Taxation (Neutralising Base Erosion and Profit Shifting) Bill

Order! Just before I call the Minister, can I have order when votes are being taken and when the Clerk is speaking. There’s just a bit of unruliness creeping into the House this afternoon.

💬 Hon Stuart Nash: Madam Assistant Speaker, I move—

ASSISTANT SPEAKER (Poto Williams): Just wait. Can I call you first? I call the Hon Stuart Nash.

I move, That the Taxation (Neutralising Base Erosion and Profit Shifting) Bill be now read a third time.

I’m very pleased to see this bill reach its third reading, because it’s an important bill for New Zealand. I’m proud that this Government introduced this bill in December last year, following on from the work done by the previous Government. To give credit where credit’s due, the Hon Judith Collins did some good work in this space. It’s also very gratifying to see this bill pass its second reading with wide support in the House.

It addresses tax avoidance. This bill addresses base erosion and profit shifting, or BEPS, as it is referred to. It is the problem of companies operating cross-border and using aggressive tax structuring to reduce their tax bill in countries like New Zealand. BEPS distorts investment and threatens the integrity of tax systems all over the world, and it also means that Governments lose out on tax revenue.

Unlike smaller domestic companies and individuals, large companies with cross-border structures can exploit BEPS opportunities to get around tax bills. The goal is to make company taxes more transparent and even in their application. Companies should pay tax somewhere and, ideally, in the right country, and, of course, if they’re operating in New Zealand, they should pay tax in New Zealand. It is not in the interests of New Zealand businesses and individual taxpayers if multinational companies can avoid paying taxes in New Zealand or elsewhere, so tackling BEPS issues is critical to ensuring the integrity of our own tax system.

The OECD and G20 have led the charge on this issue. They developed a 15-point action plan and released final recommendations in 2015 to combat BEPS. The action plan is an upgrade of the international tax framework to account for BEPS strategies that can be used by sophisticated multinational organisations.

New Zealand has been part of those discussions at the international level in working out how to ensure that multinationals pay their fair share of tax. In fact, David Bradbury, the head of the OECD’s tax policy and statistics division, recently said that he was—and I quote—“very pleased with the strong support that New Zealand had provided to the BEPS project”. We actually bat way above our average when it comes to work in the OECD, and I congratulate our Inland Revenue Department officials for the fantastic work they have done, both here and globally.

This bill builds on New Zealand’s strong international tax framework, which includes rules regarding the taxation of New Zealand - controlled foreign companies and the thin capitalisation regime. The result of our strong framework is that New Zealand is already somewhat better placed when weighed up against the OECD-recommended standards. This is not, of course, any reason to be complacent. Most multinationals operating in New Zealand pay the tax they should and are compliant, but there are some that adopt BEPS strategies to undermine their New Zealand tax obligations. So in certain areas there’s still clearly work to do in protecting the New Zealand tax base through domestic law.

The measures in this bill, therefore, are aimed at specific BEPS strategies known to be operating in New Zealand, while striving to maintain the attractiveness of New Zealand as an investment decision. We canvassed this quite a lot in the committee stage, and I think we arrived at a pretty good space cross-party.

This BEPS package can be broken down into five key measures. The first one is interest limitation rules. The use of debt is one of the simplest BEPS strategies: multinationals with excessive levels of debt or related party debt with high interest rates have large interest deductions, leaving little taxable profit in New Zealand. The bill reduces the ability of multinationals to artificially inflate their interest rate on loans to their New Zealand subsidiaries by adding new rules around credit rating of the New Zealand subsidiary and by ruling out exotic features not typically found in arm’s-length borrowing.

The second one is the permanent establishment avoidance. The existing international tax framework restricts the ability of a country to tax a business unless that business can be said to have a permanent establishment in the country. I understand this can be a little bit technical, but this is the very nature of international tax legislation. But, unfortunately, this permanent establishment concept can be manipulated by multinational firms. The bill will therefore prevent a multinational from dodging tax on its sales to New Zealand customers in cases where those sales are booked in an offshore company despite being generated by salespeople who work in New Zealand.

The third area is transfer pricing rules. Transfer pricing rules guard against multinationals using related party payments in order to shift profits offshore, often to low- or no-tax countries. The bill proposes amendments to strengthen the transfer pricing rules so they align with the OECD’s transfer pricing guidelines and Australia’s transfer pricing rules.

The fourth area is hybrid branch mismatch rules. Hybrid and branch mismatches arise from the exploitation of differences in the tax treatment of an entity, branch, or instrument under the laws of two or more countries. To address this issue, the bill contains new OECD-designed rules that prevent this particular type of BEPS strategy by denying tax deductions under the relevant transactions. These hybrid and branch mismatch rules are aligned with already enacted rules in the UK and a recently introduced bill in Australia.

Finally, administrative powers: we are providing Inland Revenue with additional administrative powers so the new rules can be used effectively. To be more specific, the bill will empower the Commissioner of Inland Revenue to investigate a multinational by obtaining relevant information held by an offshore holding company or headquarters. The bill will also facilitate the assessment and collection of tax and penalties in cases where a multinational fails to cooperate with an investigation.

These are sound measures that are tailored to the New Zealand context while being largely in line with the OECD G20 BEPS action plan. The measures will ensure that multinationals pay tax based on the actual economic activity they carry out in New Zealand. This will improve the integrity of the tax system considerably. In order to achieve its intent, the bill amends the Income Tax Act 2007 and the Tax Administration Act 1994. The Government wants to see progress in this space quickly. The bill’s proposals have been well consulted on and will apply from 1 July 2018—a little over two weeks from now.

Estimates from Inland Revenue are that the bill will result in an extra $200 million of tax revenue every year once the measures are fully phased in. This means a gain for other Government priorities—areas like health and housing—but, ultimately, this is a matter of fairness: multinationals paying their fair share of tax in New Zealand.

In bringing this bill to its third reading, I would like to thank the policy and drafting officials for all their hard work. As mentioned, this has been a complex process and is a very, very complex piece of legislation. I would also like to pay tribute to the organisations and individuals who submitted on the bill. The submissions made by tax professionals and members of the public on our taxation bills are very useful and welcome, and we all get a better tax system as a result.

I’d also like to thank my fellow parliamentarians that sit on the Finance and Expenditure Committee for their engagement with what was undoubtedly a complex set of provisions in the bill. The fact that they read all the submissions and their deliberations has meant that we have a better piece of legislation than when it went before the committee.

💬 Michael Wood: We enjoyed it.

I’m sure you did enjoy it, Mr Wood—I’m sure you did. There’s more coming your way.

Finally, I would like to give a particular thanks to the advisor to the Finance and Expenditure Committee for providing such excellent assistance to the committee members. Therese Turner does an absolutely brilliant job and I think she is a true treasure, and we love her dearly. It is therefore with great pleasure that I commend this bill to the House.

Thank you, Madam Assistant Speaker, and my pleasure to speak on this bill, the Taxation (Neutralising Base Erosion and Profit Shifting) Bill, which is one that was introduced by the previous National Government under the tax leadership, or the leadership of the revenue portfolio, of Judith Collins and is being carried on in the new dispensation that we find ourselves in by the Labour Government.

Broadly speaking, we remain supportive of the thrust of this bill, which, fundamentally, is trying to deal with that tension that we face—and that all countries face in the globalised world—of wanting to ensure that international businesses pay their fair share of tax. And so if you’re a multinational company based in New Zealand selling, for example, pharmaceuticals or something like that and you’re making profits in this country, we want to ensure that that profitability is accurately described and taxes paid for it. As long as companies have been trading across borders, there have been ways and means and efforts to reduce the amount of tax paid in countries where tax rates are relatively high and profits shifted to places where tax rates are low in order to avoid paying tax. Naturally, we, like every country in the world, have tried to resist that urge.

As a small economy such as New Zealand, we’ve always been conscious of the fact that it’s not something that we can fix on our own and that we’re far better to work with and through multinational organisations to achieve this. And so the OECD, of which New Zealand is a member, based in Paris, has been working in this tax area for a long time, and, as the Minister has acknowledged, New Zealand has had a long and proud tradition of having a very constructive role in those discussions. And so this bill flows out of the recommendations of the OECD working groups in order to try and defeat that.

Now, the tension also arises, though, between—while we’re wanting to ensure that international businesses pay their fair share of tax, we also want to have multinational companies investing in New Zealand and trading in New Zealand so that New Zealand has access to the goods and services they provide and so that we can enjoy the many, many benefits of having multinational companies actively engaged in this country, not just in terms of doing business but also from the management experience and the many, many benefits that you get from having branches of multinational organisations based in this country and investing in this country.

So we want to ensure that the tax rules that are developed are not unduly hostile to that happening. We acknowledge that if you live in a world where people are making decisions in Singapore or Shanghai or New York or London about where to invest as a company and where to trade as a company, it’s not automatic that New Zealand has to be at the top of the queue, and that we have to be attractive. The after-tax returns are obviously what companies look at, and so a certain measure of predictability about the tax that they’re likely to pay and the effective rate of that tax according to the rules that apply is very important. So what we’ve tried to achieve here in this legislation is to try and sort of get an effective line between those things—you know, wanting to make sure that the proper amount of tax is paid and that the system is robust and, at the same time, not being arbitrary and unpredictable and excessively tight in the way that we gather that tax.

As we’ve seen over the very lengthy and detailed debate that we had in the committee stage, there are lots of fine arguments to be had around the particulars. The basics of the measures of this bill are around stopping foreign parents charging their New Zealand subsidiaries a high rate of interest to reduce their taxable profits in New Zealand. The basic sort of dynamic there is that if a multinational company bases a parent company in a subsidiary in New Zealand, loads it up with debt, and then charges a high rate of interest for that debt, then the New Zealand company trading in New Zealand will post a very small profit, even though it might actually be very profitable on its trading, and therefore pay very little tax in New Zealand. The tax is paid instead where the interest is gathered. If that’s in a low-tax regime, then overall they pay less tax, but the New Zealanders receive less out of it.

I suppose the broader point I’d make in all of this—and I won’t go too deep into the details of this bill—is to contrast, I suppose, the process that we’ve had in the construction of this legislation. It may not prove to be perfect, and no tax legislation ever is, and I won’t be at all surprised if we come back in the not-too-distant future, re-examining some of these decisions that we’ve made and asking if we’ve got the balance right. But at least we’ve had a process where we’ve spent a considerable amount of time working out what we’ve tried to achieve. There has been detailed advice come in from officials about what we’re trying to achieve; then there’s been a large and considered select committee process, and changes have been made as a result of that select committee process, which has had the feedback of the many hundreds of practitioners in this space in New Zealand and internationally, and we’ve adjusted the legislation to get the best result that we can.

Unfortunately, that is proving to be not always the case in the way this Government goes about its business. The most striking contrast, of course, is with the oil and gas decision that was made in the absence of any detailed analysis by officials, by arbitrary ministerial fiat, and not actually going through Cabinet, let alone the legislative processes that may well be taken. Then we’re seeing in many other parts of the business community—if we’re looking at industrial changes legislation, for example—a determination on the Government to do very significant things but an unwillingness to listen to the businesses that are most affected by that when they raise realistic concerns about the costs that are being imposed on business. I just wish that we translated the tax development process that has been a relatively bipartisan one over many, many years in this Government and a well-known and proven track record of developing legislation and actually getting meaningful engagement with practitioners in the field—I just wish that we applied a similar level of rigour and analysis in research and a genuine listening and engaging with stakeholders most directly affected and an attempt at some bipartisanship over the political debate.

If we applied that in the fields of industrial relations or in economic development or the foreign investment rules, for example, or in the many other areas where this Government is going out and making very substantial changes in a seemingly arbitrary sense and not meaningfully listening and engaging with the broader business community, I’d think we’d be in much better shape than we are at the moment. We wouldn’t be seeing what we are seeing right now, which is falling business confidence right across the country.

So I suppose it’s a bit of a message of “This is a pattern that the Government would be well advised to follow in the broader way that they go about their business.” And I only wish that they would. So I just encourage the next speaker and the many Government speakers that will follow to reflect and consider the way that tax legislation is being developed and apply that more broadly in the way that the Government goes about its business. Thank you very much.

Well, I must thank the previous speaker, Paul Goldsmith, for his wise words of advice that we listen to his sage command to, you know, consult and engage with people in a pragmatic and bipartisan way. Look, I’m very proud of this Government, which does exactly that. It is about providing space and opportunity for all New Zealanders to actually engage in the big issues that concern us.

In this instance, I must acknowledge, though, the trajectory of this bill. It commenced in December 2016—off the top of my head—under the previous Government, and I want to acknowledge the work of our Minster of Revenue, the Hon Stuart Nash, for taking on and developing and working very hard with IRD officials and others to develop a fit for purpose tax scheme to ensure that multinationals are paying their fair share.

I think, just listening to this debate and having had the opportunity to contribute at all stages, and also sitting in the Finance and Expenditure Committee (FEC), and listening to the widespread concerns of the submitters, I want to acknowledge that there have been a number of submissions from tax experts and practitioners that have expressed that perhaps this bill doesn’t go far enough. Then there have been submissions to their contrary: that it’s gone too far, too fast. I must say, it’s actually a bit of a pleasure, really, to have been part of this process, where we’ve had to work across the aisle to, I guess, work through the very nuanced considerations, to make sure New Zealand remains a place where global business feels like they can call us home and conduct their affairs here, but also to ensure that some of those companies we’ve seen that do operate globally, that have adopted practices of aggressive tax planning and have effectively managed to dodge paying their fair amount—that we’ve tried to strike the right balance.

So I actually really just want to acknowledge Carmel and all of her team at IRD for the work that they’ve put in, working with practitioners and the industry. I also want to acknowledge the work of Therese. I know it was quite an oft-cited quote that she put in one of her papers to us on FEC that it was the most complicated piece of tax legislation that she’d seen in her 30-odd years. I do note that that was a sentiment that was reiterated across the board by many of the practitioners, because what we’ve got here—New Zealand’s not in isolation in trying to develop fit for purpose tax laws that apply themselves globally. Following from the G20 in December 2015, I think it was, they came up with a 15-point plan. So you’ve had all of these countries across the world who are members of the OECD try to—the harm is that, per annum, there’s approximately $240 billion of cash that the OECD considered wasn’t being paid and their fair bit wasn’t being done. At a more local and domestic level, the cost of tax avoidance here by multinational corporations is considered to be around $500 million—that’s gone up and down the scale, but around about $500 million.

I think, for many folks, when you’re considering how that impacts real-life human beings, it can be quite hard to sort of see how tax avoidance in a bubble can have a real-life impact, but I just want to draw attention to the well-considered and well-thought-through submission of the New Zealand Human Rights Commission, which drew on some remarks of the former UN expert on extreme poverty and human rights, Magdalena Sepúlveda Carmona. In that report in 2014, it said, “Although taxation policy may seem far removed from the daily problems of the poor, it in fact plays a major role in determining and adjusting levels of inequality in a society and in funding essential services, social protection and poverty reduction measures; it is therefore central to realizing the rights and defining the opportunities of people living in poverty.”

So I just want to really commend the work of our Minister of Revenue, but I want to commend both sides of this House for being able to work together constructively over a very lengthy period of time to develop a piece of legislation that has been well guided by the officials to ensure that New Zealand’s tax regulatory environment is fit for purpose in a global world and to ensure that multinational corporations who have decided to operate in New Zealand and call New Zealand their home are indeed, in fact, paying their fair share to our domestic revenue pot. So it’s my pleasure to commend this bill to the House.

I call Ian—Ian—McKelvie.

Madam Deputy Speaker—the member for Rangitīkei.

💬 DEPUTY SPEAKER: Goodness me! Ian McKelvie.

Ha, ha! I don’t blame you at all, Madam Deputy Speaker. You’re not the first person who hasn’t known who I am. Ha, ha!

💬 DEPUTY SPEAKER: I do know who you are.

Right, I apologise.

💬 DEPUTY SPEAKER: I was stunned because you didn’t look like Amy Adams.

It gives me a great deal of—well, I don’t think you’d ever get pleasure speaking on a taxation bill, but it does give me pleasure to get up and speak on the Taxation (Neutralising Base Erosion and Profit Shifting) Bill, known affectionately—and I don’t know whether anything could be known affectionately, but it is known affectionately as the BEPS bill. I don’t think a tax bill would be known affectionately either, actually.

It is an interesting piece of legislation, initiated by that great revenue Minister in the last Government the Hon Judith Collins and, certainly, supported by the National Party in Opposition. It is one that we’re obviously keen to—well, I think, as Paul Goldsmith said earlier, taxation is really a bipartisan issue, and it’s something that all in the House should really, I guess, share support for bills of this nature. It’s a very complicated bill, and according to our Minister it has the potential to increase the tax take by up to $200 million per year, which is a considerable amount. However, it’s worth making the point that many of our overseas companies do pay their way in New Zealand and are very good corporate citizens of this country. This bill’s designed to, I guess, fix up those ones who are not necessarily good corporate citizens of this country.

It is a corporate bill and one that takes a lot of getting one’s head around in how it works and what it’s to achieve, and, you know, it’s unlikely to be perfect—although, obviously, those people putting these bills together strive for perfection. I think the Finance and Expenditure Committee had the use of some great advice from an independent adviser in Therese Turner, who did some very good work on it and gave us some very good advice too. I think the hard work by a number of officials from the IRD and, indeed, the members of the select committee themselves and also, I think, some very good submissions certainly gave the bill every chance to get—well, it got through its committee stage no problem, didn’t it, and now to the third reading. I think that hard work’s paid off, but we’ll see, I guess, as the results of this bill become more apparent in years to come.

One of the challenging matters that need significant consideration when introducing tax legislation is what direction tax advisers, experts, accountants, and lawyers might take as a result of that legislation being introduced. Having access, again, to an adviser of the experience of Therese Turner certainly helped give Parliament the confidence that this legislation’s fit for purpose and will achieve its stated intention of preventing multinational companies or businesses from shipping their profits from New Zealand via various means, thus avoiding paying tax in this country.

One of the other constant challenges we face, as do other countries, is to put in place legislation that protects our attractiveness as a spot or a destination for investment and, at the same time, protects our own citizens from, I guess, the mercenary tax habits of some of those companies—in other words, tax erosion. It’s interesting—this same thing applies to a lot of other issues we face in this country too. We have to make sure our country’s attractive as a place to bring new products to, and you’ve only got to look in the pharmaceutical sector or even the animal health sector. It’s important that we have legislation that gives a good balance to whatever we do in the country and, at the same time, is attractive to other people to bring their products and their businesses to New Zealand.

It is a very fine balancing act at times and one that’s hard to get right every time. The simple example of this, of course, are things such as a tourism tax or a border charge for biosecurity, where, if it’s set at the wrong rate or the wrong level, it will be a disincentive for people to come to New Zealand, just as this could be a disincentive for people to invest in New Zealand if it wasn’t pitched in the right manner. So it’s very important that we do this in a manner that keeps our place in the world and also enables people to come to this country and invest in us and put their products into this country in a manner that they can make money out of it and we also get fairly recompensed for what they do.

We’ve got to keep our tax system simple, because we don’t have a large enough tax base to complicate the system. If we get it too complicated, it means compliance is far too expensive for a small country and becomes inefficient, so I think it’s really important that we do at all times try to keep our tax base simple and efficient. Of course, whilst this legislation might be complicated, it doesn’t affect a huge number of people, or a huge number of multinationals either, for that matter. It does affect some very big accounts, however.

The new measures put in place by this bill will ensure multinationals pay their fair share of tax in New Zealand by targeting a number of things which have been around since humans first came to light, I imagine. Interest manipulation: there’s a difference between interest manipulation at arm’s length—in other words, with an independent party—because you’re not going to get a great deal of discount or unusual interest rates, because the market effect will sort that out; interest manipulation between internal or like-minded companies, or companies of the same family, is much more likely, and that’s a way that’s been used historically for shifting tax and liability from one place to the next.

The next one is to stop the means, or use other means, to move profit around, and this can be done through hybrid mismatches or where tax law in various countries can be, effectively, gamed, I guess, or played off—in other words, it is advantageous to take your tax someone else rather than pay it in the country you operate in. We have to make sure that we don’t get that balance wrong as well. So that’s a pretty important issue.

It makes it easier for the IRD to investigate uncooperative multinationals, and that, again, is complicated—and I might go into that a little later if I get some time, because there’s plenty of things to talk about in this bill. Avoiding having a taxable presence in New Zealand, or what we might know as a permanent establishment in New Zealand—which is very easy to do, and many companies have done that in the past, where they don’t have an official New Zealand taxpaying entity, so to speak, and that means they don’t pay any tax in this country; they take it all home.

Then there’s things like capitalisation rules, where high levels of debt which could be held here and not in the parent company at home—in other words, they push their debt offshore into a different entity and, consequently, they can run very high interest charges and things like that.

So there are many methods that can be used to shift profit around the world, basically, and avoid paying tax in countries like New Zealand. Interestingly, there’ve been times in New Zealand where the same methods were able to be used to move tax liabilities around New Zealand entities. This is no longer the case, of course.

Tax has become of much greater global interest in recent years, and I’ve noticed a big change in people’s attitude toward tax and to the avoidance of tax. I think it attracts much more commentary than previously, and it’s no longer socially acceptable for business to exploit a country and move on without paying their fair share. Paying one’s way in the world is now part of one’s licence to operate in the market place, and we need to ensure these entities have sound guidance and legislation to ensure they’re able to operate here as good corporate citizens. And I think that the ability to be able to operate in the market place doesn’t just apply to paying tax; it’s a very big issue with respect to environmental behaviour and on things that operate socially in our economy as well. I think it’s really important that we ensure that people play their part in our community and in our society. And, morally, they have an obligation to do that. And this bill, whilst it doesn’t impose that moral obligation, certainly ensures that those companies that are affected by it will play their part in it going forward.

I briefly want to comment on a couple of measures contained in the bill to ensure the IRD has powers to investigate—and I touched on this earlier—and can do it relatively easily. These changes to information request powers—the original bill increased the information request powers of the IRD to request information concealed by any member of a large multinational group. And the revised bill requires that requested information relate to an investigation of a multinational group’s tax position. This reduces privacy concerns, because the bill, as originally written, could have requested information from an actual person such as a bank customer, and so it would have affected the way we operate with our privacy laws in New Zealand. And I think, from the Inland Revenue Department’s point of view, however they do this has got to be as simple as it possibly can.

The bill had both criminal and civil penalties for failing to provide the requested information. And criminal penalties have been removed from the bill, as it’s not appropriate to apply a criminal conviction to a New Zealand person when the failure may have been caused by an associate or offshore group. Thank you, Madam Deputy Speaker.

Madam Deputy Speaker, thank you. Unlike the previous speaker, Ian McKelvie, it is a pleasure to get up and speak on this Taxation (Neutralising Base Erosion and Profit Shifting) Bill, not the less because I don’t often get the opportunity to speak on matters economic. That normally falls upon our spokesperson in these matters, Fletcher Tabuteau, who genuinely does love this stuff and is a bit of a thought leader in how we can make our systems more fair and our economy work better for everyone; in fact, such so that I understand that he is affectionately known as “the Professor” within this Parliament—a term that he, I think, is rather chuffed with. I also enjoy the tax debates from afar, listening to Deborah Russell—Dr Russell—when she gets up here and talks about The Wealth of Nations and Adam Smith and almost makes it sound like required bedtime reading.

So here’s my chance. And I’d like to say that the purpose of this bill is to strengthen the integrity of our tax system, protect our tax base by introducing measures that address the issue of base erosion and profit sharing by multinational corporates in New Zealand. And I’d also like to put some context around this.

The following bill that we are going to be debating after this is the Overseas Investment Amendment Bill. And this is a sign of this Government going through the gears to make sure that overseas investment is channelled in such a way that it advantages New Zealand—that it is to our advantage and not to the disadvantage of our citizens. And this bill is very much in the same light—making sure that we level the playing field so our own New Zealand businesses get to compete on an even footing. This is absolutely core New Zealand First practice and principles. There’s no reason why a dairy owner or a dairy farmer shouldn’t be playing on the same level playing field as a foreign multinational. If it’s good enough for them, it is good enough for everyone.

It’s important to acknowledge the work of the officials. This is highly complex legislation. We know that jurisdictions around the world are grappling with this very same set of issues and that our officials have, in many cases, I understand, been in front of the game when it comes to grappling with this issue.

We also do acknowledge the Opposition, because the Opposition did start this process—after eight years of denying it was a problem, finally rumbled into action. There must have been a focus group somewhere that said it was problem so they rumbled into action. And it was probably no coincidence that it was when the Hon Judith Collins came back from purgatory and took over as the revenue Minister that we finally got some action on this very serious issue. And what an excellent Leader of the Opposition she will be very shortly.

We know there is global concern about aggressive tax practices used by multinationals who pay very little tax anywhere in the world. And this is—as we’ve heard before—known as base erosion and profit sharing (BEPS). There’s various mechanisms that we can—

💬 Hon Member: Profit shifting.

Profit shifting even, maybe. The OECD and the G20 have recognised this issue—as my colleague Kiritapu Allan alluded to before—in 2015. And it is a very complex, multifaceted issue. And there is no silver bullet, but that does not mean that we should not start.

Most multinationals, it’s worth saying, that do operate in New Zealand do act responsibly. They are valued and contributing corporate citizens. But some of our companies do not. Many companies that are household names to all of us, and that we probably use on an everyday basis, make tens or hundreds of millions of dollars of revenue, maybe more, but pay tens or hundreds of thousands in tax. There’s only two scenarios there: either they’re totally incompetent—which is clearly not the case given their global presence—or they are using the rules to their best advantage. There’s nothing necessarily illegal about that, but it is a loophole that we must look to close. This is about the social licence to operate. And we as farmers get that thrown at us all the time about our social licence to operate. And we know what that’s about, and it’s only fair that these multinationals do the same.

New Zealand businesses often miss out on lucrative opportunities because they are not competing on level terms, and they are required to pay their tax—and also, I might add, other multinationals that do play the game fairly and do try to be good corporate citizens are disadvantaged by this as well. We have heard that there could be—well, we’ve heard two representations of how much this could be costing the Inland Revenue: somewhere between Mr McKelvie’s $200 million and Kiritapu Allan’s $500 million. I’ve heard estimates of even more. But this is money that we need. There is so much call on the Government’s coffers after periods of neglect over the last nine years. We need that revenue, and we need it to be secured fairly and for the best interests of the country as a whole.

So it is important to address these BEPS, but this is not a vindictive measure. It is about levelling the playing field, and we continue to welcome multinationals, but they must be compliant—they must contribute.

The message this Government is sending is very clear: we are open for business on the global stage, but we must address the issue of the BEPS so as to allow a level playing field and so our multinationals who choose not to and aggressively look to minimise their tax are brought into line. Members across the House have spoken to a particular point of reasonable fairness. We must ensure we move down this path and we make sure that we cannot allow certain companies to avoid their obligations.

I’d like to congratulate Minister Nash on bringing this forward. This is—as we said earlier—a very complex set of rules and regulations and legislation that we’re bringing. It has been wrestled with over many countries. Particularly, we’re sharpening the structured arrangement definitions: we’ve replaced the definition relating to the hybrid and branch mismatch rules to correct that technical error to better reflect the recommendation made by the Finance and Expenditure Committee, which is well-led by Mr Woods and, of course, Mr Tabuteau is the deputy chairman. And I believe that this committee has worked very constructively together on this bill.

There are four main changes, as I understand it—the interest limitation changes. There are also changes to the time bar for transfer pricing issues. And in this we are aligning our thinking with Australia, which is a thoroughly sensible move. We have to act globally on this issue. The IRD powers to request information to offshore groups—and it gives Inland Revenue the powers to be able to request information that is held offshore by group members of large multinational groups with a New Zealand presence. And that is the—I’m just trying to find the other one, but that’s three—there are four, but we’ll have to leave that to the subsequent speeches to cover off.

So, just to reiterate, in conclusion, New Zealand thoroughly endorses the change made by the Finance and Expenditure Committee. This brings me back to the earlier remarks we made: that this Government has made a clear commitment to the transformation of our economy—a transformation of the way we work together to improve the lives of all New Zealanders. This is a Government that is formed a little differently and does things a little differently, but it’s fair to say that we do expect to bring forward the human face of capitalism to reinvigorate the economic landscape of New Zealand, and having every company pay their fair share towards that is an absolute fundamental.

With this in mind, it is a genuine pleasure to be part of a Government that is showing clear and decisive leadership on this issue. We are committed to being responsible, not just fiscally but socially and environmentally, and with the passage of this bill, we believe that we are well on the way to walking the talk on these issues. I commend this bill to the House.

Who knew tax could be so sexy? Who knew it could be? We’ve just heard a very political speech from the member who’s resumed his seat, Mark Patterson, and I liked a couple of the nice things he said about me. He acknowledged the fact that I had worked on this bill, that I had actually brought it forward through Cabinet and had got it approved that we would work through it, and that the Hon Stuart Nash had taken it over. And I say, too, I’ll give some credit to the Hon Stuart Nash because, in Opposition, he was very good in working with me on this, although I do recall the Labour Party howling at one stage that there were hundreds of millions more dollars that we weren’t trying to go after, and why weren’t we leading the world in this rather than waiting for the OECD and all the other countries to sign up to it. And that’s because this is not a New Zealand - unique issue; it’s an issue which every country is dealing with. And so we thought it was very sensible to go along and sign up to the OECD international treaty in Paris, where, at that stage, 73 countries had signed up to it—and I understand even more have signed since then—to actually enable the sharing of information and also the complementary, in many cases, duplicated legislation that is necessary for this to be of any effect.

Although we are New Zealand, and therefore an extremely superior country, in my opinion, we are a teeny, weeny little country, and we do not have the clout and the power or the reach of many of these multinational, global companies or incorporations. We would be wrong to think that we are talking only about companies that are based, at some stage, in some other country; we are talking about New Zealand - based companies here, as well. And people would be wise to remember that we have many New Zealand companies that are operating overseas, in many different markets, that make profits in many different markets, that make losses in some markets, and many of those markets might just be here in New Zealand. So it is not anything new that companies, corporations, will, in fact, shift their losses and their profits so that they have the most efficient use of tax legislation and tax rates. There is an entire industry around this. It’s tax advice, really.

Having said that, that doesn’t make it something that we should encourage. I think we should, as a country, make sure that we get our fair share of tax. And the reason for that is this: I’ve often thought it’s only the truly rich and the truly poor who don’t pay tax. Everyone else doesn’t get a choice. Those who earn salaries, wages, all have to pay their tax. Those who have investment income have to pay their tax. That’s one of the great things with GST, of course. It doesn’t matter how wealthy somebody is, they still have to pay GST. And I think it is really important that we understand this is not actually a bill that we should be engaging in political point-scoring on, because none of this would be of any use unless other countries signed up to it.

That is why, when the member who has resumed his seat, who did make a couple of very nice comments—acknowledgment there; not all of them were appropriate, though—wanted to sort of say, “This is New Zealand First and the Labour-Greens Government”—whatever. No, it’s not; it’s actually global. Everyone in the OECD pretty much has signed up to it, although, as I recall, the United States did not at that time, although they did do a very similar agreement with us. We were one of the first countries that they did a special deal with so that we could, in fact, share information and they would share information with us. And that is what’s crucial here. So information is king when it comes to this sort of legislation.

Is it going to be effective or not? I hope it will be. I hope it will be effective and that it will be effective in this country, as it will be effective in other countries, because if any of the countries signed up to it, who have said that they’re committing to it, choose not to enforce it, not to do what they need to do, they will actually be the weak end of the whole deal and, in fact, they will let this system not work as well as it should do. It only really works if everyone’s in it; otherwise, all that happens is people just move offshore. And nobody wants that to happen. Nobody wants us to lose iconic New Zealand companies because they’ve got a better sweetheart deal somewhere else.

I always think it’s good to remember in the New Zealand story that huge, big global multinational GlaxoSmithKlein, or GSK as they’re known now, started in Palmerston North, New Zealand, with milk powder. That’s the story of New Zealand business, and where is it now? Not really here. Not based here, anyway, although GSK is here, but not to the extent that one might expect. It is, in fact, now very much multinational, very much based out of the UK and Switzerland and all sorts of other places, because, actually, that’s what companies do; they will, in fact, go where the best deal is for them and their shareholders. And they’ll also look at not just tax, because that is very important, but also the business environment.

So this legislation, although it’s extremely worthwhile and our officials from the Inland Revenue Department worked very hard on this and will no doubt continue to work hard on it, and were seen in the OECD—and I got this straight from the OECD—as having contributed in a very positive way towards the work and, basically, the model law that was put together and signed up to as a treaty, the point really is that none of this will work unless it is (1) respected: endorsed by companies and corporations in New Zealand; and (2) treated exactly the same way by other countries, so that there is not just de facto base erosion and profit shifting that go around between countries that have signed up to this and then suddenly don’t actually enforce it. That’s the weak link in this; it needs everyone to do it. And I think that this is a bill that has potential, but we don’t actually know how much that potential is.

So when we talk about “Is it $200 million? Is it $500 million?”, all the advice I got was around the $200 million mark that we would be saving New Zealand, but actually, we don’t really know, because you don’t know what you don’t know. And until you start counting, you don’t actually know. And even then, it’s only going to be effective if the companies or businesses themselves respect it and actually comply with it without having to be checked constantly. They’re not going to do that unless they know that the Inland Revenue Department will, in fact, be looking at this, and whether or not there is a commitment from the accountants and the other tax advisers towards this. But my experience in law is that whenever there is a new rule put in place, it gives a lot of extra work to lawyers and accountants to work out how to get around it. And, clearly, that sort of thing will happen. So whether or not this is the answer for all tax issues around the multinationals—I’d say the answer is no. What it is is a step in that direction. It is a step towards making sure that countries, and particularly countries who don’t have the resources that even a small country like ours has, are able to get, at least, their fair share—or, at least, some of that fair share—of the tax that they’re owed.

I think it is always amazing. And I will allude to one of the comments of the previous speaker, who alluded to the fact that some companies apparently make a tremendous amount of revenue and seem totally incapable of making more than, say, I don’t know, $50,000 profit. I don’t know if it’s got anything to do with named companies like Apple or others, but I’ve often thought, “If they can’t make money here, I could take it over, because I could certainly make money with that sort of income”, and I think most people would think that, too. We just don’t believe it when we’re told constantly that huge global, international companies with massive reach, more power than any Government that New Zealand has ever seen and more power than any Government will ever see, suddenly can’t make a bean. Well, they should sack everyone, then, and start again because clearly there’s something wrong.

So I think New Zealand is taking the right step. I’m pleased to see such love and peace breaking out in Parliament today to support this bill. I think it’s a good piece of work and I give full credit to our officials at the Inland Revenue, because it’s actually their work not only in New Zealand but also in the OECD. We who have been Ministers and who are Ministers can go along on their coat-tails. It’s a good piece of work—nice to see everyone agreeing.

E Te Māngai, tēnā koe. Tēnā koutou e Te Whare. It is a pleasure to rise and speak on behalf of the Green Party after the previous Minister in charge of moving this through Cabinet under the previous Government and, particularly, to tautoko her point about love and peace. It’s not necessarily what I saw coming from the lips of one the Hon Judith Collins, but I am very proud of the fact that we’re standing in the House today, or rather sitting and standing in the House today—

💬 Marja Lubeck: On this special day!

CHLÖE SWARBRICK: —unanimously supporting this piece of legislation. Yes, to echo the sentiments of one Marja Lubeck, my colleague from Labour, on this special day—on my birthday—I wanted nothing more than to be debating a tax bill!

This is a very complicated piece of legislation, as many speakers before me have noted and as I was fortunate enough to note in my speech on this piece of legislation in the second reading. It was traversed, I think, incredibly well by the Minister Stuart Nash. There are four, I believe, operative tools in the legislation, which a lot of very smart and very fancy people involved in the sector have submitted on and a lot of people in the IRD and ministerial advisory departments have had their hands in creating. I kind of just want to point out—as was noted, I believe, in particular by the Hon Judith Collins but so too by Ian McKelvie—that as long as there is tax, as long as there are rules, there will be people who are likely to try and avoid or skirt around those rules. There are always going to be people who are going to cut corners.

I really actually quite enjoyed the quote of Ms Collins, that “it’s only the truly rich and the truly poor who don’t pay tax[es].” I kind of wanted to pick up on that point, in particular with regard to a campaign run last year, 2017, which, obviously, aligned with what was happening in the political sphere at the time, during the election: a campaign by ActionStation, who those in this House may be aware of as engaging in stirring up political debate and engaging community members, grassroots fund-raising, to start the conversation on a number of really important issues. They ran a campaign off the back of a report in the Pacific Accounting Review by Lisa Marriott from Victoria University and Dalice Sim from Otago University, who wrote an article called “Tax evasion and welfare fraud: do punishments fit the crime or the perception of the crime?” What they found is that annually tax fraud in this country costs us $1.24 billion, but welfare fraud, on the other hand, costs us $30.6 million. So to put that in perspective, there—

Tim van de Molen: I raise a point of order, Madam Deputy Speaker. I draw your attention to Speaker’s ruling 17/4. I believe the slogan on the member’s laptop is inappropriate to be displayed in this House. Thank you.

💬 DEPUTY SPEAKER: Thank you. I was just actually looking at Speaker’s ruling 16/3, in which electronic devices are not to be on the top of the table unless they’re being used for speaking notes.

CHLÖE SWARBRICK: I’m about to refer to it. Sorry, Madam Deputy Speaker, I’m about to refer to my laptop.

💬 DEPUTY SPEAKER: The difficulty is that you now have advertising on it and a slogan.

CHLÖE SWARBRICK: OK. I can put it down here.

💬 DEPUTY SPEAKER: So if you put it down, that would be fine. Thank you.

CHLÖE SWARBRICK: All right. I could cover it—would that work?

💬 DEPUTY SPEAKER: Yes.

CHLÖE SWARBRICK: So the point—

💬 Andrew Bayly: Speak off the cuff!

CHLÖE SWARBRICK: Speak off the cuff? Mate, I’m about to refer to the white paper by BDO, which refers to the base erosion and profit shifting: “What you need to know”. Why this is important—

💬 DEPUTY SPEAKER: Actually, I don’t need to know.

CHLÖE SWARBRICK: Sorry, Madam Deputy Speaker. The title of the article is “BEPS—What you need to know”, so if I can just clarify that point. It was published on 8 September 2017. Why I think that this is important to raise is that we’ve talked a lot about the impact that this is going to have on the tax take, for example, in Aotearoa New Zealand, and so too about levelling the playing field, but what this white paper speaks to is the perspective of businesses. They state, and I quote, “This means you need to be sure that: [firstly,] the price for which you are charging related parties for goods or services meets the arm’s length principle under each country’s respective transfer pricing legislation; [two,] your business is appropriately structured and your legal structure aligns with the commercial reality and economic substance of your business; and [thirdly,] your measures are well documented and the respective reporting requirements in each jurisdiction fully met.” Why I think that that is important to note is because what we’re talking about there is, essentially, transparency and accountability and businesses becoming comfortable with that.

We’ve had a few other speakers point to the fact that this is about a social licence to operate. There is absolutely a demarcation between morals, or ethics, and laws. What we are trying to do here is ensure that we have a legislative and taxation framework that aligns with our morals and our ethics with regard to fairness and the social contract, because what we often see with regard to what I was pointing to earlier, about so long as there are rules people will skirt them, is that we often see a circumstance where we have privatisation of profit and socialisation of cost. What I mean by that is that with the current situation, there are a few cowboys out there. I’d like to acknowledge what previous speakers have as well: that there are many businesses who are playing by the rules. But those who are not are utilising the infrastructure that taxpayers in this country have built, whether that be our very physical infrastructure in terms of transport, or whether it be the likes of our courts or judicial system. But, indeed, they are privatising profit by way of selling those goods and services and not paying the requisite tax.

So this is, indeed, about getting the balance right, and to get the balance right, as the Hon Judith Collins mentioned, we need everybody involved. That’s what’s actually really exciting about this piece of legislation, among other things: that New Zealand signed up, among 78 other countries, to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting—the multilateral instrument which adopts the OECD’s recommendations in the base erosion and profit shifting action plan, signed in June 2017, to amend multiple thousands of tax treaties around the world. So this is going to be sustainable because it is signed up to by dozens of countries around the world, and it is not a unique issue in New Zealand sole, so it requires a geopolitical response.

So, in summation, I think, to refer back to my excitement, this is a really critical piece of legislation that goes some way to pointing towards building a more fair and equitable tax system, and it’s an admirable piece of work both nationally and, indeed, internationally. I just want to thank everybody who has been involved in that but also to just quickly, if I may, point to the remarks of the Hon Paul Goldsmith, who spoke about the system needing to be robust but not arbitrary nor hostile but then referred to steps that the Government is making with regard to other policy and legislative decisions. Particularly, he referenced oil and gas and, I believe, in turn, the likes of what we are doing in the climate action space. He spoke to a want for bipartisan action, and on that point I’d like to say that I welcome his submission and the input of all of the National Party on the zero carbon bill. Kia ora.

I was enjoying that speech so much; I’m surprised it ended so quickly.

💬 Kieran McAnulty: Speak off the cuff, mate!

I am. So it’s an absolute pleasure to be talking on this, the third reading of the Taxation (Neutralising Base Erosion and Profit Shifting) Bill. Of course, as I think many people alluded to, this was one of the most complicated tax bills to come before not only the Finance and Expenditure Committee but also this House for quite some period of time. Its genesis had longstanding roots. Going back to the days when National was running the country—well, I may say, and, of course, we had an Opposition baying for blood that we weren’t doing enough—one of the issues that did come to our attention and was noted in the media was the issue of tax and making sure that everyone was paying their fair share of tax. Of course, we all need to pay our fair share of tax.

What this bill is is a very good bill, promoted initially by the Hon Todd McClay and then by the Hon Judith Collins. So, in effect, it’s a National bill, but I do have to acknowledge the Hon Stuart Nash for seeing this through to completion and to seeing it into the House, having its third reading tonight. What this is about is actually meeting our OECD requirements around profit shifting. I know there’s been a lot of discussion about it, but, essentially, what profit shifting is is multinationals who have operations in New Zealand using means to otherwise reduce their profit. Those means might be that they take on an extraordinary amount of debt, more than what would normally be required, and consequently they have a high interest cost. Therefore, that’s why the profit is reduced, and that’s why the profit in the New Zealand entity and the tax that the New Zealand entity pays are lower than they should be. The other way is around high interest rates, and that’s another way of reducing the profit and therefore the tax.

Another way is transfer pricing. What I mean by that, Madam Deputy Speaker, because I know you’re an expert on this, is how international companies with New Zealand subsidiaries use the price transfer rate for the products or services that are transferred between countries. How you price that is a way, and can be used as a way, to minimise profit and therefore tax. Other ways are around how the multinational might impose a high management fee on their New Zealand operation, and, again, that reduces profit and therefore tax. These are all mechanisms that sophisticated companies use around the world—not just in New Zealand, of course—to minimise tax, and they take those profits back to low-tax jurisdictions, often called tax havens, and therefore that’s where they account for the profit.

Obviously, what this bill is about is making sure that New Zealand is not disadvantaged. Now, the whole process, to get to the point today, followed an OECD process which set about working with a whole lot of countries around the world—principally the OECD, but it’s not limited to that—to come up with a group of policies and rules to make sure that multinationals couldn’t shift their profits around and therefore artificially lower their tax requirement. New Zealand played quite a role in leading those discussions, and this is what has come about over, I would think, probably a three-year process now, maybe even longer, to get to this point. Of course, there were a lot of people saying, “Come on, hurry up! Do it. You need to do something.” And, of course, we were keen to do something, but the result of this bill is more than just New Zealand meeting its requirements; it is actually New Zealand meeting its requirements in the context of everyone in the major international community also meeting theirs and putting in similar rules, because only when you have a web of countries putting in these rules will they have the effect that we need to make sure comes to pass.

So there was a lot of discussion around this bill. We made a lot of changes, and I think one of the things—I’ll just summarise: the bill really deals with high artificial interest rates and debt levels, which I’ve talked about. Also, it deals with the issue of what’s a permanent establishment in New Zealand. Of course, Government members might be asking themselves, “What does that mean?” So what that means, just to help some of the members in the House, is that in terms of how a multinational may operate in New Zealand, it has various options that it can use. It can form a subsidiary company; it might set up a branch structure; it might have a sales representative office; or it might even use some other non-corporate - type structures like partnership arrangements. Depending on how they are deemed—whether they are a permanent establishment or not—it makes it difficult in terms of assessment of profit. Part of the changes we were clear about in the bill was: what is the definition of a permanent establishment? In some cases, multinationals achieve a lot of profits in New Zealand just by having a sales office. So one of the rules, for instance, is that if a multinational has sales of more than €750 million and they have a sales office in New Zealand, that is deemed a permanent establishment and therefore is caught by the taxation rules around this.

Also, as I talked about, there is inappropriate transfer of pricing arrangements and using what’s called hybrid and brand mismatches to exploit tax situations. Again, mismatching or use of hybrid instruments—I see you’re looking at me, Madam Deputy Speaker, so I thought I’d just clarify that small aspect for you. So what that might mean is there is a big difference between using terms or instruments such as a debt instrument—a loan or a debt instrument of some sort—or an equity instrument such as buying some shares. In between, you have what are called hybrid instruments. They might be, for instance, redeemable cumulative preference shares, which means that the dividend is cumulative. There is a dividend, but it may be redeemable for a debt instrument. There are a whole lot of permutations.

I could keep going on about a whole lot of hybrid instruments, but what those are, what they mean, is that in some countries what you might do is make sure that the instrument looks like it’s a debt instrument and therefore the interest cost is deductible in New Zealand, but when you take the other side of the ledger, because accounting always has debits and credits, as we all know—Rudyard Kipling—on the other side, it might be a multinational with its head office or its regional office in Australia. In that jurisdiction, it is treated as an equity instrument, and therefore you have a mismatch between the two countries of where the tax is paid and where it’s deducted. Those are hybrid instruments, and that’s where you have the mismatch. This—the bill—seeks to clarify some of those mismatch arrangements.

I think the big change we made was the one on the rights of the IRD to be able to go to multinationals—and it might be a smaller sales office, as I said—and say, “We want all your information and we need you to present it to us.” We made a change around those rules. Previously, the initial draft was that it was very Draconian. We said, “No, there needs to be some more rules around that to make sure the IRD has appropriate powers to request that information.” But you couldn’t necessarily sue a salesman in New Zealand, both from a civil and a criminal perspective, for failing to provide some of that information; so we limited it just to civil.

The other one was the rights of IRD to actually challenge a multinational’s tax position in New Zealand. Initially, they asked for seven years. We believe that was too long. At the moment, their rights are not that, and so what we did is we put in place an arrangement for the IRD so that they would have to notify the multinational, within four years, that they were going to make a claim or dispute a tax calculation, and then, at the end of the four-year period, they could have that notification of dispute, and then they’d have a further three years to take the action and clarify it.

So part of it was making sure that the IRD has the right powers to go and enforce and get the tax revenue that New Zealand is justifiably entitled to, and, on the other side, to make sure that the powers of the IRD are appropriate and warranted, and I think we ended up with a great bill. I’d like to acknowledge the officials, I’d like to acknowledge all the submitters, and I support the bill.

The next call is a split call. I call Michael Wood.

Thank you, Madam Deputy Speaker. There was a day when I thought that my parliamentary career had peaked, after listening to the submissions and the consideration and the deliberations about this bill in the Finance and Expenditure Committee, but the eight speeches in the Chamber today have well and truly scaled that mountain. Can I thank all of those members for their very learned and very precise contributions on this very important bill.

I think this bill has a great deal of momentum so I’m not going to go on and on, but in the comments I do make today, I just want to give a little bit of background in respect of the OECD process from which this bill arose, and just make a couple of comments that I don’t think have been picked up in debate so far. Can I also acknowledge the two Ministers who have led the development of this bill.

It’s fair to say that these issues in respect of multinational tax avoidance have been on the radar for some time. First there was quite a formal report from the Inland Revenue Department in 2012 to the Government of the day. It’s my view that it did take longer than it should have to get on to this process—as late as 2016, the previous Minister Michael Woodhouse was, basically, saying, “There’s not a big problem here.” But this was a piece of work that was significantly picked up by the previous Minister Hon Judith Collins last year. There was a substantial process of public engagement through the middle of last year, and it was one of the top priorities of Hon Stuart Nash when he came into the portfolio under the new Government. Between those two, we’ve made great progress on this bill.

As I said, this bill came out of the OECD base erosion and profit shifting project and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, more succinctly known as the “multilateral instrument”. Here’s the really important thing about the multilateral instrument: at the moment, there is a profusion of tax arrangements between different countries. We have double tax treaties with I can’t remember quite how many countries, but many, many other jurisdictions, and all of those jurisdictions have double tax agreements with other countries as well. So, effectively, you have hundreds, if not thousands, of these arrangements between jurisdictions around the world. If you want to rationalise the rules in some way to deal with a multilateral problem like multinational tax avoidance, how do you do that when you’ve got, literally, thousands of agreements sitting out there? It would take for ever and a day to amend every single one of them. So the multilateral instrument is the way in which we lever into making changes across all of those agreements. That is why it is so very important.

We should also not undersell our commitment in this area and just sort of say, “Oh, well, we’ve gone along with the multilateral process like everyone else.” I actually think we’ve been a bit of a leader in this area. One of the quite important points to note is that, in respect of the multilateral instrument, although many countries have signed up to it, not every country has actually progressed in terms of implementing all of the particular provisions of the instrument in the same way that we have. In fact, we did have some submissions from people who had relationships with multinational companies operating in New Zealand who sort of said, “You’re rushing ahead too fast. You shouldn’t be signing up to all of the provisions in this bill.” But, actually, the direction from the Minister, and certainly the view of the select committee, which I was very pleased to be a part of, is that this is an area we should be leading in.

As the Minister and other speakers have pointed out, this is fundamentally an issue about fairness and about the social contract. A member of this House from some years ago, Laila Harré, used to say that multinational companies are very welcome in our country but when they are here they are guests and they should play by the rules. I think, as the Hon Judith Collins said before, every small business in New Zealand has to pay its tax, every wage and salary earner in New Zealand has to pay their tax, and that tax is important. It funds the operation of this place. It funds the fact that we have a legal system that businesses can rely upon. It funds our infrastructure, our education system, which provides the workers. In a society, you all put in to those things, and that is fundamentally the ethical, the moral, and the political issue that we are dealing with here.

So I’m very pleased to commend this bill to the House. We’ve heard about the key areas in which it takes action. I just want to finish my remarks by thanking everyone who’s been involved: the two Ministers, the Hon Judith Collins and the Hon Stuart Nash; my fellow select committee members, who went through a long and detailed process to try to get to grips with this bill; all of the submitters; and our very, very good officials from the Inland Revenue Department.

I want to leave my final thanks to the people out there in civil society, including the journalists, who, over many years, have been driving this issue up and putting it into the light to say that we have to do something to make sure that multinationals are paying their fair share of tax. Well, the work’s not finished, but with the passing of this bill, we are on our way. Thank you, Madam Deputy Speaker.

It’s a pleasure to take a call on the third reading here on this very exciting bill. I look around the House and I see huge interest and anticipation in the debate as we progress through the latter stages of this. I believe, indeed, there are people tuning in all around the country to follow the progress of this particular bill—watching online, no doubt, which is in part available to them of course because of the large investment by the previous Government in UFB, or ultra-fast broadband. Actually, before I deviate too much further, I heard an interesting fact recently: the average New Zealander now uses 3.6 devices per day. I thought that’s a really interesting fact—so tablets, etc., computers. So they’re tuning in all over the show.

But what we’re talking about here, with the Taxation (Neutralising Base Erosion and Profit Shifting) Bill in its third reading today, is about ensuring that multinationals are taxed fairly and on the basis of their actual level of economic activity within the jurisdiction of New Zealand. So what we’re proposing here is making some amendments to the legislative framework. It does need reviewing. There are numerous examples where some of these multinationals have been exploiting loopholes where while they’re not illegal we definitely could and should be capturing more revenue through those streams. So it was great to see the previous Government’s work in initiating this and bringing this bill before the House. I would like to also commend the current Government for continuing with that line of work.

Actually, there are a number of great pieces of legislation this current Government is putting through, and the one similarity they all have is that they were put forward, initially, by the previous Government, and I would like to encourage them to continue in that vein, indeed with this bill and others.

So, look, just coming back to that tax aspect. We’ve heard a number of ways in which some of these multinationals are looking to minimise their tax bill. Again, as one of the latter speakers in this debate, we’ve heard a lot of those technical aspects already. But I’d just like to touch on, in particular, the high interest rates that they can charge through debt levels from subsidiaries and also the artificial arrangements such as management fees, consulting fees that they can charge to help to avoid their tax obligations. Indeed, I just refer to a quote from Benjamin Franklin that the only certainty in life is death and taxes. Well, indeed, these multinationals are doing their best to disprove that particular quote. Benjamin Franklin, for that fantastic quote actually, and perhaps one or two other things was subsequently—

💬 Kieran McAnulty: Make your own quotes up.

—given the honour of appearing on the US $100 note, which is a fun fact for Mr McAnulty if he ever participates in a pub quiz.

So, moving on from that, we need to focus here on what the additional revenue opportunity is, and we’ve heard that could be anywhere—perhaps around $200 million is one figure that has been put out by the previous Government, and indeed this new Government is proposing that it’s an additional $200 million over the earlier $100 million additional funds that were proposed.

Then we had a Government speaker, Kiri Allan, saying that it’s hard to see any real-life impact from this piece of legislation. Well, I would suggest that real-life impact comes from seeing that additional revenue of $200 million, where we could perhaps reinstate the previous Government’s tax cuts that were removed by this Government, helping those people on lower incomes, providing them with a better scope of life now that they’re paying so much more in fuel taxes. Indeed, they could perhaps be paying less fuel tax if we had an additional $200 million of revenue, or we could be investing more in Predator Free 2050. Or, indeed, we could even—for Mr Patterson’s party—be providing further tax cuts for good-looking race horses. So there are many areas of this bill that provide significant benefit to New Zealand, and I think that we are here trying to get the balance of attracting investment into New Zealand and also maximising the benefit to New Zealanders from that investment.

I’d just like to touch on one point the Hon Judith Collins mentioned earlier on around businesses like GlaxoSmithKline, which had its formative roots just out of Palmerston North. Actually, after that building burnt down it moved into my electorate, to a small town of Mātangi—a dairy factory now derelict, but it had been operating from that stage and became a global company. That same site also produced the Anchor milk brand, which is now a very well-known brand around the countries that it’s sold in as a Fonterra brand. So there are significant great businesses to come out of New Zealand, and this bill helps to ensure multinationals pay their fair share domestically.

Thank you, Madam Deputy Speaker.

Chlöe Swarbrick: Give us a lecture.

No, no, I’m not going to give you a lecture today, Ms Swarbrick.

Sitting suspended from 6 p.m. to 7.30 p.m.

Thank you, Madam Deputy Speaker. I was just observing to my friend that it was such a good eight seconds I’m not sure I could improve on it, but what I was actually going to say to Ms Swarbrick, on this auspicious occasion of hers, was “Many happy tax returns.” But this bill is an important bill, and it is one where there’s a lot of cross-party agreement, so that’s good to see. It’s also worth noting that New Zealand’s at the forefront of this in implementing the OECD G20 base erosion and profit shifting action plan. And here we have it—one of the first countries to actually put this into place. And it’s really important to note that this is part of a global network. It’s about tightening the net.

It’s been observed in the House, already, that there are businesses out there that purport to make no profit in New Zealand, and that’s simply a fiction. What they are doing is making great profits in New Zealand, but by, essentially, fictional arrangements they’re moving those profits offshore. And what this bill does through the various measures it has is to eradicate those fictions so that when there are loans, as opposed to equity investments, those loans must be at market rates. And there’s a lot of detail around that. But the principle is this: the rules and frameworks that are imposed by this legislation create real commercial transactions so that real profits are shown and, if losses are claimed, they are genuine losses.

Transfer pricing is another one of these tools—the idea that when goods or services move between related companies, they’ve got to be priced realistically and fairly, and, of course, the permanent establishment rule: the idea that if you have an actual business that is genuinely being conducted in New Zealand, then it will be recognised as established in New Zealand and taxed accordingly.

These are just some of the tools that are in this legislation. But I must say, it is good to see that in New Zealand and elsewhere the whole idea of tax dodging as being a sport is something of the past; that, in fact, we now recognise that these global entities, if they’re going to have a licence to trade in New Zealand and in any civilised nation, they must meet their fair share; that as part of the social contract we won’t have tax havens, we won’t have—for illegitimate profit shifting, that, in fact, there’s a recognition that this is an important bill.

And if I can just say, just one real observation: Therese Turner, the specialist who assisted the Finance and Expenditure Committee, brought the most complex piece of legislation down to earth in the way that only she could so that committee members like me were able to engage in it and, I hope—with our friends on the other side of the House—improve it. So, on that basis, I commend this bill to the House.

It gives me pleasure, in this last part of this process, to speak on the Taxation (Neutralising Base Erosion and Profit Shifting) Bill and to reaffirm, obviously, this party’s support for this legislation. It seeks to make an amendment to the Income Tax Act 2007 and the Tax Administration Act 1994.

I think, as I’m the last speaker, I do want to pay tribute to the people that have got us to this point: the Hon Judith Collins, who, actually, in the last Government went to OECD meetings, brought this issue back to New Zealand, and set up a process, and my Hawke’s Bay colleague the Hon Stuart Nash, who’s guided it through this part of the process and who, I might add, in the committee stage gave one of the best set of representations from that side of the House in answering questions. I think we appreciate it on this side.

This is all around fairness and equity. It’s a global issue, it’s been identified, and we are seeking to align it with the OECD, and it’s taken us a while to get there. This coalition Government is, really, following work led and started by the National Government. That’s why we support it.

Most multinational companies actually follow the law, but there are some that don’t. There are some that have been in our face flouting the law, and most New Zealanders do not like it. This piece of legislation and this change, on the National Party’s prediction, was expected to bring $100 million worth of new revenue annually. Under the Labour Party projections, it’s more likely to be $200 million. That is a significant amount of money to come to make this tax system in New Zealand more fair and equitable.

I go back to its genesis, though, and it’s pretty high level, and this signifies how big this was globally. This was put on the G20 agenda in 2013. It wasn’t some sort of little idea of New Zealand; it is a global problem, and there was a 15-point action plan put out by the OECD in that year.

💬 Simon O’Connor: How many?

15-point.

💬 Simon O’Connor: Oh, it’s 15 points.

Yes. And in terms of recognising the vulnerability of not just New Zealand but other countries, New Zealand agreed to participate up to 2015, and in 2016—in June of 2016—we released our response. Really, what we’re doing tonight in this House is completing that process in multi-party agreement to actually align ourselves with the OECD. On 1 July 2018—which was, really, the start of this legislation—we actually brought it first to this House.

So the combination of measures will do a number of things: stop foreign parents charging their New Zealand subsidiaries high interest rates to reduce their taxable profits in New Zealand, stop multinationals using artificial arrangements to avoid having a taxable presence in New Zealand, ensure that multinationals are taxed in accordance with the economic substance of their activities in New Zealand, counter strategies that multinationals have used to exploit gaps and mismatches in different countries’ domestic tax rules to avoid paying tax anywhere in the world, and make it easier, importantly, for the Inland Revenue Department to investigate uncooperative multinational companies.

The OECD multinational instrument seeks to implement tax treaty - related measures to prevent base erosion and profit shifting (BEPS) and also allows several thousands of global treaties around the world to be quickly aligned in one. We’ve heard, at the committee stage and previous readings of this bill, that there are over 2,000 country-to-country treaties. In one fell swoop, this seeks to align most of them under the OECD treaties.

💬 Simon O’Connor: How many treaties?

Over 2,000. The multinational instrument is a new major weapon to fight against base erosion and profit shifting, because tax treaty abuse is often the basis for such techniques.

There were some significant changes made to the bill in the Finance and Expenditure Committee, and I want to congratulate members of that select committee and the bipartisan approach which this committee took to resolve these issues. I’ll give you some examples. First of all, the removal of the interest-to-income test for New Zealand borrowers for foreign lenders: the original bill actually stipulated that a New Zealand borrower who borrowed funds from a non-resident lender had to pass three tests to prove it was a high BEPS risk. If it could not pass these three tests, then its credit rating could be capped at one notch below the worldwide group’s credit ratings. This revised version of the bill removes one of these tests—one of these three tests—meaning the New Zealand borrower from overseas lender will only have to pass two tests to prove it is not a high BEPS risk. The test that has been removed is the income-interest ratio, which was, roughly, whether the New Zealand borrower has an earnings before interest, tax, depreciation, and amortisation data at least three times the interest expense.

Now, these are significant and complex issues, and for me, as a new member of the Finance and Expenditure Committee, it took me a while to get my head around. But, actually, where we’ve ended up is largely endorsing and supporting the submissions that were made to the select committee by technical evidence and by the staff at the Inland Revenue Department. There was actually not a lot of contention in this space, and the test was removed as it unfairly targeted companies making a loss who are new traders. The purpose of the test to identify companies with a high relative debt is captured by the debt percentage test, which is one of the following remaining tests.

We also made changes in relaxing the credit rating restriction. The original bill stipulated that where a borrower failed one of three tests for being a high BEPS risk, it would be restricted to a credit rating one notch below that worldwide group. We made changes to this, as I’ve just alluded to, and the purpose of this change is to address concern that that one-notch spread was too light and would increase the risk of double taxation, so we actually changed it to a two-notch test.

The last thing I wish to comment on is the third-party debt. The revised bill extends the third-party exclusion to a credit rating to include those companies that are classified as high BEPS risks. The logic here is that if an unrelated lender is willing to lend significant debt at a particularly implied interest rate, then this is objective and independent evidence of a credit rating of the New Zealand borrower and removes the need for an arbitrary credit rating based on the parent company. We’ve tidied this up, and I think we’ve made a fundamental difference.

We also had a lot of conversation—and it was raised at the committee stage—about the extension of the IRD’s time limit to investigate breaches of these various rules. The original bill had the time bar. It had to amend the tax position of a taxpayer from four to seven years if any amendment was related to transfer pricing. We had conversations in this Chamber, and the Hon Stuart Nash explained to us that as long as the initial investigation had begun within the four years, then it could carry on into seven years, but if it hadn’t begun in the four years, it could not carry on. I think, reluctantly, we accepted that provision. What we on this side of the House were worried about was long, drawn-out proceedings that the actual company did not estimate at the time were going to be carried out, and to have something done on you after seven years, we thought, was too long. So I think the compromise provision is accepted and supported.

During the last two years particularly, there have been a lot of conversations in the media and in New Zealand about companies’ rightful share of taxation, particularly corporates like Amazon, Google, Facebook—you name them—as to whether, in fact, they are paying their fair share of duty and taxes in New Zealand. This is an international phenomenon, and I think most New Zealanders accept—and I certainly believe—that companies like that should pay their fair share and should not use discrepancies in international tax law to crawl around the world trying to find a country where they can get a better tax deal, and I think this Parliament has responsibly answered that call. We’ve done it in consultation with the OECD. It’s taken us nearly four years to get to this point, but in the way in which we went through the select committee process, the time we took, and the submissions we received, there were actually very few things that this committee disagreed with.

In closing, I commend this bill to the House, and I commend the work that was done between the parties to get it to this point. It’ll make the New Zealand tax system a fairer system. Thank you.

Thank you very much, Madam Deputy Speaker, for this opportunity to speak in the third reading of the Taxation (Neutralising Base Erosion and Profit Shifting) Bill. This is a bill to avoid tax avoidance by multinational companies, but, before I do speak on this bill, I would like to acknowledge the work that the previous Government did on this legislation. They started this work. I want to especially acknowledge the Hon Judith Collins, who then handed it on, and I want to thank and acknowledge the Hon Stuart Nash, who finalised this work.

One of the things that was stated earlier on this evening which I really agree with is the fact that there is love and peace in this House and Parliament as we’re talking about this bill. It’s not very often that we have unanimous agreement to a bill, but to have love and peace on a taxation bill is indeed unique.

This bill has been designed to ensure equity of taxation where multinational enterprises are concerned. We welcome the operation of multinational corporations and companies in Aotearoa New Zealand. They often bring goods and services to our country, but when these multinationals come and they operate here in Aotearoa, they do benefit from a lot of our public services—our public roads, our telecommunications, our infrastructure—and with that it is only fair that they pay their fair share of tax whilst operating here in our country.

On 6 December last year, this bill was introduced by our Government, and one of the main purposes of this particular bill, as I said, following on from the work of the previous Government, is to protect Aotearoa New Zealand’s tax base from erosion through abuse of the tax system. There is a concern around the world about the aggressive tax practices often used by multinationals either to pay no taxes at all or to pay as little tax as possible anywhere around the world. Now, many of these multinationals are operating in New Zealand and they are compliant with our legislation. However, for those that are not compliant, the reason why we are introducing this particular bill is to ensure that these strategies that minimise their obligations for tax purposes are actually addressed.

This bill is designed to ensure fairness for New Zealanders in terms of multinational tax corporations. I commend this bill to the House. Thank you.

Bill read a third time.