Taxation (International Investment and Remedial Matters) Bill

I stand to speak to the Taxation (International Investment and Remedial Matters) Bill. I stand here in part due to the infinite wisdom of the shadow Leader of the House, who deemed that I should have an opportunity to speak, so soon after my maiden speech, on a topic of interest.

💬 Simon Bridges: Are you not interested in the bill?

I note also that in his infinite wisdom, as the member opposite raises the question, the bill he chose to provide me with this opportunity is indeed the Taxation (International Investment and Remedial Matters) Bill. It is surely not the most important or urgent bill before the House currently, and it is a bill that has made slow progress. It has been around for nearly a year, and I think I should probably reserve my judgment on whether it is a compliment or a commentary that I have this opportunity so soon to speak to such a bill. That we are dealing with this matter does reek of a Government bereft of a plan other than to sell assets.

Labour will support this bill, but it does have concerns about the removal of the approved issuer levy. That levy is on payments of interest on securities meeting certain requirements as notified under the Act. The question as to why we would give away the small amount of money, the small amount of revenue, gained by the approved issuer levy, rather than actually making a more robust mechanism, has not convincingly been answered. It is better to give, I guess, a neutral tax signal like capital gains tax to make sure that investment is done on a basis of profitability than to be tinkering in this way and tinkering around with the idea of investment on the basis of tax treatment, which is the inevitable result.

I do agree with the Minister of Revenue that it is important that we do not encourage 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 companies to move from New Zealand to overseas jurisdictions. Indeed, we must guard against that danger. But there are many ways to skin a cat. A broader tax base would also allow for lower rates and a more competitive tax system, and surely to look at those bigger mechanisms would be a worthier use of parliamentary time. There are many other revenue options, and financial transaction taxes, capital gains taxes, and estate duties are amongst them.

We do need to address the dropping tax base. There is an urgent need to address this. The recent briefing to the incoming Minister from the Inland Revenue Department showed a 4 percent drop in revenue, and that is quite shocking. We need to preserve the services that New Zealanders value. A 4 percent drop in revenue is of great concern. The officials from the Inland Revenue Department pointed out that only 1.5 percent of that can be attributed in any way to a recession, and 2.5 percent of that drop in Government revenue has come as a direct result of Government policy changes. That is that switch to regressive GST, which has punished those who work hard but do not have the capital that you need to really advantage yourself in the system.

Those tax cuts that made this possible gave the top 10 percent of income earners 41 percent of the value of the cuts. Those at the bottom 20 percent got just 2 percent of the value of those tax cuts. They are a lot worse off as a result of that tax switch, and overall our tax take is down. That is something we should be worrying ourselves with, rather than the matter of the approved issuer levy.

In summary, Labour has supported this bill, but we retain our concerns with regard to the removal of the approved issuer levy. Thank you.

Just before I call the Minister, just because we are having a debate across all parts and schedules of the Act, that does not open up the debate to any subject even remotely related to taxation. The heading of the bill is Taxation (International Investment and Remedial Matters) Bill, so I just ask members when they are speaking—yes, they can speak on any part of the bill, but not on any matter of taxation.

I thought it would be helpful for the Committee if I just outlined the process and the history to date of the reform of New Zealand’s international tax regime, and also made some comments about the approved issuer levy. The change—

💬 Hon Shane Jones: Tell us about Tony Gibbs.

Well, that is actually a different piece of legislation altogether, and the reality, if the member wants to know, is that that legislation has now run its course and Mr Gibbs and his company have accepted the outcome.

But let me come back to this Taxation (International Investment and Remedial Matters) Bill. We began around 2007, during the term of the previous Labour Government, a reform package of New Zealand’s international tax rules. What happened in the 1980s was that New Zealand took the stance of taxing all New Zealand entities on their worldwide income in New Zealand. It was a stance that was not replicated in many other countries, and we have begun a process of change, which has had many facets to it, to try to modernise and bring into line with contemporary practice our international tax rules. Members who have been here a while, like my colleague who interjected a moment ago, will remember the fair dividend rate debate a few years ago, which was, again, part of this change. This bill takes further the steps that we introduced in the previous international tax bill about bringing in the active/passive distinction for income earned offshore for New Zealand companies, which meant that active income earned offshore would not be taxed in New Zealand alongside the country in which it was taxed. That would create a greater incentive for those companies to stay resident in New Zealand.

The issue of the approved issuer levy similarly has a long history. The Capital Market Development Taskforce, which was established in 2008, recommended to the Government in 2009 that the approved issuer levy be reduced from 2 percent to nil for some public issues of debt held by New Zealand residents. And that is what this bill does; it actually reduces the rate from 2 percent to zero. It does not actually get rid of the approved issuer levy per se. The reason for doing this is to boost the development of the bond industry in this country, and to make sure that bonds that are traded in this country become a relatively cheaper source of corporate finance, which helps to level the playing field so that we no longer have domestic bonds being disadvantaged relative to bank loans in offshore funding. What happens at present is that when a New Zealand resident borrows from a foreign lender, for example, they become subject to non-resident withholding tax on the interest payment, and that can be at 15 percent or 10 percent, depending on the nature of the tax treaty that the country of origin of the loan has with New Zealand. But it can be in certain circumstances reduced to zero, and in lieu of that the borrower pays the 2 percent approved issuer levy.

When the approved issuer levy was introduced about 20 years ago the main aim was to reduce the tax that was imposed on loans that were from unrelated parties, but since that time concern has been constantly expressed that the existing tax settings really contribute to the shallowness of the bond market in New Zealand, and discourage the issuance of bonds to non-residents. So what the bill does is pick up the recommendations of the Capital Market Development Taskforce, introduce the zero rate of the approved issuer levy, and also ensure that we actually have strict criteria to prevent loans, syndicated lending, private placements, and other forms of closely held or non-traded debt from qualifying for the zero rate.

This is a very specific measure, falling within the overall package of international tax reform. When you take them together, aggregate them with the changes that have been made previously, they bring New Zealand’s international tax approach into line with what most countries now follow. We were previously the outrider. We were the country that had the “grey list”. We were the country that had a whole range of rather antiquated and unusual provisions. We have now come into the mainstream with this set of measures. It will position New Zealand business well for the future. It also actually helps retain a measure of our own economic sovereignty, but ensures that New Zealand becomes a more competitive place and a more attractive place for both offshore investment and also for New Zealanders doing business from here in offshore markets. I think it is no great surprise that this bill is supported widely around the House, because it is a positive step forward. It will be eagerly awaited when it takes effect shortly after 1 April this year.

Can I just deal with this issue and ask the Minister of Revenue to clarify a few points around the approved issuer levy—its abolition, effectively; bringing the approved issuer levy to a zero rate, which is like abolishing it, except leaving the framework there. It is not going to be applied. The report of the Labour Party, in the minority report from the Finance and Expenditure Committee, noted that there was no good evidence that this was going to increase the rate of flow of funds available to New Zealand lenders, nor that it was necessarily going to decrease the cost of borrowing in New Zealand.

💬 Simon Bridges: You guys are sticklers for the evidence.

We are sticklers for the evidence, Mr Bridges, and you know—

💬 Simon Bridges: I told you. It’s a value judgment.

No, it is actually an assessment of the evidence that was given. Around the world, Governments are running deficits in part because they have hugely decreased the taxation that is paid by the wealthiest of people in the world, who move capital around between jurisdictions and somehow manage to avoid paying much, if any, tax. Given that this was a very small impost effectively upon the rate of return that was being received by overseas lenders into New Zealand, the Labour Party is not convinced that the tax burden that was effectively being paid by foreign lenders into New Zealand was wrong. I pay tax. Everyone else in New Zealand pays tax. Why should people who benefit from the New Zealand economy settings not pay tax? They benefit from our police force, from the fact that we have an enforceable rule of law, and from the fact that we have an educated and healthy population, who are educated by a system that is paid for by taxation, and who use health services that are paid for by taxation, all of which increase the capability of the New Zealand economy to pay the interest that is the reward that overseas lenders in New Zealand receive. I have got no problem with those overseas lenders being rewarded for lending money to New Zealand, but I do think there is as good a case for their contributing to the finances of New Zealand as there is for other people. Why zero-rate the approved issuer levy when there was no good evidence that this would have an effect that was measurable on either the available liquidity coming into New Zealand or the rate of interest paid by New Zealanders? I know that we in the Labour Party reached the conclusion that it was just bad policy.

New Zealand has a multibillion-dollar deficit. That deficit is effectively funded by the Government borrowing money—indeed, in part, borrowing more money from overseas investors who are being given, effectively, a lower tax burden through the zero rating of the approved issuer levy. So I ask the Minister to tell the Committee what the evidence is that the approved issuer levy going down to zero percent will either reduce interest rates or increase liquidity into New Zealand. And if there is no good evidence, why is it that the Government, with a multibillion-dollar deficit, is giving up on that revenue?

There were claims that the approved issuer levy was easily avoided. Well, the answer to that is to close the avoidance mechanisms, not to reduce the levy to zero. If we were to reduce all taxes to zero—rather than closing the loopholes—just because some people avoid them, we would not have a health system, we would not be able to pay the police, and we would not be able to educate our population. The appropriate response to the fact that the approved issuer levy was not being paid by everyone because there were ways round it that were legal but were known would be to close the loopholes. So I ask the Minister why the loopholes were not closed, but, rather, the easier option was taken to decrease the approved issuer levy to zero—to zero.

Can I also ask the Minister—and this is an area where I am admitting ignorance or less knowledge than I should have—whether the people who are receiving the approved issuer levy are all paying non-resident withholding tax on all of the interest that is paid to them by New Zealand institutions, or whether they are able, through the approved issuer levy route, to avoid their non-resident withholding tax obligations. Because if they are able to avoid paying non-resident withholding tax obligations on the interest that is paid to them by New Zealand borrowers who are lending money from international lenders—if they are not paying non-resident withholding tax through the approved issuer levy route—then that further reinforces the fact that the approved issuer levy, rather than being abandoned completely, should have had the loopholes tightened. This would ensure that there is a reasonable return to the New Zealand authorities to help fund the very services that the overseas lenders rely upon in order for them to be paid their interest—that is, enforcement of the rule of law, education and health services, and a healthy economy, all of which those lenders benefit from.

That is the end of my contribution.

I am by no means an expert in tax, and I have got to raise a couple of questions.

💬 Hon David Cunliffe: Too modest.

Well, that is true, but I was going to call on John Hayes, who today, as the chair of the Finance and Expenditure Committee in public session, made a magnificent job of running interference against the Government. That is why I hope Mr Hayes is going to take a call soon, because I know it will be an outstanding contribution. He will probably ask even more deep and penetrating questions than I could even think of.

But can I just ask the Minister, given there is a trend—and I will not widen the debate, as per your instructions, but I just want to touch on two points. I will just mention their names and move on. There is a trend with this Government, whether it be the Sentencing (Aggravating Factors) Amendment Bill, or whether it be the Student Loan Scheme Amendment Bill that is before the Finance and Expenditure Committee, which we dealt with in public session today, and part of this bill, the Taxation (International Investment and Remedial Matters) Bill, which of course we support, where members get up and ask for evidence and rationale as to why the Government has embarked on a particular course of action, and that does not arrive. I will not go into those other bills, because it would not be appropriate—there will be a time and place for that—but we have seen evidence of that before a select committee today.

I think it is right and proper that when members raise concerns in respect of possible fiscal leakage, as Mr Parker has already said, it would be interesting if the Minister wanted to provide evidence to perhaps allay our fears in respect of this issuer levy, on the face of it, not increasing liquidity, or reducing interest rates, or adding any debt to capital markets. They are legitimate issues that the Opposition raised, and it would be helpful, I think, for the Minister to provide, through his officials or whatever, some analysis or evidence of that. I would welcome it.

I would also ask another question. Given that the issuer levy is zero rated, and therefore is effectively null and void, the question that arises is why you would still have the framework in place. Again, I confess I am not an expert in tax and there may be a logical reason for it, but it appears to me that if the issuer levy is effectively redundant, zero rated, and has no relevance, then, why—was it a mistake? Is there some way we can sort it now, perhaps, in Committee, maybe through leave, or whatever, but why would you leave a tax framework in place when it has no effect at all? So I think there are some legitimate concerns here.

I do reiterate Mr Parker’s point, that at a time when this Government seems intent on slashing and burning and clawing every dollar out of every particular department—you know, doing a dash for cash, desperate for cash resources everywhere, and so-called savings, and making cuts—why would it embark on this measure, which in effect could provide fiscal leakage and could weaken the tax base, without some pretty robust evidence that that would not happen. Now it may be, and I know the Minister has been in the job for many, many, many years; he is probably the longest serving revenue Minister in the history of this country, possibly the history of any Commonwealth Parliament. He went to the same university as me, I think part of his degree was history, and he may want to research that—

💬 Hon Member: And you went to the same high school.

Absolutely. We went to the same high school, St Bede’s College, absolutely, and he may well want to research that fact. He may well end up in the Guinness Book of Records, but I think, generally, this Minister has acted in a way that does generally provide information to allay those concerns, but it is legitimate to ask those questions.

I will just say this again. There is a trend coming into this Government. When it embarks upon measures—and there will be a time and a different place, for instance, to talk about, maybe, the Student Loan Scheme Amendment Bill and whether it will actually return much cash to the taxpayer for the exorbitant cost it is going to cost to put it together or not. That is for another day; evidence is not prevalent, perhaps, there. Other bills that have been put up are shiny, politically palatable to some, a good bit of spin and promotion, but actually do nothing in effect but change a few words and have no practical effect in our communities.

We support this bill; that is absolutely clear. I accept and I support the Minister’s view that this will streamline a number of measures for New Zealand companies and will bring us into line with many other Western-country partners. But I think this is a particular issue that has vexed the Opposition, and to date, with respect, there has not been a lot of robust evidence or analysis put up to allay our fears.

If we are wrong, fair enough. But, if we are wrong, I think we owe it to Parliament and the community to allay those fears and ensure that there is evidence on the table.

I am going to take a call at this point because I have another commitment very shortly that will mean I am absent for a little while, but I will come back. I want to respond to the points that have been made by the two members who have spoken. I have read Labour’s minority report with some interest. It is a fairly brief report, and it is really a thinly disguised argument for a capital gains tax, which is a separate issue altogether. We are not going down that path.

💬 Hon David Cunliffe: We don’t disguise our call for a capital gains tax. We say it openly.

Well it is a very little paragraph. You want a capital gains tax—or, the Opposition wants a capital gains tax—and this side of the House does not, so that is really a policy divide. But I want to come to the points that—

💬 Hon David Cunliffe: You used to like it.

I have never been in favour of a capital gains tax. The member can check the record going right back. I have never spoken for a capital gains tax.

Let me come back to this bill and the questions from Mr Cosgrove, and from Mr Parker to some extent, as well. I would like to refer them back to the regulatory impact statement, which sets out a number of the conditions that are being applied to the changes, in particular in regard to the approved issuer levy, to make sure that it is tightly focused, and to make sure that the benefit is borne by the New Zealand borrower, who currently suffers the tax burden, rather than the offshore lender.

Mr Parker, I think it was, asked how much revenue was potentially being forgone through this measure. The best estimate stated in the regulatory impact statement is based on the last 3 years’ movement in the bond market—about $5 million. So it is not a large sum of money.

Mr Cosgrove then went on to ask why we were just zero-rating the approved issuer levy, and why were we not abolishing it—

💬 Hon Clayton Cosgrove: No, no, why are we taking the framework?

Yes, effectively, and the short answer is—and this is a slightly flippant answer but there is good historical precedent for it, and I know the member wanted me to quote history—many, many years ago we struck a zero rate for stamp duty. We still actually have stamp duty on the books in New Zealand. I do not think it is a particularly good argument in the approved investor levy case, but it is just a signal that there are some precedents. The point is that this is a new area of change. We are operating on the basis of the Capital Market Development Taskforce recommendations. It was considered prudent at this stage to simply shift the rate from 2 percent back to zero.

We will obviously keep a clear eye on how this works out in practice once the change is made. But, frankly, we see it more as being about tidying up the process, making it neater and clearer as the member acknowledged, and simply getting round what we think has been an impediment that has imposed costs on New Zealand businesses, has not raised a great deal of revenue historically, and, frankly, is probably seen more as a disincentive than as a positive.

I do not have time to go into all of the other issues that were raised in terms of things like financial transaction taxes and everything else that Mr Parker spoke of. They are way beyond the scope of the bill; they are not on the radar screen at this point. What we are focused on in this measure is the further progressive tidy-up of our international tax rules.

I conclude by quoting—and this time I will try to get it right—the phrase of Dr Michael Cullen when this matter was first on the table.

💬 Hon David Cunliffe: “We won. You lost. Eat that!”

No, Dr Cullen paraphrased Star Trek when describing New Zealand’s international tax rules. He said: “New Zealand boldly went where no country chose to follow.” That is a very good summary of the position we were in. This legislation effectively is a further part of the winding back of that to get us to a more realistic and credible position, and I am grateful for the support of the Opposition.

I rise to take a call on behalf of New Zealand First in relation to the Taxation (International Investment and Remedial Matters) Bill. New Zealand First does support this bill, but as we have said in this House, we have certain reservations and there are some caveats.

We heard from the Minister of Revenue that this is intended to tidy up some of the tax areas internationally, to put New Zealand on a level footing with other countries, and for there to be a fairer, equitable system for our companies and corporates to operate both onshore and offshore in a globally competitive market. However, we do have reservations, and it has been seen in the past that often where there are such exemptions or allowances we, the New Zealand taxpayer, and we, the New Zealand Government, can sometimes be taken for a ride. We have previous instances where it has been convenient for companies to relocate to other tax jurisdictions to avoid paying their full dues and their full taxes here in New Zealand, and New Zealand First certainly would not want to see this occurring as a result of this Taxation (International Investment and Remedial Matters) Bill.

We can all recall, or those who are old enough can recall, in the 1990s what happened through the wine-box saga. It was our party, New Zealand First, as you will all recall—those of you who are old enough; some in the back rows of the Government, perhaps, are not old enough to remember it—and it was the Rt Hon Winston Peters who exposed these very loopholes in this Parliament, and the New Zealand companies who were trying to evade paying their full dues to the New Zealand Treasury. We cannot go back to those days. We cannot go back to the days when companies hid behind the loopholes and the convenient bills before this Parliament and the Acts in this Parliament to secure a preferential situation for themselves in some other tax jurisdiction.

Also, as we have seen in recent weeks, there are now more and more companies, of course, that operate in cyberspace, that operate on the internet, that operate in virtual reality—and I am not talking about the Government here; I am talking about real companies that are operating. In this respect we also have a situation in which, of course, where the actual company is located these days is often very questionable. Although it may be operating on a particular website, on a particular internet site, or in some particular cyberspace position, it may not actually physically be within our jurisdiction, but it may be using our jurisdiction for its own convenience.

However, New Zealand First is in favour of reformation of our taxation system. We have always said that the long-term objective must be to reduce taxation of New Zealanders. We would like to see all tax laws simplified. If you will bear with me, Mr Chairman—you said that you did not wish to stray into these other areas, but at the same time we must be fair to all taxpayers, and although this bill is aimed at supporting our companies, our exporters, and our international trading organisations to be competitive, and supporting investors investing in this country and overseas, we must also ensure that we are being fair to the overall tax system. We must ensure that this is not undermining our tax system, and is not undermining our Government’s ability to pay for the health, welfare, education, and all the social security systems that are required by the people of New Zealand. So New Zealand First does support this, but the caveats are that it must be fair, and it must be a system where corporates are not using it as a convenience to avoid tax.

I also note that in the commentary on the bill there is a reference to exemptions for new residents’ superannuation schemes, and a recommendation from the Finance and Expenditure Committee in relation to that. This is another area that I raised in the House last week. This should not in future just be applying in terms of the corporates of New Zealand; in the future we need to also be mindful of taxes being paid by, particularly, many of our immigrants. We also have to be mindful of those who have immigrated to this country and perhaps have paid into pension schemes in other countries—particularly, I am aware, the UK, the Netherlands, and other countries. They have been long-term contributors to pension schemes, and when they come to New Zealand there are difficulties with reciprocal arrangements under our pension schemes in New Zealand. They, likewise, are being treated unfairly, and New Zealand First certainly will be following through on this. Perhaps we could add it to our SuperGold card, which is hugely successful, as the Government will be aware. Perhaps that could be another situation to be added to the SuperGold card, whereby those pensioners, who have paid their dues and have paid their rightful taxes in other tax jurisdictions around the world, would have access to the same rights, remedies, and pensions through the New Zealand system, and not be penalised, and likewise, in the Pacific, so that they can perhaps take advantage of opportunities to be with their friends, families, and whānau, and not be penalised as a result.

Although we support this, we do raise some flags of concern; we do say that we will be monitoring it. New Zealand First will be a party that will continue to look at situations like that. We do not want a repeat of the wine-box situation in the 1990s. We do not want New Zealand companies to see this as another way of the New Zealand Government or the National Government helping its mates to get a better deal somewhere else. We do not want to see its mates in some corporates getting a handout or a leg-up from this. National has already done very well by its mates with tax reductions for the select few. We do not want to see this as another situation where National Party mates are benefiting and redirecting their business investments to other jurisdictions where they might be able to save on tax. At the end of the day we do have to make sure that the coffers are full enough to pay for our health, to pay for our welfare, and to pay for our education. We cannot allow this to undermine it. Thank you.

I just want to comment on some of the speeches and the points made, and Andrew Williams’ speech. He was doing so well until that last, scurrilous attack on the National Party. Prior to that, he was supporting the Taxation (International Investment and Remedial Matters) Bill. I thought that, in what I understand was one of his first speeches after his maiden speech, he gave a very lucid speech, and I know that Barbara Stewart, the real leader of New Zealand First—the puppetmaster within New Zealand First—will be watching Andrew Williams and will be thinking very carefully about giving you a question at question time soon.

I turn now to Clayton Cosgrove because, speaking of scurrilous, that was a scurrilous attack he made on John Hayes, the Parliamentary Private Secretary to the Minister of Foreign Affairs in this Parliament.

💬 Hon Clayton Cosgrove: I raise a point of order, Mr Chairperson. I just want to withdraw and apologise. I want to give you a commitment that I will never praise John Hayes in this Chamber again.

John Hayes has been a wonderful contributor on economic matters and tax matters in the Finance and Expenditure Committee.

David Clark gave a speech, and I was very disappointed in David Clark.

💬 Grant Robertson: Are you a teacher? Are you giving a report card, or are you actually going to give a speech?

Basically. I will come to the bill—I will come to the bill. But David Clark, in his contribution, was very disappointing. He had no enthusiasm for this bill. I think he just wanted to get on his feet after his maiden speech. If “elegant” is the word of the week, I thought his “skinning the cat” phrase was entirely inelegant, and not something that the animal lovers of New Zealand like to hear in this Parliament.

Like some of the members opposite, this bill may be dull but it is worthy. I do say “dull” because, you know, actually—as I said in my Address in Reply speech—it is not some big bang we need in the economy; it is incremental work, minor steps, time after time, and this bill is that. It makes a contribution to our tax regime in New Zealand, and it is worthy.

As I explained and made clear in my speech in the first reading of this bill in this House, what it means, when we clear away the jargon—and I appreciate there is a bit more to it than this—is that New Zealand businesses overseas, when they are in foreign countries investing, are not penalised and they are not double taxed, and that has got to be a good thing for growing New Zealand and growing our interests overseas.

So this bill, as I say, like some of the members opposite—

💬 Hon David Cunliffe: Have you read it?

—is dull but worthy. I have read it; I read it prior to the first reading. I was not on the Finance and Expenditure Committee when it considered this, but I did read it. It is dull but worthy, and it does bring us into line with international tax regimes and what is happening in other countries. And so I am very happy at this Committee stage, when we are taking all the parts as one, to globally support this bill.

What a pleasure it is to follow the boy wonder, Simon Bridges, who has hardly read the Taxation (International Investment and Remedial Matters) Bill, by the sound of it. This bill is one which Labour supports on balance, but I think the real phrase here is “on balance”, because it is a bill made up of the good, the bad, and the potentially ugly. We will be watching very carefully to see its implementation. The good is undoubtedly the modifying of the thin capitalisation rules to ensure that banks and financial institutions pay out a rather larger slice of tax when they are offshore domiciled, in order to contribute to our economy. I think that would be welcomed by all sides of the House. The bad is the approved issuer levy reduction. Now, there are a number of important reasons why it is, in our view, very, very questionable to reduce the approved issuer levy, and we are going to be watching this one like a hawk.

The first reason is that it erodes the tax base associated with financial institutions at a very interesting time. At a time when one major bank declared today that it had increased its profit by over 30 percent, and the sector as a whole, according to the latest KPMG survey, increased its profit by a quarter in the last year—by 25 percent in the last year—when GDP was flat and New Zealanders’ living standards, if anything, went backwards, this Government is giving institutions like the banks a net reduction in tax through this bill. What is happening in Europe? France and Germany have said that the real economy is bearing a big load in the recession, so it is time for the financial sector to bear a load. And both the conservative Governments of France and Germany are looking at bringing in a financial transactions tax.

We are not advocating that. It would be pretty difficult for New Zealand to do in isolation, but I do point out that this bill is reducing the net tax burden on financial institutions. Now, why might that be a problem, as well as the fact that we are losing revenue with which we pay for schools and hospitals? Well, here is an economic paradox: it is, because of this bill, cheaper to source funds from offshore now than it was, and cheaper relative to funds saved and sourced onshore. In other words, it means, relatively speaking, that foreign banks and foreign-sourced funds are taxed more lightly, and domestically sourced funds and institutions are taxed more heavily—thus providing an incentive to shift capital out of the country and to favour foreign institutions over local ones.

Why would you do that? Not you, Mr Chairman; it is not your idea. Why would the Government want to do that? Why would the Government want to provide an additional incentive for foreign-owned, domiciled, and sourced banks? I note that we are debating this on the day that several Ministers—one of them is sitting in the front row, the Hon Maurice Williamson—have been overturned in the High Court. In a rare move, the High Court has said that the Ministers misapplied the national economic interest test and wrongly favoured a foreign-domiciled company in the purchase of the Crafar farms. Tonight we are debating a tax bill that favours foreign banks over New Zealand financial institutions by reducing the approved issuer levy that applies to foreign institutions.

Actually, might we think about the reverse? Might we think about ensuring that foreign financial institutions in New Zealand are actually paying their fair share, and about getting beneath the question of how come the real economy is flat and the banking sector increased its profit between a quarter and a third in 1 year? No one is alleging malpractice. Nobody is saying that there has necessarily been any breach of the law or anything corrupt—far from that. But the fact remains that one sector of the economy—and it is not dairying; banking—has had a stellar, skyrocket year in 2011, and ordinary New Zealanders are wondering how they are going to pay the mortgage and the bill and put food on the table.

So all I am saying is that this is not a big bill, this is not a major piece of legislation, but this is another small let-out that allows foreign capital a lighter tax burden in New Zealand. So the bad bit about this bill—and it is against the background that foreign-sourced capital institutions already have a lower tax burden than New Zealand - domiciled capital—is that we tax savings in New Zealand too heavily but we do not tax savings sourced from offshore heavily enough. It is already unbalanced, and this bill makes the balance worse. So we will be monitoring very closely the effects of this bill.

Having agreed with the Government on the thin capitalisation rules, having clearly disagreed with the approved issuer levy reductions—that was the good and then the bad—the potentially ugly is the other major part of this bill, which is the foreign investment fund regime. This is a hideously complex piece of tax law, and for listeners out there I am just going to try to get my head around it and help them. What this bill does is it affects a particular class of investor. It is not the little guys; the little guys are not helped by this bill. Anybody owning less than 10 percent of a foreign investment fund gets no help from this bill. So mum and dad at home, if they are middle-class Kiwis and have retirement funds and superannuation funds invested in an offshore fund—Fidelity, State Street, I do not know; whatever—they get no help from this bill. But if you are a large investor—and this may go to some of the issues that our colleagues from New Zealand First raised—owning more than 10 percent but less than 50 percent of a foreign investment fund, you get a tax break.

Now, that may or may not be the right thing to do. There are some design issues, and we understood the advice of officials on this matter about making the law symmetrical, in some regards, to past practice and ironing out some definitional problems, and that is why the bill is here before us today. We are going to give the advice a chance, but I want to lay down a very clear marker on behalf of the Labour Opposition. This bill is under watch. This provision is under watch. I am sure listeners can hear a pattern emerging. The approved issuer levy part makes it cheaper for foreign financial institutions. They pay less tax. The foreign investment fund rules part means that people owning less than 10 percent of a fund—that is, 99.99 percent of New Zealanders—get no help. They are no better off. But the few big rollers who may have a large stake worth more than 10 percent of a fund, or an active investment in a substantial offshore company, get extra help.

So New Zealanders need to ask themselves whether Mr Bridges was, in fact, right with his sunny Bay of Plenty optimism, his perma-tan, and his lovely sparkling white teeth—oh, it is beautiful. They have to ask whether he is right with his sunny optimism, because—guess what, Mr Bridges—it is only the big fish that get the minnows here. The little fish—the 99 percent of small-business people that that member has got in his electorate—miss out. They are at the bottom of the barrel, Mr Bridges, and this bill gives them nothing. In fact, if they are like most of the small-business people in my electorate who have to borrow capital to survive, they are going to be paying more, because the foreign financial institution just got a “get out of jail free, collect 200 bucks when you pass go” Christmas present from the ever-honourable Peter Dunne. My goodness, he has earned his money for the capitalist class, has he not? The perennial Santa Claus of rentier capitalism is back in business again. He has had more allegianceships than the Māori Party has had leadership coups. Goodness me, I predict that by 2013 Peter Dunne will be back, pawing at the glass in the doors at the end of the Labour Opposition corridor, saying: “There’s been a misunderstanding.” We have got bad news for David Clark, who has the revenue portfolio. Peter Dunne is after his job; Peter Dunne is after his job. When John Key goes—

💬 Hon Tau Henare: Shearer’s got yours.

Mr Henare, your chances of getting back in west Auckland look even thinner. When your mate “Hone” Key goes off to the World Bank, what is happening to your poll ratings? When “Hone” Key goes to the World Bank and that Minister comes back, begging for a job from us, this bill is “all over, red rover”.

Never have I prayed for the ringing of the bell as I did that time, listening to the member opposite. Can I say to members opposite that I think you made the wrong choice last year. There is a man who still harbours leadership ambitions, with a speech like that. I am not sure whether it is the party of the member on my left or on my right he is interested in. In fact, I had a constituent send me a message yesterday, having watched television coverage from this House, saying that somewhere in New Zealand a homeless man has lost his beard. Can I suggest that David Cunliffe gives his beard back to him quite quickly. That man is worried and winter is coming. [Interruption] Actually Mr Bridges is not homeless; he has always had that suntan.

I want to very, very briefly make mention of an important part of this Taxation (International Investment and Remedial Matters) Bill, and that is where the active income exemptions will bring New Zealand tax rules into line with others. The reason I want to mention this is because of a number of important free-trade agreements that our hard-working Minister of Trade, Tim Groser, has been working on for a long period of time. The free-trade agreement with China is a very important agreement that Tim Groser has spent a huge amount of time focusing on. What this part of the bill means to that agreement is that New Zealand companies that may manufacture in China will have an opportunity to do so under the same tax rules as other companies will face there. Lastly, the Trans-Pacific Partnership is under negotiation at the moment. That too will provide benefits for New Zealand companies. There is so much more I want to say on this that I might need to take another call later in the debate. Thank you.

Tēnā koe, Mr Chairman. I would like to acknowledge that as a consequence of my colleague David Cunliffe coming back from a great summer he can see the future. That sort of hirsute look that he brings to the Chamber is in contrast to that very handsome mop of hair that has haunted a number of us as it watched your circuitous career. I would like to say as well that I am about to eat venison as a consequence—unrelated to tax—of a hunting trip. The Minister sitting next to you can claim some credit, on a completely unrelated issue.

The Taxation (International Investment and Remedial Matters) Bill, amongst the other amendments it makes—and I was chided earlier by the Minister of Revenue—in actual fact does make some improvements, I presume, or amendments to that marathon exercise called the fair dividend rate. The Minister and I imposed ourselves upon the swallows of Kororāreka, Russell, a bunch of New Zealand and overseas residents who took great umbrage at the changes that Dr Cullen and the Minister at the time, who is still the Minister, were making. Perhaps he could enlighten us during the course of the evening as to how these amendments and how these changes are actually going to improve the functioning of not so much international business but us sourcing capital.

We have heard a bit from the other side of the Chamber, and I understand John Hayes has joined the Finance and Expenditure Committee. As he sits on that committee I just hope that there is some topic that comes across the purview of that committee to do with Persian rugs. If not Persian rugs, then Persian cats. There is one thing I know about Mr Hayes and it is that he is a walking encyclopaedia on matters pertaining to Persia. Unfortunately, the only person disinterested in listening to him is the current Minister of Foreign Affairs, who in days gone by actually was on the Finance and Expenditure Committee. But I will not speak ill of that fellow resident, at one point in time, in North Auckland, etc. That was Tau Henare and he does not have a perma-tan. His head has been on the sunbed for far too long. He knows that, and he also knows that this is the last—[Interruption] I actually hope that he does stand and take a call on this tax-related bill, largely because it may be the most coherent thing we are going to hear from the man, in this final 3-year countdown of his parliamentary career. I have no doubt he curses the day that he made fun of the “hammerhead shark” who sits here on a regular basis—otherwise known as Winston Peters. Tau Henare’s career may have gone on and on, but let us come back to these tax matters.

We support this bill. Of course we support this bill, because we are incredibly supportive of turning round the fortunes of the country, unlike our colleagues over there, who have the rhetoric but have not given us a clear set of ideas as to how these changes to the international tax regime will apply or ensure that those players who are investing overseas are paying their fair tax. I would like to hear from the Minister on this question of the connection with the protracted experience we had in creating the fair dividend rate, which I presume actually did improve the prospects of Tony Gibbs before he fell from grace, but that is another matter. I was the person dispatched to try to make sense of what he was on about, and that was prior to hundreds of thousands of dollars being spent on the New Zealand Herald, the Dominion Post, and various other organs of the fourth estate as they sought to change the minds of the Finance and Expenditure Committee and the Government of the day. We, being a responsive Government, were a little bit flexible in that regard.

But, as I recall, the fair dividend rate is referred to. That is one of the amendments in this bill. There was an attempt to ensure that for New Zealanders who were capturing their wealth through the capital growth of equities that they held overseas—and they were able to repatriate them back to New Zealand because it was a capital growth and it was not regarded as income—there was an opportunity for them to, let me say, short the New Zealand - based tax system and capture the full value of their equities overseas as they grew, in terms of their capital value. When that was monetised and cashed up, the rest of us were struggling here and paying PAYE as an ordinary part of our daily lives, but they were able to—I would not say evade—circumvent that obligation. The fair dividend rate is contained in here, so I really look forward to the Minister bringing a little erudition—but not in that usual sort of schoolboy style.

I am happy to oblige the member. I do recall the trip we made to the Duke of Marlborough Hotel in Russell to meet a number of wealthy expatriates who had come to this country as their bolthole and who were enjoying the benefits of their earnings and investments at that stage. The fair dividend rate regime effectively said we would tax them on a portion of the gain, provided they were outside Australia—because, the member will recall, 70 percent of New Zealand offshore investment at that point was into Australia, so the people who were going to be caught by this were those outside the Australian regime. Most of these people, of course, were Americans and Canadians and Europeans—

💬 Hon David Parker: Not used to paying tax.

—not used to paying tax—and even more incensed that this was a Government policy, which was broadly supported by all sides of the House, that might require them to pay some. My overriding recollection of that meeting, and I am sure the member recalls it, was that there was one group of people in the front who were being very nice and reasonable and trying to go through all of the arguments without actually portraying their real intent. Right at the end of the meeting I think it was a Canadian woman who got up and said: “I’m sick of what I’m hearing. I’m hearing all these people talking about fairness and equity and paying their taxes. We’re wealthy people. We shouldn’t have to put up with that nonsense.” The consensus that had been built during the meeting about trying to work our way through was destroyed by the selfishness of this particular individual.

💬 Hon David Cunliffe: Was that Michelle Boag?

No, it was not.

Having said that, we did develop a regime that was fair and reasonable. What I have been trying to say in earlier parts of the discussion on this Taxation (International Investment and Remedial Matters) Bill was that this is part of an overall package of reforming our international tax rules. The member made reference to Mr Gibbs, and it was the Brierley—Guinness Peat Group—

💬 Hon David Parker: GPG.

—GPG—over the cotton manufacturers, whose name I temporarily forget. The member will recall we gave it a 5-year exemption that if it could prove that within that 5 years that Guinness Peat Group, or—the name—Coats, the cotton people, were substantially located within New Zealand, then it would be exempt from the regime. I should tell the member that what happened—because the 5-year anniversary was last year—was that Mr Gibbs, or his successors, quietly have let that one go. So the argument was that it was a substantially New Zealand company and that, therefore, it had to be exempted when we said: “You have got 5 years to make the transition.” At the end of the 5 years it came back and said: “No, we are quite happy with things as they stand.” So that was the outcome on that story.

I just want to make a comment about the amendment that has been put forward by Mr Parker. If I read it correctly, what he is seeking to do is to hold the rate of the approved issuer levy at 2 percent.

💬 Hon David Parker: Yes—omit clause 142.

Yes. So in effect, what clause 142 does is give us the mechanism to strike it at zero. He is simply saying remove that—hold it at 2 percent. Well, that is contrary to the intent of the bill. The Government will not be supporting that, and I would suggest to Mr Parker that what he has proposed is a rather elaborate mechanism. If he is opposed to going from 2 percent to zero, he should vote against that part.

We will be voting against Part 3, but we want to vote for the Taxation (International Investment and Remedial Matters) Bill. The bill will be improved if Part 3—or clause 142, which is the same thing—is omitted. I want to explain to the Minister of Revenue my reasoning for that.

Since my last contribution I have confirmed that there are some bond issuers in New Zealand—namely, large corporates—that can currently issue bonds that do not incur non-resident withholding tax on the interest that is paid to the overseas lender. At the moment, the only contribution to the revenue in New Zealand that is made by those international lenders into New Zealand is the 2 percent issuer levy. If that levy goes to zero percent, effectively the interest that is being paid to the overseas lender will incur no tax and no approved issuer levy. There will be no contribution to the New Zealand revenue in respect of an income payment that is being paid out of the New Zealand economy to that overseas lender, and the Labour Party thinks that is wrong. We think that those people should be paying either non-resident withholding tax or an approved issuer levy at a decent rate.

If there are ways currently of avoiding the approved issuer levy that are unfair to some people who go through the proper route—if other people avoid it—close the loophole. But what is the case for international sources of capital paying no tax and no approved issuer levy? They have the benefit of our enforcement of the rule of law—the enforceability of their contract—and our economic settings, which are underpinned by taxation that funds the police, who protect law and order, that funds the court system, that funds education, and that funds health, which means that we have a healthy and employed workforce and economy, which means that the New Zealand borrowers can afford to pay the interest that the overseas people want to get. That is why they should be paying some taxation, just as everybody else should be. They should not be paying as high a rate of tax as a New Zealander, because they do not benefit from all of the things that we get—I get my own health and education—but they should pay some tax.

This proposal by the Government is wrong. There are the good parts of this bill, and we have acknowledged those, but this part is patently wrong. I thought my colleague David Cunliffe made a very good point. If this is going to have any effect, what you are effectively creating is a disincentive to New Zealand savers. You are effectively creating a bias in favour of the overseas investor, which reduces the rate of return that would otherwise be earned by competing New Zealand investors. Presumably, the theory that lies behind this is that the cost of funds overseas becomes more competitive because you keep interest rates in New Zealand down. Well, although there was no good evidence of that—and we say it fails for that reason—if it were true, it would be creating a disincentive to New Zealand savings, which would be encouraging consumption rather than savings, and would be going further away from this need to rebalance the New Zealand economy towards improved New Zealand savings—

💬 Hon David Cunliffe: Making the current account deficit worse.

—reducing the New Zealand current account deficit through improved savings. Instead, we will have less New Zealand savings and we will have a worse current account deficit. So this bill fails both in terms of the fairness of overseas people not paying their contribution towards tax, and this part undermining the New Zealand economy by decreasing the incentive to save, increasing the incentive to spend, decreasing the incentive to invest in our productive export economy, and increasing our incentive—I would suggest, Mr Cunliffe—to invest in our speculative economy. Both of those things go to increasing our current account deficit and, over time, increasing New Zealand’s net international liabilities.

This is a poor part of the bill. That is why, despite the fact that it is a small part of the bill that will not cause us to vote against the whole of the bill, we have submitted an amendment that omits this particular clause—clause 142—which is to that effect. I would ask for the support of other parties in this Committee to vote in favour of my amendment to omit clause 142 from the bill.

I have had time to consider the member’s amendment—

💬 Hon Clayton Cosgrove: Be nice.

The CHAIRPERSON (Eric Roy): Well, I am bound by Standing Order 325, which says that an amendment that may have an impact on the Government’s fiscal aggregates, or move a change to a vote, needs 24 hours’ notice, and the member has failed to observe the 24-hour—

💬 Hon David Parker: So it’s fiscally significant?

The CHAIRPERSON (Eric Roy): The member should not engage in dialogue with me while I am giving a ruling. But can I just say to members—not hearing the member—that the Standing Order does not define the impact. It just says that has a fiscal impact. Now, for members who have come into the Chamber since leave was sought, I say that leave was sought for the debate to be taken as one and for the vote to be as one question. If the members want to vote against Part 3, they will have to seek leave that Part 3, or clause 142—I am just trying to assist the Committee here. That would have the same impact as the member’s amendment. I am going to put the question now.

I seek leave of the Committee that the vote in the Committee stage on Part 3 be taken as a separate question.

The CHAIRPERSON (Eric Roy): Leave is sought for that purpose. Is there anyone opposed to that course of action? There appears not. Leave is granted.

The question was put that the amendments set out on Supplementary Order Paper 5 in the name of the Hon Peter Dunne be agreed to.

Amendments agreed to.

Parts 1 and 2 and clauses 1 and 2, as amended, agreed to.