Goldsmith PaulHon PAUL GOLDSMITH (National): Oh so very kind of you Mr Chair. Look I am a little concerned that people listening into this debate might be a little bit flummoxed by some of the details that are being discussed and I'm very keen to try and lay out in the simplest terms possible some of the issues that we're trying to address with this legislation.Fundamentally it's in relation to how non-residents can reduce their tax that they pay in New Zealand by capitalising their investment with debt instead of equity. So if we took one example of say an Australian investor putting $100 million of capital into a New Zealand company as equity and that company earns $10 million a year from sales and pays $2.8 million in tax—so 28 percent of $10 million is $2.8 million in tax. Now if the company pays the rest of the profits as a dividend—$7.2 million—it's earning $10 million and paying $2.8 million as tax.Now another company could invest in the same business and instead of putting $100 million in capital into the business it puts it in as debt with an interest rate of 10 percent. If that's the case the same company would earn the $10 million but it has to pay $10 million of tax-deductible interest back to its parent company and so the taxable income as a result is zero. So no tax is paid by the company and the only tax that is paid is a 10 percent interest withholding tax on the $10 million of interest it's paid. So the net result of that is that only $1 million is paid in tax to New Zealand.So the difference between the two ways of capitalising that investment in New Zealand of $100 million is the difference between $2.8 million in tax and $1 million in tax—or an effective tax rate of 28 percent and an effective tax rate of 10 percent. So obviously that's a big difference and has a very big impact on investment decisions. So what we're doing with this legislation is to say Well actually we're not going to let you do it"—as that second investor had—"with putting in 100 percent debt and charging 10 percent interest in order to reduce your taxable income to zero." So what we're saying here is that the debt can't be more than 60 percent of the assets. So it's an arbitrary figure and I'd be interested in getting a sense from the Minister whether we've got that arbitrary level right.Then we have this strong view on what the appropriate interest rate should be. As we've been discussing the rule that's been set out is that rather than just letting them dream up whatever interest rate they want the pattern through most of the world is to have an arm's-length interest rate which is effectively what the market would sustain but we're not happy with that either. We're going to now suggest that it should be the interest rate that's determined by the credit rating of the parent company. If it's a multinational company based in Germany for example with a high credit rating then that would lead to a low interest rate. So what we're saying in that example is that rather than borrowing it at a 10 percent interest rate they might have to borrow it at a 4 percent interest rate which is much lower and might not relate to the risk profile of the company involved. So the net outcome of that—the combination of not allowing them to put as much debt in and not allowing them to charge as high an interest rate—is that they will pay more tax in New Zealand and that effective tax rate will go up from say 10 percent in the example that I used at the start to maybe something closer to 28 percent.Now the concern of course—and I'm holding the disclosure statement and regulatory impact statement—is that if you over-egg it you could have the impact of reducing the amount of investment coming into New Zealand. So getting that balance right is the critical thing and I go back to raising the question with the Minister: how confident is he that the decision that we've landed on with two notches below the credit rating—[Time expired]"