Wood MichaelMICHAEL WOOD (Labour—Mt Roskill): I'm very delighted to have been provided the opportunity by the Minister of Revenue to deliver his opening remarks on the Taxation (Neutralising Base Erosion and Profit Shifting) Bill. As I open up my comments I want to thank and acknowledge the National Party for their new-found enthusiasm for cracking down on multinational tax avoidance. It's taken only nine years of avoidance and delay to get to this point but better late than never.It's my great pleasure to make comments on this bill which is coming before the House today and it's the first bill containing the Government's proposed measures to address the issue of base erosion and profit shifting in New Zealand.Jami-Lee Ross: I raise a point of order Madam Speaker. There's leeway in the Standing Orders for a Minister giving a first reading speech when they've moved the motion to read a speech but there is no such leeway for members that wish to read another member's speech.Madam DEPUTY SPEAKER: Yes but it is in the Speaker's ambit to decide how strictly those rules are applied.Hon Dr Megan Woods: I raise a point of order Madam Speaker. I didn't want to disrupt my colleague when he was speaking but I just seek your clarification on the interjections that were being received from the Opposition benches about the presence or otherwise of a member in this House.Madam DEPUTY SPEAKER: I apologise. I didn't hear that.MICHAEL WOOD: Thank you Madam Deputy Speaker. Base erosion and profit shifting is a challenge for tax systems around the world. It has received wide media coverage particularly overseas and it's often referred to by the acronym BEPS". It's a 21st century problem arising as it does out of the ease with which business can be transacted across borders today. It used to be that in order to begin trading in New Zealand a business would need to open a shop or a factory or have some other kind of physical presence in the country in which they were carrying out that business. But now due to global supply chains distribution models and in particular digital technologies it's possible for multinational corporations to generate significant sales from New Zealand customers and book those in an offshore company that does not have a taxable presence in New Zealand.In addition some multinationals have entered into increasingly complex and aggressive taxation arrangements to shift profits and to minimise their global tax liabilities. These include using related-party transactions and royalties and interest deductions to shift profits into low-tax countries and exploiting hybrid mismatches that arise due to technical differences in different countries' tax laws. The overall result of these BEPS strategies is that some large multinational companies are paying little or no tax anywhere in the world. This weakens the integrity of our tax system and it weakens our tax base.New Zealand has been part of the OECD's global response to BEPS but it's long been conscious of the international taxation issues and consequently our tax rules in this regard are generally very strong. However the measures contained in this bill target specific base erosion and profit shifting strategies that IRD believes are being used by some multinationals in New Zealand. These are the use of excessive debt and interest paid to parent companies to shift profits out of the country; the exploitation of differences between countries' tax rules to achieve an advantageous tax position; steps taken to avoid having a permanent establishment and therefore a taxable presence in New Zealand; and transfer pricing transactions between related parties to shift profits offshore. These are areas where we need to strengthen our rules.These are complex issues and for the benefit of members I want to give a brief overview of each issue and our proposed response. Interest payments on debt are an expense to a company that is deductible; thus a New Zealand - based foreign-owned company can reduce its taxable income by borrowing from its foreign owner. If the interest paid to the foreign owner is exorbitant then it becomes an easy way for the company to shift profits into a parent or holding company offshore. The unusually high interest rates are often justified by debt funding the New Zealand subsidiary more heavily than the rest of the group making it appear to be a risky investment. The bill proposes to counteract this strategy with new rules that limit the interest paid on a related-party debt. It does this by setting specific rules and parameters so that the credit rating of New Zealand borrowers at high risk of BEPS will typically be set one notch below the ultimate parent company's credit rating and also so that any features not typically found in third-party debt are removed in order to calculate in combination with the credit-rating rule the correct amount of interest that is deductible on the debt.The second component in this bill addresses what are known as hybrid mismatch arrangements where differences between two countries' tax rules are exploited to achieve complete non-taxation of income which is generally not intended by either country. Non-taxation is achieved because differences in countries' tax rules allow payments to be made that are either deductible in one country but taxable nowhere or deductible in two countries against different outcomes. The bill proposes a comprehensive adoption of the OECD recommendations on hybrid mismatch arrangements with suitable modifications for the New Zealand context. The measures in the bill will ensure that where these arrangements involve New Zealand deductions are denied or payments are taxed in a way that prevents double non-taxation without giving rise to double taxation. Similar measures have already been adopted by the United Kingdom and announced in Australia and the EU.Moving on to the third major focus of the bill the issue of permanent establishment and therefore a taxable presence is one I alluded to earlier. The problem is that some multinationals are now able to structure their operations so that their New Zealand sales and associated profits are all booked offshore despite the fact that in substance the sales are generated by New Zealand - based salespeople. The old rules of permanent establishment are no longer meeting our needs. The bill therefore proposes a new anti-avoidance rule that will expand the criteria for a multinational to be considered to have a permanent establishment in New Zealand. The proposals are similar to anti-avoidance rules already implemented in Australia and the UK.The final major item in the bill focuses on transfer pricing. Transfer pricing involves the pricing of cross-border payments between related parties but sometimes the price setting can become a means for shifting taxable income out of the country. The transfer pricing rules limit the ability to shift New Zealand profits offshore by requiring the related-party price to match the arm's-length price that unrelated parties could agree to. The bill proposes various measures to strengthen our current rules that will bring them more into alignment with the OECD's transfer pricing guidelines and Australia's transfer pricing guidelines too. These are the main features of the bill.The Government is focused on improving fairness in the tax system. The objective of the bill is to address a source of unfairness in the tax system and if I may just take a couple of moments to expand on that question of unfairness this goes to the heart of the Government's tax reform agenda. A tax system must have integrity because we ask from this House the ordinary taxpayers the ordinary small-business owners the ordinary investor in New Zealand the mums and dads and the ordinary Kiwis who are doing their bit to pay their fair share of tax to fund our schools our hospitals our transport system our judicial system and the running of our democratic institutions. And by and large most New Zealanders accept that bargain. They know that tax as has been said is the price that we pay for civilisation. But the fundamental integrity of our system becomes undermined when we ask some people to make that contribution and they do but others who operate in our country and indeed who profit from their operations in our country shirk their obligations. That is the great concern that many of us have in this House: that over a number of years a situation has arisen in which large multinational corporations—not all of them but some of them—use sharp tax practice to avoid those legitimate tax expectations. Make no mistake—these are companies that benefit from their operations in New Zealand that derive profit from their operations in New Zealand. The estimates of the potential tax forgone because of multinational tax-avoidance range from around $200 million to $300 million to over $500 million. The Tax Justice Network has estimated a potential loss of between $500 million and $1 billion. That is serious money—serious money—that could be funding our schools our hospitals our infrastructure and all of those things that are so important to living in a just and decent and prosperous New Zealand.So it is the intention of this Government through its tax programme to ensure that our tax system does have integrity that it is fair that—as Mr Joyce said before—we have a broad low-based system. A broad low-based system relies on everyone paying their fair share and we cannot allow a situation to carry on in which a small number of multinational companies shirk that obligation. This won't necessarily be the only set of measures that this Government undertakes in pursuit of that objective but it is an important set of measures. These are complex and often technical rules and I think it is very appropriate that when this bill comes to select committee they give real scrutiny to the detail and listen closely to submitters. This is an important bill to ensure the integrity of our tax system and I commend it to the House. Thank you.Madam DEPUTY SPEAKER: Just before I call the next speaker this is an unusual circumstance we've had and it may never happen again but I refer members to Speaker's ruling 46/5 whereby the Speaker can decide to let members read a speech under certain circumstances."