Goldsmith PaulTAXATION (NEUTRALISING BASE EROSION AND PROFIT SHIFTING) BILLIn CommitteePart 1 Amendments to Income Tax Act 2007Hon PAUL GOLDSMITH (National): Thank you very much and thank you for the opportunity to say a few words on this Taxation (Neutralising Base Erosion and Profit Shifting) Bill. I think this is the stage where we try and delve into the nitty-gritty of the legislation. I think just for the benefit of the viewers around the countryside trying to get their heads around what we're trying to achieve with this legislation it is trying to navigate that fine line between ensuring that the tax laws in place are fit for purpose when it comes to overseas investors and multinational companies operating in New Zealand so that they pay their fair share of tax.When you're operating across different boundaries and jurisdictions then there are ways in which the companies and their subsidiaries in New Zealand and the relationship with the companies that own them overseas are structured can have big influences on the taxes that are paid. One of the simplest ways to reduce tax paid in New Zealand is to price related party debt which is to say that if you load up the New Zealand business with a large amount of debt then that business has the debt servicing costs in New Zealand that can be offset against their income. Depending how expensive that debt is and how high the interest rate is it lowers the effectual taxable income in New Zealand for that subsidiary.So there's all sorts of rules that have been developed over the years to ensure that overseas companies don't charge excessive levels of interest and don't have excessive levels of debt in their New Zealand company in order to avoid paying tax in New Zealand and to shift the profit offshore perhaps to another country where there is a lower tax rate. So that's what certain parts of this bill—and we're dealing with Part 1 here at the moment and I'm looking specifically at sections GC 15 to GC 19 in clause 37 which deal with these cross-party related debt issues.So the fine line that we've got to navigate our way through is a desire for these rules to be effective in ensuring that excessive interest rates are not charged and excessive debt is not loaded into the New Zealand company against wanting to ensure that by making those rules too tight we could have the consequence of actually increasing the overall effective tax rate that the overseas investor—or would-be overseas investor or multinational company—is actually paying. If the net outcome of it was that we had less foreign investment in New Zealand because we had effectively increased the effective tax rates then that would not be a good outcome.So the primary question that I have for the Minister—and I'd be very keen to have his view on this some time over the course of the evening—is to reassure us that he thinks we've got that balance right as to having the rules around related party debt sufficiently tight as to ensure that a sufficient amount of tax is paid in New Zealand but not too tight that they are artificially increasing the effective tax rate that would-be foreign investors in New Zealand are looking at paying and making us a relatively unattractive place in which to invest. That I think is the critical thing that I'd be very keen to hear from the Minister on.But as we drill into the details one of the matters that was discussed at great length during the select committee process was when a New Zealand borrower with an identifiable parent failed one of the three tests that we are introducing—and another one of my speeches will talk about doing away with one of those tests because it was too high—it would have its credit rating restricted to one notch below its worldwide group credit rating. Now what we're getting at there is how you determine what is an appropriate—[Bell rung] Madam Chair I might just keep going if that's all right.CHAIRPERSON (Hon Anne Tolley): The Hon Paul Goldsmith—yes.Hon PAUL GOLDSMITH: So what we're trying to determine in the course of this legislation is what an appropriate rate of interest is for a New Zealand subsidiary to be paying back to its global parent. If it's too high that interest rate then the New Zealand subsidiary won't be paying much tax because all their profits will be eaten up with interest payments. If it's too low then the parent will feel like it's an unfair transaction and so a lot of the discussion and argumentation through the course of the select committee stage was about how we get that right.I mean for example we had a submission from KPMG where they talked about the group credit rating approach not being a particularly fair one. Their concern and the concern of a lot of people involved in this was that the traditional global practice has been to have what's called arms'-length interest rate payments. So it's what you'd get on the global market for this particular business—its size its risk its security—and at a market rate then you can justify that. Now we're shifting away from that to this idea that the New Zealand subsidiary should actually pay the highest credit rating for the worldwide group and then take one notch off that. So if the New Zealand company however big it was was operating and if it was owned by a multinational company the highest credit rating that multinational company had—whether it was AA or A- or whatever it was—you'd take one notch off that and that would be the guide to the interest rate that would be appropriate for the purposes of this tax.Rt Hon David Carter: So why one notch?Hon PAUL GOLDSMITH: Well see that was what was suggested by officials and the concern is that that was too tight. So our suggestion throughout the select committee process was to drop that to two notches to make it a more reasonable approach. Many of the submitters were concerned that even that was too tight because the New Zealand subsidiary you know was obviously considerably smaller than the global entity. It may have a completely different risk profile. It may have a whole lot of particular circumstances that mean that it is a fundamentally riskier proposition which would justify having a higher interest rate charged to it. So that really is the second question that I have for the Minister and I'd be very keen to get his view on that. Is he absolutely confident that we have got it right in terms of dropping two notches from that highest group credit rating as a guide for the interest rates that we'd apply?I think we should still be worrying I suppose as to why New Zealand isn't adopting what is pretty much the global practice around having an arm's-length interest rate rather than this concoction that we've come up with here. So you know I'd be very keen just to get a sense of how comfortable the Minister is and secondly whether he thinks two notches below the global highest group credit rating is sufficiently broad and capacious so as not to achieve what is—my main concern about all this is that what we don't want to do is reduce the attractiveness of New Zealand as a place for international investors to invest. And that's where the effective tax rate that they'll be paying is so important because if I was to sort of make a broader point in conclusion it is that this is a country that throughout its history has relied on foreign investment. Ultimately if we want jobs and growth and opportunities for the next generation of New Zealanders that depends on investment and if we are to rely purely and simply on our domestic savings that's fine but we will only grow relatively slowly.