Bayly AndrewANDREW BAYLY (National—Hunua): Thank you Madam Chair. It's a pleasure to be talking in this Taxation (Neutralising Base Erosion and Profit Shifting) Bill committee stage. I've got to start off by saying that I want to acknowledge the Minister of Revenue Stuart Nash for standing up and giving us some elucidation of some of those points already raised in this important debate because as you'd know this is a very complicated bill—one of the most complicated bills apparently to come before the Finance and Expenditure Committee—and of course it will have significant taxation ramifications for New Zealand for New Zealand companies and particularly for those companies owned by foreign entities.Of course we've got a big trade-off. The trade-off is we do want foreign investment here in New Zealand contrary to a point I heard earlier from Mr Clayton Mitchell but we want to make sure that they pay their fair share of tax. I just want to start off by saying one of the key parts of this bill is around restricted transfer pricing rules which I know the Minister's been following very carefully. Of course what the transfer pricing rules are all about is making sure that when a foreign entity lends money to its New Zealand entity whatever that might be—it might be a branch it might be a subsidiary it might be an agency or it may even be sort of an office; a sales office in effect—we have to work out the process for determining the interest rate that will be charged on any debt provided by the foreign parent.We had a number of submissions—in fact we had a stack of them—from a range of accounting firms legal firms chartered accountants and even electricity firms saying that the proposed restricted transfer pricing rules mean that what we end up with is basically an arbitrary process for determining the interest rates on debt provided by foreign owners. Of course the more you move away from the actual rate used or charged by the foreign parent to the New Zealand subsidiary or whatever the more artificial more academic it becomes. So what this bill is trying to do is to standardise that process and to make it one where it's to some extent consistent but also defensible and also fair to New Zealand taxpayers.But a large number of those people said as soon as you start putting those arbitrary academic approaches on assessing the interest cost you then start to enter the realm of creating maybe a higher tax rate in New Zealand that the foreign entity can't claim back all the tax as a deduction in its own area—so you get a mismatch of interest rates and interest costs and some are deductible and some are not. Normally they would offset each other as they work their way through the process.I know there's a lot of discussion around this with the officials but the officials' view was that one of the things about the rules was we should be looking at the foreign parent and assuming that there is an implicit parental support. What that means is that for any loan there is an obligation or an expectation that the foreign parent will always stand behind that New Zealand entity and therefore on that basis the interest rate that is charged on any loan should reflect basically that fact. Now with a New Zealand subsidiary the issue is sometimes that the activities that the New Zealand subsidiary undertakes are totally different from the foreign parent's activities. What this means is the assumption that you can take a certain debt and make it consistent doesn't actually take into account both of those aspects. So my first question to the Minister tonight which I'm hoping he might have an opportunity to address is what happens if in the documentation or the arrangement between the foreign parent and the New Zealand subsidiary there is no documentation to underline to underpin and to evidence the issue of the implicit parental support or otherwise financial guarantee?Now one of the other issues I really wanted to talk about tonight is that in the group credit rating approach a number of submitters also made a submission that it shouldn't proceed in its current form. One of the most notable submitters of course was KPMG. I did work for them a long long long long time ago.Simon O'Connor: But you're so young.ANDREW BAYLY: Thank you thank you.Rt Hon David Carter: It was a secondary school project.ANDREW BAYLY: Thank you. One of the issues that they raised is that if the restricted transfer pricing rule proceeds the group credit rating approach should not be used instead. They talked about new section GC 16(7) in clause 37 and whether in fact the approach proposed in that section or the restricted credit rating approach in new section GC 16(8) is the most appropriate.Using the parent's ultimate credit rating to derive a starting point for the New Zealand one—as my good colleague the Hon Paul Goldsmith very well discussed in his speech—raises the issue: is this the right start point for assessing debt and credit ratings and in a sense the interest rate on that debt? Typically New Zealand operations of foreign multinationals often have smaller ratings. So you can imagine if you've got a large multinational parent heavily diversified operating in 100 countries and you've got a small New Zealand operation which may only have three people doing sales functions the attributes of that New Zealand subsidiary or operation are totally incompatible and inconsistent with the parent company and therefore that's why KPMG were actually raising this as a particular issue. I think this is a really important point. And I know the Minister sort of traversed some of this earlier in his response but I think it is a fundamental aspect we need to sort of look further on.The other thing is we actually had submissions and one of them was: is it too premature for New Zealand to be diving into this form of calculating interest rates? In fact it was noted the OECD research is under way on this very issue. Of course New Zealand—as the Minister quite rightly pointed out—has been at the forefront of the development of these base erosion and profit shifting policies that encompass all the OECD countries around the world. It's important that we play our part but also what we don't want to be seen as is actually ahead of the game.I think the strength of the BEPS—if I can call it that; base erosion and profit shifting—system around the world is that there is a collegial grouping of countries that all start to apply the same policies with regard to foreign companies investing in domestic countries. I think if New Zealand steps outside the boundaries and is seen to be leading it—and I think it's a very legitimate question that particularly the Corporate Taxpayers Group raised which is whether in fact under action four of the OECD recommendation we should be actually jumping ahead of the game.The last bit I just want to turn my attention to in this segment is the Minister said it's very important that we act very consistently with those other international jurisdictions and I would say to you that probably the most important jurisdiction that we have compatibility with of course is Australia—Australia being our main trading partner. Again I think it's very important that we note that PricewaterhouseCoopers the accounting firm made this very very point. It said the Government had noted the importance that New Zealand transfer pricing rules are aligned with Australia.However we do have some differences already in this bill. For instance if I can just highlight a couple of those the first one is we have a maximum debt loading if I could use that term—the normal term is leverage. We allow businesses with up to a maximum of 40 percent debt loading to be deemed to be low-risk companies and therefore outside of the BEPS regime. In Australia for instance they allow a higher leverage ratio of 60 percent so already we've got a mismatch.The other thing is in Australia they don't allow for credit ratings to be prescribed. So they have a more flexible approach to the way they do. I just ask the Minister to turn his mind to some of those issues—particularly Australia.