful lobbying attempts to do with international taxation that I ever saw, when Tony Gibbs started spending enormous amounts of money, hiring lobbyists and plastering advertisements—which I am sure the Inland Revenue Department officials of that time would recall—in our provincial newspapers and our national newspapers. That example showed that the kinds of people who store their wealth in entities that might be captured by attempts—such as this bill—to ensure that the taxation system is not unfair, but also that people pay a fair amount, are not to be trifled with.

We will support this bill, but the bottom line is that whether you are on that side of the House or where my colleague Mr Parker and I sit, we know that it is important that investors who are coming to New Zealand and are taking a punt to put their funds into areas that may or may not turn into further jobs, but that are successful investments, are not scared away through our tax system, and at the same time that we New Zealanders do not find ourselves being able to make investments in other overseas jurisdictions and then having people complain that there is an uneven playing field. And that is a reasonable principle; politics will determine how far the principle tilts one way or the other. But we will support this bill.

I think it is interesting that the amendments that have been made draw on the fact that although we have a internationally recognised set of accountancy principles—and after the Enron crisis at that particular point in time I was, wisely, the chair of the Sealord company before being possessed by a sort of flash of enthusiasm to come into Parliament—I do recall that the imposition and the application of the accountancy principles at that time led to a whole host of transactional difficulties for New Zealand firms. Now, to avoid such opportunities for leakage, opportunities for gouging from the professionals—because many of the business managers are not really au fait with the integration between our domestic code and international standards—we are going to go with the accountancy principles enjoyed by the United States. So it is good to see that our friends in the United States still have a level of repute and power in that particular sphere of the world’s economy, because they have been great. As someone who suffered an education in the United States, it is good to see that that particular part of the apparatus has not been eclipsed by other economies that are growing very strongly.

It is important that the Labour Party reiterates—and unfortunately, my colleagues who actually were on that committee are no longer here this evening—the areas that we disagreed upon. But, broadly speaking, the two main parties have to have a view as to whether or not we have got the balance right when we mesh together domestic expectations of tax revenue and international expectations as to whether or not this country is either a fair or a reasonable place to store wealth, or to attract wealth into. Now, we are always going to have a problem for as long as we have the current fiscal settings that are being pursued by the Government of the day. We have a revenue base that is shrinking, we have spending ambitions that are large in the community, and we have capital ambitions that are large. Let us hope that these remedial matters actually improve the prospect of not so much the Government as the community being able to delve into various sources in the economy and generate enough revenue to pay.

Now, we are always going to have a debate as well as to what the appropriate level of expenditure is, in terms of the community’s expectations, when there is—as our friends from the Māori Party seem to have developed—a sudden fascination for funding family reunions, etc. Given my father had 17 kids, I look forward to being an applicant in that regard after I leave politics

💬 Hon Member: No chance!

No chance—you are probably right there. They are more Dalmatian than Māori, and they will say “You can pay for it yourself, Mr Jones.”

This committee, in dealing with technical matters, at the end of the day has depended, indeed, even in our time, on Therese Turner and the very fine officials from the Inland Revenue Department. There are a couple of occasions when submitters do come to the committee and they want to find enough confidence that individual members of the committee not only understand the content but understand the context of the problem that they are bringing to us. We rely on the technical advice of such officials, and, of course, the greatest official of them all was Mr Oliver; no doubt he is endeavouring, or did endeavour, to clone himself, and he was aided by that old mate of mine, Rob McLeod, who has long since fled to Australia to substantially improve his income. Those matters aside, we have to acknowledge the efforts of the Inland Revenue Department officials. But, in particular, they also need to recognise that individual members of the committee from time to time do call for additional information from specific submitters.

Now, why we do that is to ensure that as lobbyists, representatives from companies, and investors come, they want to know that this committee, the most senior committee in the select committee constellation, has people who will make the additional effort in a highly technical area.

💬 Hon Christopher Finlayson: Like Māori Affairs.

Well, I have yet to enjoy the pleasure, not of Hone Harawira’s company but of Tau Henare’s chairmanship on the Māori Affairs Committee. I have waited 6 years to actually get on to the Primary Production Committee. I am particularly glad to be on that committee, because I am told that from time to time it is invited to places such as Central Otago, and I understand an Adelaide trip could be in the offing, as well. Given I have a modest level of knowledge about aquaculture, I look forward to that invitation. No doubt leave will be sought, and, hopefully, provided.

So we will support this bill. I acknowledge the efforts of the officials. I acknowledge Simon Bridges and the role that he has taken on. We have some senior people on our side who will be working on this committee, so we suffer not a sliver of doubt as to whether we should support this bill. But we point out that the underlying principles will always be a balance of politics, and there is one area we are disappointed with: the approval levy. But that goes more to ensuring, at a time when revenue is shrinking and spending ambitions in the community are growing, that we do not unwisely or foolishly block off important sources of income. We will support this bill.

I rise to speak on behalf of the Green Party on the second reading of the Taxation (International Investment and Remedial Matters) Bill. This bill, at its heart, addresses some of the detail around the tax treatment of incoming and outgoing foreign investment. It does this in a way that, basically, works from the principle that it wants to establish a level playing field with regard to the treatment of incoming and outgoing foreign investment. I actually think that is a bit of a mistake. We will be supporting this bill because it makes minor amendments, some of which are improvements.

The reason I think it is a mistake is this reason: when you look at the most recent Inland Revenue briefing to the incoming Minister, what it talks about is what is going on with regard to incoming investment into New Zealand. Essentially, most incoming investment coming into New Zealand is looking to access the New Zealand domestic market. If we think of the banking sector, the banking sector is not a launch pad for an export industry in New Zealand; it is just foreign investment coming in because it wants to access the New Zealand domestic banking market. If we think of telecommunications, it is pretty similar. It is dominated by overseas foreign investors coming into New Zealand in order to access the domestic market. So those investors are coming into New Zealand for their own reasons. There is nothing particularly in it for New Zealand necessarily, although they can add something to the New Zealand economy, but those domestic markets will exist regardless and they will attract those foreign investors. That is fundamentally why they come here.

The second reason why foreign investors are coming in here is to access resources, particularly land, but other kinds of resources as well that New Zealand has, because those resources are important to their global business model. So the treatment of incoming foreign investment needs to be separated from the treatment of outgoing foreign investment. We do want to make it easy for New Zealand - based firms to invest and prosper overseas, so some of the changes that have been made in this bill attempt to do that.

Debate interrupted.

The House adjourned at 10 p.m.