Willis NicolaNICOLA WILLIS (National): I rise to take a call on the Taxation (Neutralising Base Erosion and Profit Shifting) Bill. I want to dwell in my contribution on the permanent establishment rules. These are outlined particularly in clauses 4 34 43—the definitions—and clauses 44 to 48.Now of course the permanent establishment rules propose a new anti-avoidance rule for large multinationals that structure to avoid having permanent establishment and therefore a taxable presence in New Zealand. So the new rules that are proposed here both simplify the test for determining whether an item of income has a source in New Zealand and ensure that all items of income New Zealand is entitled to tax under a double tax agreement (DTA) will be taxable under domestic law.Now what I want to raise some questions for the Minister this evening about are some comments that have been made by officials in particular because while submitters were generally supportive of the proposed anti-avoidance rule—and while National shares that support—there were some aspects where concerns were outlined and I just want to take a few of those this evening. So in particular we had the concern raised that the proposed rules would have a detrimental effect on foreign direct investment. Of course foreign direct investment is very important to the growth of New Zealand businesses the provision of jobs and income and that is something that we want to ensure can happen in the proper manner.So in particular there were submissions from Deloitte the Corporate Taxpayers Group PricewaterhouseCoopers (PwC) and the Chartered Accountants Australia and New Zealand noting that if other countries adopted similar positions in their domestic legislation many New Zealand exporters could find themselves with permanent establishments (PE) overseas that they don't currently have. Now officials have of course responded to that concern saying that New Zealand is undertaking these base erosion and profit shifting (BEPS) measures in line with most other OECD countries and that the expected tax revenue increase is expected to be relatively small.So I just wondered for one thing whether the Minister would indulge us by commenting on whether or not he can update the House on the expected tax revenue increases as a result of this and secondly whether he can give us any update on the progress of other OECD countries in undertaking these BEPS measures. Those would be useful things to have an update on.Now the second issue I want to comment on this evening was from a submission from KPMG where they raised the important issue of the need for clear guidance in the officials' report. Of course members in this House know that the officials' report has no official standing when it comes to interpretation of this legislation so I want to raise two particular issues: one which was around determining whether an activity is sufficiently connected to a sale in New Zealand and if so determining whether that activity is preparatory or auxiliary. What officials have said is that this information this guidance would be provided in a tax information bulletin on enactment of the bill. So I'm just wondering if the Minister this evening can confirm that that bulletin is in fact under preparation and whether he can confirm in fact when that bulletin will be provided.Another issue that I would like to comment on is this question of treaty override. So the proposed PE anti-avoidance rules—as members who have clearly read this bill in detail understand—is overriding some of New Zealand's DTAs. Now we had a number of submitters from Chapman Tripp Chartered Accountants Australia and New Zealand the Corporate Taxpayers Group KPMG the New Zealand Law Society and Russell McVeagh raise a concern that this was a unilateral override. What officials have outlined is that this anti-avoidance rule is a measure that only applies if there is a more than merely incidental purpose of tax avoidance and accordingly it should not conflict with New Zealand's DTAs in the vast majority of cases. I wondered whether it would give comfort to those submitters and to those looking at this legislation—because this House is supporting it—if the Minister was able to detail in fact the small number of cases where it would actually have any override because I think what officials are saying here is that it would be a very small number of cases. It would probably be useful to outline what those are if the Minister could do that.It's also noted that the wider PE definition will be added to the OECD model convention and so represents what the OECD considers to be the current best practice. Again I ask you: has this happened yet? Has this wider PE definition—[Bell rung] Can I continue Mr Chair?CHAIRPERSON (Adrian Rurawhe): Nicola Willis.NICOLA WILLIS: So what I ask is simply—the member wishes to be better informed and I'm sure the Minister can inform her whether that widened PE definition will in fact be added to the OECD model convention and so whether we have in fact had that representation of what the OECD considers to be best practice.I now want to move to the issue of royalties and the deemed PE source rule. This is an issue that KPMG and PwC in particular raised a broader concern—that the proposed changes increased the risk of unintended consequences such as double taxation and of course members of this House don't want double taxation to be something that occurs incidentally. So what officials have told us in this regard is that the risk of double taxation can be seen as a disincentive to entering into PE avoidance arrangements which they note are typically designed to achieve double non-taxation. So essentially officials have said that they don't think the risk of double taxation exists because of the nature of current arrangements. I wonder whether the Minister can enlighten the committee a bit further by detailing evidence for the claim that the risk of double taxation is actually seen as a disincentive to entering those PE avoidance arrangements in the first place.I think it's interesting to note the submission from the Corporate Taxpayers Group on the scope of the PE anti-avoidance role. In terms of permanent establishment they are very clear in reminding this House that we should be careful that the scope of the rule should not be widened in future. So they're very careful that the scope as it currently stands is appropriate but to widen it in future would not be appropriate. It has been heartening to have officials confirm that they have no intention of widening that anti-avoidance rule beyond its current scope and it would be useful to have the Minister confirm that that is the Government's intention with this part of the legislation.I now want to move to the issue of the application of the permanent establishment rule—in particular as it relates to the threshold that may still result in the rule applying to smaller New Zealand resident entities. So what Chartered Accountants Australia and New Zealand raised as an issue was the idea that the EU has estimated that there are about 6000 multinationals that fit the definition in the bill around the threshold of turnover of €750 million but officials note that the rule only applies if the non-resident has a related party in New Zealand that carries on sales-related activities. So it's actually a two-part test: one do they meet that EU turnover threshold and two do they have a related party that carries on sales-related activities in New Zealand? So my question is: do we have an estimate from officials or does the Minister have information that can tell us actually how many entities in New Zealand we think this rule might apply to? I suggest it would give submitters a lot of comfort to know it's a lot fewer than the 6000 that meet the first test once we think of that second test in terms of sales-related activities. So it would be useful to have that number. I now move to the issue of the proposed application dates because some submitters of course were clear that they didn't think they allowed sufficient time for multinationals to restructure. Of course this is a legitimate concern because what this is about is multinationals saying Yes we do want to meet the law as it stands. It is appropriate that we do so." but acknowledging that in some cases it takes some time to rearrange tax affairs to meet the law. So again officials have considered that and have given some comfort by saying that inland revenue will take any current restructuring process into account when it investigates or assesses a multinational following the introduction of the proposed rule. I think it would be very useful for the Minister to put on the record of this House in the Hansard that in fact that is the approach that inland revenue will take. Furthermore I would be very interested to understand what conversations the Minister has had with the IRD about this and whether any directions have been given or whether he intends to give the IRD any directions on this in the future.I now turn to the issue of the facilitator rule and the matters that it may cover—Andrew Bayly: Ah the facilitator rule.NICOLA WILLIS: That's right. So the chartered accountants—again they've been heavy submitters obviously on this bill as you would expect and clearly play a very important role in ensuring that this legislation be interpreted well by businesses and by those operating in New Zealand. What they have iterated is that they believe that it should cover sales only and not extend to activities that don't relate to a specific sale such as warehousing marketing and advertising. Now of course in the commentary to the bill those preparatory or auxiliary activities are—"