Cunliffe David: Taxation (Base Maintenance  and Miscellaneous Provisions) Bill — Second Reading 
Cunliffe David: Taxation (Base Maintenance  and Miscellaneous Provisions) Bill — Second Reading 
[Volume:626;Page:21434] 
Hon DAVID CUNLIFFE (Associate Minister of Revenue) 
 on behalf of the 
 Minister of Revenue 
: I move  
That the Taxation (Base Maintenance and Miscellaneous Provisions) Bill be now read a second time 
. The Finance and Expenditure Committee has considered the bill and recommended a number of amendments to the proposed legislation. 
The main feature of the bill of course is legislation to ensure that foreign-owned banks operating in New Zealand pay sufficient tax on their New Zealand income. The legislation proposed in the bill is a response to the fact that foreign-owned banks operating here appear to be relying excessively on debt funding their New Zealand businesses and their offshore investments. They can therefore use interest deductions arising from this excessive level of debt to reduce the proportion of their income that is subject to tax in New Zealand. One way of doing this is to use cross-border financing arrangements which are generally funded by debt to generate income that is effectively not subject to tax in New Zealand. 
Banks can also substitute debt for equity in financing their New Zealand business which can result in a New Zealand business being thinly capitalised relative to the worldwide business. The bill therefore introduces thin capitalisation rules that ensure that the income of banks cannot be sheltered by interest deductions arising from excessive debt. Banks will not have access to interest deductions if they do not hold a level of equity equivalent to 4 percent of their New Zealand banking assets weighted for risk. They must also have enough capital in New Zealand on which no interest is deductible to fully fund their overseas investments. Supplementary Order Paper 337 which was released after the bill’s introduction further strengthens the proposed legislation and ensures that it operates as intended. 
The committee has recommended several changes to ensure that the legislation once enacted is fully effective. A major group of recommended changes relates to the measurement of equity that supports a New Zealand banking business that has a foreign owner. In particular the committee has recommended changes to make it clearer what should and should not be counted in the equity calculation and which assets can and cannot be debt funded. The Supplementary Order Paper allows regulations to be made by Order in Council should the definition of “equity” prove to be unclear at any point in the future. The committee has recommended that this power be narrowed and limited to situations where there is a need for clarity about whether a particular instrument is considered to be a debt or equity instrument. I am confident that the changes will improve the operation of the new thin capitalisation rules. The Government intends to monitor closely the operation of the new rules to ensure that they are well understood and operating as intended. 
The bill also introduces statutory privilege or a right not to disclose certain documents to confidential tax advice that is given by advisers such as chartered accountants. That right is similar to legal professional privilege although it is subject to a number of exclusions. The change has been welcomed by tax professionals. As introduced the bill required tax advisers to provide a statutory declaration of information contained in a privileged document. However the committee believes that such a requirement for all circumstances would impose unnecessary compliance costs on those seeking to claim privilege and that a statutory declaration should be required only as a last resort. Therefore it is recommended that a process is introduced that would see the Inland Revenue Department requesting a statutory declaration only when necessary to an investigation. 
The other main change the committee has recommended to the privilege legislation is to widen the definition of “tax adviser” so that it is not limited just to advisers who have a significant function of giving tax advice as long as they are members of an approved organisation such as the Institute of Chartered Accountants of New Zealand that does so. The committee has recommended a number of other technical amendments to the privilege legislation that will also help it to operate more effectively. 
The bill introduces several business-friendly amendments. They include clarification of the income tax rules on transfers of assets and liabilities to beneficiaries when a taxpayer dies which is a reform that is long overdue. They include a number of technical changes to the tax depreciation rules to ensure their operation and reduce compliance costs. The ambit of the changes extends from the treatment of patents in plant variety rights through to deductibility for losses on buildings. They include expansion and clarification of the rules on tax deductibility for business environmental expenditure such as the cost of preventing remedying or mitigating the discharge of contaminants. The changes allow environmental costs like other business costs to be taken into account for tax purposes. The changes include the introduction of a 6-year tax exemption on income from non-resident drilling rigs and seismic ships involved in the exploration of petroleum in New Zealand as part of a package of measures to boost gas exploration. The committee has considered those and other amendments in the bill and has made a number of helpful recommendations to ensure the smooth operation and effectiveness of the proposed legislation. 
At some point before the bill proceeds to the Committee of the whole House I will release two Supplementary Order Papers: one to ensure that the draft legislation better reflects the recommendations of the Finance and Expenditure Committee in a number of areas and the other to split the bill into two in anticipation of passage. I thank the committee for its thoughtful consideration of this highly technical bill and I recommend it to the House.