Taxation (International Taxation Life Insurance and Remedial Matters) Bill — In Committee 
Taxation (International Taxation Life Insurance and Remedial Matters) Bill — In Committee 
[Volume:656;Page:5959] 
Taxation (International Taxation Life Insurance and Remedial Matters) Bill 
In Committee 
Part 1 Amendments to Income Tax Act 2007 
CRAIG FOSS (National—Tukituki) 
: 
 I rise at last as the Taxation (International Taxation Life Insurance and Remedial Matters) Bill comes to the Committee stage. It is normal and courteous but right also as chair of the Finance and Expenditure Committee through which this bill passed that I acknowledge and thank all those who have assisted in getting the bill to this point. I thank mainly my colleagues on the committee. Across the committee there was a very good process and there were many different points of view. New understandings of the issues in this somewhat massive bill were garnered by members on our committee. 
I need to acknowledge our independent advisers with whom we started a new angle in that we brought in an independent drafting adviser. A mere look at this bill will probably give members reason why we needed to do that. I also thank our official advisers and I acknowledge and thank the submitters who submitted in writing who presented before us and who engaged with officials and ministries throughout this Parliament and also in the last Parliament as well. We remember that this bill first arrived in the House in I think July 2008. I also acknowledge that large parts of the original bill were carved out and formed part of the Taxation (Business Tax Measures) Bill we put through in January and February this year. Again I acknowledge members on all sides of the Chamber for assisting us with that. 
I will give a challenge to Hansard if I can and I would like to have an audible sigh—aah—at the thought of getting the bill to this point. That is a challenge; I would like to see that one. The bill comprises 431 clauses in Part 1— 
Chris Hipkins 
: Read them out! 
CRAIG FOSS 
: Do my colleagues want me to read it? I tell them that I have actually been reading it for the last 6 months. Believe me if any members have trouble sleeping I can pull out some clauses and parts that may be of interest to some of them. But I say seriously that very very serious matters are addressed in this bill. The bill is quite fundamental and there is a lot of strength in it which I think we will see in its passage through the Committee stage. I think the bill has six or seven parts and as I noted before the bill was introduced in the last Parliament under the previous Government. Like quite a few bills that we have picked up it has been added to and improved on and perhaps had some value added but it has had input from all parties to get it to the point where we are now. 
I will talk to some of the specific clauses later in the Committee stage. In this tome of a bill there are 668 pages before we get to Part 2. There are many quite fundamental changes just in Part 1 including the underlined changes to the Income Tax Act and to the Climate Change Response Act in changes to the GST treatment of emissions trading units or alternative units. There are Government funding changes to film and television to research and development to portfolio investment entity rules and to International Financial Reporting Standards rules. There are interpretations remedial changes and some fundamental changes to the way in which life insurance is taxed and perhaps more of a modernisation of that matter. I think that members might spend a bit of time on that particular issue; it occupied our committee for quite some time and some of the explanations and diagrams we got from officials on the way through were very beneficial. 
Part 1 also deals with payroll donation changes. That issue was one that occupied quite a bit of the select committee’s time and members will note that in the commentary the committee talks about some of the process we went through to get buy-in and acceptance of the changes and amendments brought in at that stage to enhance the intent under the trust side of payroll provisions and to deal with the obligations and commitments that Inland Revenue Department officials gave to us as we agreed that this part would be rolled out. There was some give and take on that matter and some assurances around the department’s systems and its education for the public given our knowledge of the systems and availability of various avenues for information. Thank you. 
AMY ADAMS (National—Selwyn) 
: 
 It is a delight to take a call in the Committee stage of the Taxation (International Taxation Life Insurance and Remedial Matters) Bill. I have probably taken up half of my speaking time just going through the title. As the previous speaker Craig Foss mentioned the bill before us is broken into six parts but interestingly enough the breakdown is grouped by amendments to the various Acts rather than by subject areas. Part 1 contains the bulk of the detail of the bill. Many of the substantial amendments are in this part. 
Mr Foss the chairman of the all-powerful Finance and Expenditure Committee has already alluded to the committee spending a considerable number of hours working its way through the bill trying to make what was already comprehensive legislation as good and as comprehensive as we possibly could. I think the changes the committee has made to this part are worthwhile. We can be very proud of the work we have done. 
I want to take a moment to talk about the international tax rules component of the bill because they are the centrepiece of it. I want to reflect on the need for reform in this area. Until now New Zealand operated under a “grey list” system whereby we identified countries whose tax system we felt was relatively comparable to ours. It effectively allowed controlled foreign companies operating in those jurisdictions to be treated as tax-neutral. 
However there were three problems with that system. New Zealand was one of the few countries that worked in that way. Most countries operated a system akin to the one we are now moving to whereby instead of having a “grey list” of approved countries and everything else they looked at the type of income that the controlled foreign company was earning. If the controlled foreign company was earning active income in overseas jurisdictions then that income was exempt but passive income—the likes of royalties rents dividends interest and so forth—was taxed in the parent jurisdiction. So straight away New Zealand was at odds with many of our major trading partners. The problem with that was that it created an incentive for New Zealand businesses with offshore operations to move their headquarters to countries with more favourable tax rules. It is not an objective of our tax system to drive our parent companies offshore. If that is the effect then it is something we need to address. This bill starts to do that. 
Another issue we had with retaining that “grey list” structure was that increasingly we were finding that our trading companies and our growth companies were not looking as much to our traditional trading parties: the motherland the States Australia and the like. The growth opportunities were more and more in the non - “grey list” countries. New Zealand businesses that expanded into areas like China South America and the Middle East found that their compliance costs and their tax costs were substantially higher than their competitors’. That put New Zealand businesses on an un-level playing field. We are not seeking through our tax system to put New Zealand businesses into the international market place with one hand effectively tied behind the back. So that was one of the things that we wanted to address. 
The other issue—in order to complete my list of the three issues we had with retaining the “grey list” structure—was that the “grey list” exemptions were effectively allowing businesses to build structures that could save them domestic tax. That is not the purpose of these sorts of rules. 
So we can see very clearly why the policy driver was to move away from the “grey list” structure that we had and move to what we will now have through this “light” bill which is as I said a system where income is regarded as active or passive and is classed accordingly. I think it is worth mentioning that within that system we will still have an exemption for up to 5 percent of passive income. We will not require companies to overly complicate their accounting and return processes for what is effectively a de minimis proportion of their income if it is passive income. So if 95 percent of their income is active all the income can be taxed in the jurisdiction where it was earned. If more than 5 percent of a controlled foreign company’s income is passive it will have to be taxed in New Zealand. By doing this we are looking at reducing the tax barriers to businesses that want to expand offshore while minimising their compliance costs. At the same time we are ensuring we maintain a level of protection for our domestic tax base. 
I think most people would concur that those are sensible policy foundations for these changes. They certainly were not easy to make and the Finance and Expenditure Committee had a number of concerns when we worked through them one of which related to ease and accountability. 
Hon PETER DUNNE (Minister of Revenue) 
: 
 I will take just a brief call at this point to acknowledge the work of the Finance and Expenditure Committee in particular in dealing with what I think is the second-largest tax bill to come to this Parliament the Taxation (International Taxation Life Insurance and Remedial Matters) Bill. This is an 842-page job. It does not beat my previous effort of 3500 pages with the rewrite of the Income Tax Act— 
Hon Members 
: Don’t try it! 
Hon PETER DUNNE 
: —but I am not attempting to do so. I acknowledge the fact that the select committee had a monstrous job in working through some very important complex legislation in order to get it to this stage. I note that Supplementary Order Paper 34 which I have tabled is 50-odd pages so it is nearly a bill in itself. All those things really go to point out how complicated our tax law is even when we seek to simplify it. 
I will pick up on the comments of the member who has just resumed her seat Amy Adams when she spoke about the international tax changes. The genesis of this legislation goes back some time. We began during the life of the previous Parliament with the release of the  
Business Tax Review 
 which initially recommended changes to the corporate tax rate but which then initiated the wider review of our international tax regime. I am sure members will forgive me a moment of levity if I quote what the previous Minister of Finance used to say to describe our international tax regime. He said New Zealand went where no one dared to follow. I think that that is a very accurate description. We made changes in the 1980s to move to the “grey list” as the member made reference to but in fact we were out of step with most of our trading partners. 
We have been running a very unitary system for a long period of time and the changes that see their completion if you like in terms of stage 1 in this bill arise from the fact that we needed to recognise that active/passive exemption. We needed to create the opportunity for a number of New Zealand - based businesses to try to stay located in this country even if their manufacturing was going to take place offshore; and we needed as part of introducing a competitive international tax regime to streamline our processes and bring them into line with international practice. 
Progress reported. 
Report adopted.