Nash StuartTAXATION (NEUTRALISING BASE EROSION AND PROFIT SHIFTING) BILLSecond ReadingHon STUART NASH (Minister of Revenue): I move That the Taxation (Neutralising Base Erosion and Profit Shifting) Bill be now read a second time. As a small open economy reliant on trade this is a very important bill for New Zealand and for our tax system. Along with other countries New Zealand is taking action to prevent multinational corporations from engaging in aggressive tax-planning. This practice known as base erosion and profit shifting or BEPS is a challenge for tax systems around the world. The overall result of these BEPS strategies is that some large multinational companies pay little tax in New Zealand or in fact anywhere else in the world despite having a significant economic presence here. This threatens the revenue base that Governments need to deliver public services.Multinationals benefit from taxpayer-funded investments in areas such as education infrastructure economic development regulations and property rights so they should rightfully contribute to the costs of these investments and I don't think anyone would argue with that. Aggressive tax planning distorts competition and effective and efficient allocation of resources. It enables some multinationals to exploit gaps and weaknesses in tax rules to get an advantage over other businesses who do not engage in BEPS. Finally BEPS erodes the overall fairness and integrity of our tax system. Fixing this is most important. The tax system must be fair for all income earners regardless of their size or complexity. The Taxation (Neutralising Base Erosion and Profit Shifting) Bill contains a comprehensive package of measures designed to combat BEPS and ensure fairness and equity and improve system integrity. These measures will prevent multinationals from using a large number of BEPS strategies including using artificially high interest rates on loans from related parties to shift profits out of New Zealand. The bill also prevents related-party transactions which are intended to shift profits into offshore group members in a manner that does not reflect the actual economic activities undertaken in New Zealand and offshore. Further the bill tackles hybrid mismatch arrangements that exploit differences between countries' tax rules to achieve an advantageous tax position as well as preventing artificial arrangements to avoid having a taxable presence or a permanent establishment in New Zealand. The final major item in the bill addresses certain tactics which can be used by non-cooperative multinationals to stymie an Inland Revenue Department investigation such as withholding relevant information that is held by an offshore group member. The Government is determined to address these issues because we want to improve the fairness of the tax system but at the same time we want to ensure that New Zealand remains a good place to invest and do business in. We also want to ensure that the measures we introduce do not impose unnecessary compliance costs but at the same time not only maintain but enhance our reputation for transparency.I am very grateful to the Finance and Expenditure Committee for their careful consideration of both the bill and the public submissions on the bill. This is a complex piece of legislation. A number of the submissions were highly complex. I know the members spent a lot of time and energy working collaboratively to come up with a consensus on this and I do thank them. A number of changes have been made to the bill though in response to public submissions. These together with the committee's recommendations make this a better bill by making important adjustments. For the benefit of members I will explain the most important of these changes very briefly.The first is cross-border related borrowing. The use of debt is one of the simplest ways of shifting profits out of New Zealand. The bill as introduced proposes a new transport pricing approach to price-related party loans between non-resident lenders and New Zealand borrowers or inbound cross-border related borrowing. However submitters were concerned at the risk of double taxation. Adjustments have been made to strike a better balance between addressing the problem of subjectivity or manipulability of standard transfer pricing and reducing this risk.The income interest ratio which was one of the three tests intended to prove a company is not a high BEPS risk will now be removed. This is because the rule could result in double taxation where companies are in loss or only have recently started trading. The remaining two tests will be sufficient we believe for establishing whether a company is a high BEPS risk or not. In the bill as introduced where a New Zealand borrower failed any of the tests to show it was not a high BEPS risk its credit rating would generally be restricted to one notch below its worldwide group credit rating. For example if a worldwide group's credit rating for long-term senior unsecured debt is AA+ a one-notch margin means the maximum deductible interest rate on a related-party loan to a New Zealand subsidiary would be based on an AA rating.Andrew Bayly: Say it like you mean it.Hon STUART NASH: And I do mean it Mr Bayly very much so. This is an important piece of legislation and I look forward to your contribution as well. To alleviate concerns about double taxation the spread will be increased to two notches provided the New Zealand borrower's credit rating is BBB− or higher because as we all know BBB− is the lowest investment-grade credit rating. We need to get this right.In examining the terms of a loan between related parties for BEPS risk inland revenue will consider—they will consider—whether such terms are in line with a commercial loan between unrelated parties. Some features of the borrowing can be disregarded by the IRD—amazing—unless it is a feature in significant third-party debt. In the bill as introduced one key aspect was to restrict the credit rating of the New Zealand borrower. The bill as introduced allows a borrower to include a feature in pricing a related-party loan when it is a feature of significant third-party loans but an equivalent test was not available to determine a borrower's credit rating. We think this is unduly harsh so a third-party exclusion is proposed to be extended to the credit rating of high BEPS risk borrowers.Time bars—inland revenue currently has four years from the end of the tax year in which a taxpayer files an income tax return to investigate and amend their tax position. This four-year limit is known as the time bar. The bill as introduced included a provision that would extend the time bar for transfer pricing issues to seven years which is consistent with Australia's time bar for transfer pricing. The committee however recommended an amendment so that the time bar would only be extended to seven years in those cases where inland revenue had begun a transfer pricing tax investigation within four years of the relevant tax return being filed and has notified the taxpayer of this investigation.This amendment ensures that the vast majority of taxpayers will benefit from the same level of certainty as the current four-year time bar. Taxpayers will know their tax position is final including any transfer pricing positions if they have not heard from inland revenue within four years of the tax return being filed.Powers to request information from offshore group members and associated parties: the bill proposes to extend the scope of inland revenue's existing powers—most important. So they allow inland revenue to request information that is held by any member of a large multinational group. To reduce privacy concerns and to ensure that the new information power is appropriately targeted and investing in multinationals' tax affairs the proposal is amended to require the requested information to relate to an investigation of a multinational group's own tax position—Dr Duncan Webb: Very wise.Hon STUART NASH: —very wise indeed—rather than relating to an investigation of a natural person such as a bank customer who is not part of that multinational group.The bill as introduced also includes both criminal and civil penalties for failures to provide information that was held by an offshore group member of a large multinational group. However when failure may have been caused by an associated offshore group member it was not appropriate to apply a criminal conviction to a New Zealand person. The criminal penalty therefore has been removed from the proposal. We believe that the proposed civil penalties should provide sufficient incentive for multinationals to comply with any inland revenue information request.That is a brief overview of the most important changes made to this very important bill. New Zealand's response to BEPS or base erosion and profit shifting is generally aligned with Australia's. It is also broadly consistent with the OECD and G20 action plan although the specific proposals are tailored for the New Zealand environment. Once again I thank the committee for their important contribution to this bill. I commend the bill to the House.