Taxation (Neutralising Base Erosion and Profit Shifting) Bill

Thank you, Madam Chair. It’s a pleasure to rise and speak on this bill. I think the bill has broad support across the House. I particularly want to talk about clauses 54 and 55, and I have some questions for the Minister. If we have a look at the departmental report and have a look at the submissions, I think submitters raised some very valid points, such as: “Taxpayers should not be exposed to criminal penalties for the acts/omissions of another group member over whom they have no control.” That was ASB, Corporate Taxpayers Group, EY, Russell McVeagh. And I do note that, in the departmental report, the officials said they agree. They agree with the submitters, and the recommendation was that the submissions be accepted.

There’s one in particular that I’d like to ask the Minister about, and that is, I think, the New Zealand Law Society, who raised an extremely good point in their submission. And theirs was that “it should be a defence under sections 143 and 143A that the member charged with the offence did not have the knowledge that the requested information was in the knowledge, possession or control of another member of the group.” Taking a look at those two sections in the Tax Administration Act, it is my read of that, Minister, that the offence is committed if the knowledge or possession is in the hands of that other member of the group. The person being charged, whether they have the knowledge or not as to whether someone else in, say, the multinational has the knowledge or possession of the information, is irrelevant. And that cuts across, therefore, still, in my view—it doesn’t take on board the submission from the New Zealand Law Society.

So I would like the Minister to stand and take a call and tell us, given the departmental report says that the submissions be accepted, how it is—given that the bill itself now just strikes out the provisions, the clauses that relate to 143 and 143A of the Tax Administration Act. So how is it, therefore—given the sections as they currently stand in the Tax Administration Act, where knowledge of the person actually being charged with the commission of the offence, knowledge of what the person elsewhere in the world in the group has or doesn’t have, isn’t actually part of, or doesn’t appear to be part of, the test or the concern as to whether or not an offence has been committed. So I look forward to the Minister—and I see the Minister turning to officials, looking to get some clarity around that—taking a call and just sharing with us how that has been addressed, because I do note that officials did say, in their report, that the submissions be accepted.

The other matter I’d just like to touch upon is clause 53, which is the same general matter but about civil penalties. And I’m particularly interested here in the rationale from the Minister as to why—and this is a submission from Westpac. Westpac said that “imposing a civil penalty liability that exceeds the available criminal sanctions is equally inappropriate—particularly if its intent is to avoid the need for Inland Revenue to bring civil proceedings.” And they note, “There are no equivalent civil proceedings in the Act relating to comparable failures;” That’s from Westpac. And there are; there are quite substantial differences in the amounts payable under the criminal versus civil penalties. Civil penalty has a maximum of $100,000. So, clearly, I imagine there was a reason for officials and for the Minister, therefore, in seeking to continue with a regime where the maximum civil penalty is quite substantially greater than the fine, at least, for the criminal offence. So unless the entity has pretty clear confidence that Inland Revenue aren’t going to charge them greater than the penalty they would otherwise incur, then perhaps that creates something of a disincentive to settle, effectively, out of court. So I would just like the Minister to comment on that.

I would sort of pre-empt that I don’t think trusting the Inland Revenue—while we all might do; we might have great faith in them as an entity—not to apply a penalty which others might see as a bit unfair—I don’t think that’s really where we could be on this. So I’d just like to hear from the Minister on those two areas: the part I raised around sections 143 and 143A around the criminal penalty, and also about how the civil penalty is higher, or can be higher, than the criminal penalty. I look forward to that, Minister.

Thank you, Mr Chair. Can I acknowledge the excellent contribution from my colleague Brett Hudson. I think his questions are very good questions, and I’m sure that the Minister in the chair will want to answer those. But I want to just speak on this bill, because this is a bill that I started—and the Minister’s acknowledged that before, so it’s not a big thing. But it’s not as though it was all my work. Revenue worked so hard to make this all happen, but also I signed us up as a country, at the OECD, to the multilateral arrangements around tax and information collection that this bill is part of.

It addresses a situation, in Part 2 of the bill, very much around the fact that we now have big multinationals in the world who are, in many ways, much bigger, much more powerful, and far better-resourced than some countries, including ours. Those particular multinationals do shift their profits from one country to the other, but also they use their losses or their cost of business to put them in tax advantageous places. As was explained to me at the OECD, some of these big multinationals do in fact have entirely massive tax departments, and as a tax lawyer I found that very interesting. But also they have these big tax departments which are very much focused, as part of their business, on shifting the losses and the profits, depending on where they can pay the least tax.

Now, that works OK for them, and it works OK for their shareholders. But it does not work OK at all for the rest of the world that does not get to do that. By the way, the rest of the world’s paying for the roads and the schools and the law and order and all the things that help make places safe for people to undertake business in.

So I am someone who is very pro - this bill. I know that our party absolutely supports it, because we agreed to it before, when we were in Government, and started it. But I am also someone who thinks that we need to sometimes dial back our enthusiasm for all things collected internationally and shared, because we also need to be aware that, with the greatest and best of intentions, we can in fact empower a group as professional and responsible as our Inland Revenue Department people are—and I have great confidence in them, having been their Minister—but also understanding that what actually helps the Inland Revenue Department to remain a very well-respected department and well-thought-of department and trusted department is that they do not just have carte blanche to go and do anything that they particularly want to do. They have to keep to the law.

So I am just a little bit concerned, along with my colleagues, around the penalties, and particularly when there are multinationals that New Zealanders may be involved in in some way: law firms, accountants, other professionals, or even shareholders or whatever, and people who are directors, who are going to, under this legislation, bear—I think, in some ways—a disproportionate responsibility for the actions of others. One might say that, “Well, that’s their fault for being involved in these businesses.” But, actually, as a law professional, we also have a code of ethics that requires us to—as they say, people take the first cab off the rank. That means that law firms do not get the luxury of saying to a client, or someone presenting as a client, “I don’t like you much, so I’m not going to act for you.”

So I think we need to think about that, and I think the questions raised by my colleague Brett Hudson are incredibly valid. We do not want to have a situation where, rushing to agree with everything that we’ve signed up to before—rushing to agree to all the things that we share in terms of the intentions—we actually create a bigger problem a little bit further down the track.

So I think it is important: the issues raised by the law firm Russell McVeagh and others around this—that we don’t actually penalise our law professionals or our tax professionals or others who are working in these areas quite legitimately—that we don’t penalise them because of what’s being done overseas, where they have no control of it. That’s the thing with the law profession or the accountancy profession: you have your obligations, you certainly have your code of ethics, and what that doesn’t always allow you to do is to actually delve into all of the things that are going on elsewhere.

We need to be very careful that we don’t end with a situation where the penalty for members of a large multinational group failing to provide information under clause 53 of the bill becomes one that actually means that our very competent lawyers and other professionals have to say to overseas companies or multinationals—or even New Zealand companies—“I’m actually sorry. We can’t act for you. We can’t do anything for you. We can’t be part of this organisation. We can’t be a director. We can’t do whatever it is that we’d normally be able to do, because the penalties that could be imposed on us for actions over which we have no control are so onerous that, actually, we just can’t do it.” I think that actually creates quite a bit of a conflict for anybody who is in one of those professions around their ethical obligation to take on clients who turn up seeking assistance. So we just need to get some clarification from the Minister as to how that will in fact be undertaken.

I think we’ve also seen some pretty chilling—and I want to actually just raise this as an issue, because I think it’s a very good point. We’ve seen in the United States recently—and I don’t want to go into any details of people’s court cases—where some lawyers have been specifically targeted around their actions, or, actually, even the actions of their clients. That, I think, has a chilling effect, and should have a chilling effect, on all lawyers and professionals who are working in these very often very difficult ethical areas in the liberal democracies of which we form a part. I’m not saying that what happens in America necessarily affects us, but I certainly see that there is a certain culture of going after, if I can use that colloquial term, people connected to those in high places or those who are seen as being a legitimate target. So I really want to hear a bit more from the Minister about this. I’m sure he’ll give us some good assurances.

But it’s the sort of thing where I think that it’s good for Parliament to question just how this law will in fact, or could in fact—a very legitimate profession and one that we should actually protect ourselves, because it goes to the rule of law. When we can’t have lawyers and other professionals whose job and career and ethical obligations are around the protection of rights—if they cannot continue with their work free of fear that they will suddenly end up penalised for something they have no knowledge of and no control over—then we are going down a very, very slippery path.

I don’t want that to happen. I know it has never been the intention of this Parliament, but what I also know, as an experienced lawyer, is that the intention of Parliament is not necessarily what matters; it is the actions of Parliament that matter, and it’s what the law itself says. So I would like to hear from the Minister in the chair, Stuart Nash—and I’m sure he’ll want to address this—just to make sure what it is that we are talking about, how this will operate, and how professionals in this very important area will in fact be protected from undue bullying or pursuit by revenue and the Inland Revenue Department investigators.

Let me start off by dealing with the penalties issue—well, I will deal with the penalties issue. First and foremost, to the last member, Judith Collins, who I have the utmost respect for and who did some fantastic work in this area, I acknowledge the fact that she went to the OECD and signed up to this and set New Zealand on the path to actually enhancing the integrity of our tax system, which is what we all want. It’s a little bit rich for her to share concerns over certain obligations to which she signed New Zealand up for, but one thing I will say to her and Mr Butler—

💬 Hon Judith Collins: The Minister started so well and let himself down.

Ha, ha! I absolutely trust the Inland Revenue Department, first of all—[interruption]—to prosecute under the appropriate law, Mr Butler; so that will happen. There is no doubt about that. The second thing is that we know that Inland Revenue operates with huge integrity—we know that. We also know—and I can give you my utmost assurance—that Inland Revenue is not going to “go after” a large organisation or an individual just because they’re high profile or a tall poppy. They just haven’t got the time or the resources or the inclination, let alone this is not how they operate. They will only “go after” someone if they believe they have broken the law—and so they should—which is what this legislation is about.

Now, talking about clauses 54 and 55, well, it’s a little irrelevant, because what we actually did is we took criminal charges out of the bill. So they’ve been removed. Criminal penalties don’t apply anymore; so it was not necessary to amend these penalties.

The other thing I would say to the Hon Judith Collins is that we’re talking about failure to provide information, OK? So someone is going to get prosecuted if they fail to provide information that the Inland Revenue has requested, but the penalties that we’re talking about in the $100,000-range only apply to large multinational groups with global revenues of more than €750 million. So the former Minister, the Hon Judith Collins, talked about lawyers and accountants; well, if you’re lucky enough to have a client with global revenues of over €750 million, then the practice is probably doing really well, and you’re probably highly experienced and incredibly competent in a certain area of law. So we don’t think that, in this context, a civil penalty of up to $100,000 is excessive at all. In fact, you could mount an argument that it should perhaps be higher, but we won’t go there. So let me deal with this.

The second one is that civil penalties were introduced because we consider the existing penalty of $4,000—$4,000—is unlikely to be adequate when applied to failures of large multinationals to cooperate by providing information that the Inland Revenue has requested. So this is a big area. I hope I’ve dealt with those concerns, with regard to penalties and with regard to clauses that have been taken out, and with regard to the scale of the penalty, but, also, with regard to whom Inland Revenue may seek to prosecute. I just want to reiterate: Inland Revenue is not going to go after someone if they don’t think there is a very good case. Thank you very much.

Thank you for the call. I’m pleased to support this bill and acknowledge the work of the Hon Judith Collins and the Hon Stuart Nash in getting to this point.

I’ve sat on the Finance and Expenditure Committee. It’s been a learning experience, a significantly complex piece of legislation, but we’re here, in urgency, to get it to the next stage. That being said, Mr Chair—and to the Minister in the chair, the Hon Stuart Nash—there is a suggestion I’d like to make for no other reason than I think we are potentially exposing ourselves unnecessarily to a whole lot of legal fights and a whole lot of lawyers’ interpretations. I specifically comment on clause 50, new section 17(1CB). In this section, there is a specific mention around how we can access information for multinationals in other jurisdictions. It says, “disregarding any law of a foreign country relating to secrecy of information,”.

Now, I worry that that is something we don’t need to say. It is something in the legislation that, particularly, points us to a fight that I’m not sure we will necessarily win. I say that on the advice of the submitters to the select committee, including ASB, BNZ, Chapman Tripp, Corporate Taxpayers Group, New Zealand Bankers’ Association, Russell McVeagh, Westpac, and Chartered Accountants Australia and New Zealand. They considered this a significant overreach in terms of what the powers are, or actually, more so, what is the reality of the situation. So I understand we’re trying to be able to reach into other countries and other entities of multinationals, but, in May, the OECD published figures that show there are 2,700 bilateral relationships already, and that continues to grow.

My point is that if we set amendments that are impossible to comply with and are not necessary, all we’re doing is offering a chink, a bureaucratic nightmare—or whatever word is you want to call it—to something that may not need to be there and would need to be tested in law anyway. While I’m not a lawyer—and I freely admit that—I do think taking on and telling a foreign country that this bill supersedes any other law related to that foreign country is a fight we might not want to have.

So the Inland Revenue Department does not consider it’s appropriate to allow multinational corporations to locate information overseas. I understand that, and I have some sympathy, actually, in our ability to go after multinationals. But I have put in a tabled amendment in my name which, specifically, seeks to remove the words “disregarding any law of a foreign country relating to … secrecy of”, in clause 50, new section 17(1CB). I do that because I think it’s superfluous. If I’m wrong, I’d encourage the Minister to show us, in this Chamber, what value it would, in fact, add to this piece of legislation.

I’m very supportive of this bill. It’s been a steep learning curve, as I’ve said, and I offer this point, in a way, to help future Parliaments and the New Zealand Government—and the Inland Revenue Department, actually—to make sure that we do not get caught up in some big multinational sort of activity and court case when, if you look at the OECD website that looks at this work, massive progress has been made. I suggest we keep going on that path rather than putting in what I regard as unnecessary, over-the-top sort of inflammatory comments in a clause, which I’m not convinced can actually be enacted anyway.

So I ask the Minister to take a call and, specifically, outline the reasons for that, and if he cannot, then I respectfully request that he consider my tabled amendment and make an amendment to this piece of legislation. Thank you.

I move, That the question be now put.

Thank you very much, Mr Chair. I wanted to focus a little bit on clause 52 and the country-by-country reports that are being requested. The idea here, of course, is to ensure that a New Zealand - headquartered multinational group with consolidated funds of €750 million in revenue for the previous year furnish the IRD with information on their global earnings. Now, it’s interesting, actually, in the briefings, that it’s been stated that this would apply to about 20 multinational groups. I’m a little bit pleased and surprised to learn that there are 20 such companies of scale in New Zealand, and maybe there are more. That probably is a reflection of the robust health of the economy that we’ve seen over the last nine years, and I do hope that that continues that way under this Government, where business confidence is falling.

I suppose the primary question I have to the Minister—well, before I get to that, the point of this is that by requiring that these multinational companies give information about the gross revenues and profits, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets in each of the countries in which they operate, the idea is that then the IRD will share that information with other nations, not so that they can do their tax assessment directly—we’re not asking for that level of detail—but just to give them a broad idea so that they can have a clearer idea of the overall tax picture and make further inquiries if they need to in other countries.

So the primary question I have for the Minister is: how confident is he that New Zealand will get useful information on the many hundreds of multinational companies based elsewhere in the world who have operations in New Zealand, so that the information that we receive will be useful in our collecting of tax by multinationals that are not based in New Zealand but operate in New Zealand? So that’s the primary question: how confident are we that we will get useful information from other countries? I presume it’s only a certain number of countries that have signed up to this and that that would be a moving feast. I’d be keen to get an indication from the Minister as to what percentage of those companies, in terms of overall coverage, in terms of major companies operating in New Zealand which are subsidiaries of multinational companies in the rest of the world and that operate in New Zealand, will be covered by reciprocal relationships and reciprocal information that flows through this country-by-country reporting that we, obviously, expect other countries to be doing, as well as us.

I’d be interested to know the projected time line, I suppose, as to when we think we will start to get that sort of useful information from other countries, because we’re doing this. New Zealand has always been a good global citizen and been prepared to make our effort in order to ensure that there is good cross-country cooperation and understanding of how the taxation burden is met by multinational companies. So we’re doing this and we’re passing this law in the next few days, and it’s been largely a bipartisan law because we are keen to make sure it works. What I’m keen to understand is whether we are going to actually get useful information from other countries out of this that will help us; who they are; roughly, what the percentage of overall revenue for such companies will be covered by countries that are helping us in this area; and what the time frame is for our expected flow of information. I’d be very interested to hear from the Minister and to get a sense of that.

Thank you, Mr Chair. I just want to take a call in regard to clause 38 of the bill, and that is in regard to the new section HD 30, and that’s “Members of wholly-owned large multinational group”. This clause had a number of submissions on it, from ASB, the Corporate Taxpayers Group, New Zealand Bankers’ Association, PricewaterhouseCoopers—

CHAIRPERSON (Adrian Rurawhe): Order! Sorry to interrupt the member, but we are on Part 2, which is clauses 49 through to 53B.

OK.

Thank you, Mr Chair. It’s with pleasure that I address Part 2 of the Taxation (Neutralising Base Erosion and Profit Shifting) Bill. Specifically, I wish to address clause 51 of the bill, which will insert new section 21BA into the parent Act.

I would like to outline the significance of this clause before I speak to some quite specific aspects of those provisions. The significance is really in the heavy powers that are going to be accorded to the commissioner in relation to requiring information from a large multinational group. In new section 21BA(1), we read, “This section applies if the Commissioner notifies”—noting that that’s a unilateral instigation of a process, as reflected by the fact that there’s an information demand and a requirement by the member to comply. So the language is very clearly setting out a situation in which the IRD, through its commissioner, has very large powers, and we don’t need to think too long and hard about overseas jurisdictions in which tax departments—or services, as they might be referred to in other countries—have used their powers in a way in which the citizens of that country would surely not approve. I would not suggest for a moment, Mr Chair, or indeed to the Minister in the chair, Phil Twyford, or to anyone else listening, that our own revenue service would apply powers in an ultra vires way, but, nevertheless, it’s important to bear that in mind when we consider exactly what powers we are going to give them to conduct lawfully in accordance with the statute book.

So, specifically, then, in relation to new subsection (1)(c), a point has been highlighted in submissions to the Finance and Expenditure Committee—and I note, in passing, that I was not a member of the select committee for very many of the times that the committee considered this bill. The phrase that has been met with some objection—or at least some concern, perhaps it’s not too far to say—by the New Zealand Law Society is the one that states: “whether or not in the knowledge, possession, or control of the member,”. The significance of that is that information that must be provided, as required by the commissioner, is not excluded on the basis that the member doesn’t have knowledge, possession, or control of that information. So that’s a pretty high threshold. The suggestion of the New Zealand Law Society—and it seems a sensible one to me, at least—is some slight stepping back from that absolute strict liability requirement so that good-faith measures to hold, possess, or have such knowledge could be applied. Alternatively, we might consider wording such as “best endeavours” or another similar type of approach.

In any case, bearing in mind that the onus is placed fairly and squarely on the taxpayer—namely, the member as defined—I think some slight mitigation of that pretty tough, stringent requirement could be in order. If the Minister is prepared to take a call to give some indication of whether he’ll contemplate that, then I will draft a Supplementary Order Paper along those lines—and I would be very happy to do so.

Heading to the next subsection, within that same section that I’d like to address, subsection (3), I note that a submission was made along similar lines by various submitters—but most compellingly, in my view, by PricewaterhouseCoopers—that the provisions excluding evidence are “too harsh”. Subsection (3) talks about a situation in which a member of a large multinational group might dispute a prosecution, imposition of a penalty, and so on, and, in doing so, the rules for the evidence being allowed or not, as then set out in subsection (4), are subject to a number of criteria. Each of those criteria is required in order for an exclusion to be set aside such that—[Time expired]

Thank you very much, Mr Chair. Let me answer some of the questions that have been asked and see where we end up. First of all, to the Hon Judith Collins, I just want to reiterate an answer I gave earlier. You were concerned that New Zealand lawyers, etc., would not advise multinationals or take on multinationals as clients for fear of being hit with a $100,000 fine if they did something wrong or something occurred outside of their knowledge. I’m pleased to inform the member that, in fact, the civil penalties apply to members of large multinational groups, and it would not apply to their advisers. So, hopefully, that has answered that point.

Lawrence Yule brought up a point around secrecy. It is not an amendment that we can consider. In clause 50, there is reference to disregarding foreign secrecy laws, and this is consistent with existing information request provisions within the Tax Administration Act anyway.

The other thing I would also say is that most countries are repealing their secrecy laws to meet new standards for exchange of information. Keep it in mind we’re not going this alone; this is OECD-led. Everyone—every jurisdiction, every tax department—wants multinationals to pay their fair share. Let me give an example—and I know the committee was briefed on this—of where we may need to do what we’ve done in the bill. That is, for example, a tax haven—not that many large multinationals use tax havens, of course—may have a secrecy law that makes it illegal to provide certain information to a foreign Government. So that’s the reason why we’ve gone down that route. Most secrecy laws relate to bank secrecy, and so it would not prevent a multinational from providing IRD with information about their own tax position.

There is something I would like to say to Mr Penk, and that is: please do not compare New Zealand’s IRD to other jurisdictions, certainly those that may be considered in not the same light as New Zealand. We are known globally—we are renowned globally; we have a global reputation—for a fantastic tax system. The integrity of our tax system is very, very highly valued, and there are two former Ministers of Revenue here who understand that, who worked hard on that. The thing I would say is that one of the reasons—it’s not the only reason, but one of the reasons—is, obviously, a broad base - low rate but also the commissioner. The commissioner—in this case, the current commissioner—is a person of immense integrity, even though I am well aware that this bill will transcend her time—I’m assuming; who knows how long she will be there?

The thing about this bill—and I talked about this a lot when I was in Opposition—is there are the words “may” and “must”: when are we going to compel the commissioner to do this, or when is it up to the commissioner’s discretion to do this? I’m not prepared to accept an amendment that waters down the commissioner’s ability to go hard against multinationals, for two reasons. Yes, you are dead right; the onus is always on the taxpayer to provide information to IRD. It doesn’t matter if it’s your money or a large multinational. If someone has that information or not, that is still up to the taxpayer to find that information and furnish that to the commissioner, keeping in mind the commissioner—I sort of addressed this last week—just doesn’t have the time to go on fishing expeditions, and that would not enhance the integrity of our tax system in any way, shape, or form.

So what we are doing here is providing the commissioner powers to investigate or compel the taxpayer to provide information when there is evidence or when there is a very strong suspicion that, in fact, that taxpayer is not complying with the law. I think if we watered that down, then we would open a massive big loophole for a whole lot of corporate lawyers to march right on in and say, “Well, the commissioner had to use their discretion. We don’t know if the discretion was used appropriately.”, etc., etc. So I think compelling the commissioner to do this is actually the right thing to do to maintain the integrity of the Act, as well as the tax system. Thank you.

I move, That the question be now put.