Parker David: Taxation (Annual Rates Employee Allowances and Remedial Matters) Bill — Second ReadingText is incorporated into the Bound VolumeParker David: Taxation (Annual Rates Employee Allowances and Remedial Matters) Bill — Second Reading[Sitting date: 27 May 2014. Volume:699;Page:18324. Text is incorporated into the Bound Volume.]Hon DAVID PARKER (Deputy Leader—Labour): I rise to take a call on the Taxation (Annual Rates Employee Allowances and Remedial Matters) Bill. Labour will be supporting this bill. There are some good provisions in this legislation but I do want to just deal with some of the submissions that were made to the Finance and Expenditure Committee in respect of the intergovernmental agreement on tax enforcement which the United States Government is effectively enforcing on the New Zealand Government.I want to deal with some of the concerns that have been raised by the submitters on the bill. Can I say at the outset that the Labour Party does not support tax avoidance. We think that there is too much tax avoidance around the world and in New Zealand. It is concentrated amongst the wealthiest. Some of that avoidance is legal through tax loopholes like the absence of a capital gains tax in New Zealand which of course is the largest gaping hole in our tax affairs and means that middle-income groups pay higher rates of overall taxation on their income and spending than higher-income people do because middle-income people spend most of their income. Their economic income is normally in the form of taxable income and is taxed under the Income Tax Act their spending is captured by GST and their savings are not as high as higher-income people who also have the benefit of avoiding tax on irregular capital income payments which we know are disproportionately received by the wealthiest in society. If there is a glaring omission in this bill it is to curb that hole in our tax system which should be curbed for both reasons of fairness and reasons of economic efficiency.It is no coincidence the OECD the IMF the Reserve Bank and Treasury all in their own way say that this tax bias that we have at the moment which shields some forms of economic income from being taxed even though they are economic income relied upon by the recipients—all of those agencies say that curbing that hole is one of the best things that could be done for the strength of the New Zealand economy so that firstly we would have people paying their fair share of tax so other people do not have to pay it for them and secondly we would have a stronger economy because we would have investment going into the productive parts of our economy rather than disproportionately into speculation on land-based assets.The Prime Minister’s plaintive cries that we already have a capital gains tax are of course nonsense. They are seen by the vast majority of the public to be nonsense. What is true is that there are some categories of transactions involving land that are tantamount to trading in land or trading in changes in the value of land occasioned by changes in planning status for example which cause those transactions to be treated as income. It is not a capital gains tax; it is a tax on income-related activities for people who are traders.David Bennett: Higher tax rate too.Hon DAVID PARKER: What is that?David Bennett: It’s actually a higher tax rate if it’s income and not capital gains isn’t it?Hon DAVID PARKER: Well that is true. When it is called income they pay tax as income rather than as a capital gain but only a very small fraction of capital returns are taxed in that matter. Indeed when they are they are not being taxed on a capital account; they are being taxed on an income account. So that is one example and it is probably the most egregious example of tax avoidance in New Zealand—that people can classify certain types of income in a way that our economic income—David Bennett: Why don’t you answer the question David?Hon DAVID PARKER: Actually I did not hear the question otherwise I would have an answer to it. The member can take a call and explain to New Zealand why it is fair that the richest people in New Zealand do not pay as high a rate of tax on their overall economic income as middle-class taxpayers who cannot take advantage of some of those tax loopholes.In respect of international tax avoidance there are people who hide income from their home jurisdiction by failing to disclose it. America has got an enormous budget deficit at the moment unlike New Zealand. Unlike New Zealand they did not have a progressive Government during the 2000s. It is notable that the big difference between the tax policy of America and that of New Zealand is that in the 2000s New Zealand had a progressive Labour Government. It ran enormous Budget surpluses and therefore did not have this huge debt overhanging it at the time of the global financial crisis and did not have to cut back spending in a way that caused the downward spiral in the tax take that we have seen occur in places like the United States and parts of Europe.As a consequence the New Zealand Government on the back of those surpluses of low debt and low unemployment it has inherited has not had the same need to curb Government expenditure in the same way as had happened overseas and it has been able to get back to surplus in 6 years which is a good thing. But in the United States they are not in that happy position because they had a Government that did exactly as the National Opposition said the Labour Government should have done: they had a Government that during those times of plenty still ran deficits and ran up Government debt. So it is now scrambling around trying to enforce every little last bit of tax that it can—except from the wealthy actually in the case of the United States as well. The United States Government is trying to crack down on some of this international tax avoidance including from its own citizens who might live in a country like New Zealand but be due to pay tax in America.This is where it gets quite complex because the American system of taxation is different from virtually any other country in the world in that it taxes on the basis of citizenship rather than where people live and earn their money. In New Zealand if you are a New Zealand resident while you are here you pay tax. If you move overseas even if you remain a citizen and if you become a resident of some overseas country and that is where you are living and you are not back here frequently then you actually do not have to pay tax in New Zealand.Under the American system you are taxed for ever if you are still a citizen. That causes problems for people who have also become New Zealand residents left the United States come to New Zealand are living New Zealand lives have not renounced their US citizenship—and even if they did they would occur enormous tax penalties when they did—and are really in a cleft stick. They are worried that the Foreign Account Tax Compliance Act will effectively mean that the American Internal Revenue Service will come to them while they are living in New Zealand and even though they have paid New Zealand taxes in accordance with New Zealand law the Americans can theoretically say that they want them to pay a second lot of tax in America. That ofcourse is patently unfair but that unfairness arises not from New Zealand’s tax laws; that arises from the American tax laws.As has already been pointed out by Paul Goldsmith—and I agree with him on this point—this legislation that we are passing through another stage today does not change that reality but it does put those citizens perhaps more at risk because that information will or may be shared with the Americans under this agreement. We were assured by the officials that it is not intended to be chasing those sorts of people but I can understand their nervousness that that might be the case in some future time.So why then is New Zealand forced into a position where we actually have to pass this legislation? Well because as other countries have found around the world if we do not effectively there will be additional taxes taken from New Zealanders who are meeting their obligations in respect of investment vehicles that have some investments in America. I do not think there would be many people in this House who think that we should be imposing those additional tax obligations on New Zealand investors for example in their KiwiSaver schemes that have investments in America. That would be unfair on them.As a consequence we do think it is necessary to sign these agreements. However we did ask for a simple amendment to the legislation. We will have in Committee stage an amendment to this effect. There should be in the empowering legislation an obligation that these agreements are reciprocal. At the moment this legislation has got no principles setting out the limits to the discretion of the Inland Revenue Department to enter into these intergovernmental agreements. We think that the discretion of the revenue department should be limited so that the agreements have got to be reciprocal. It would be good if we could put some of these other protections in.As well as that we thought we should be using this point of leverage to try to exert some pressure on America in respect of companies like Google and Facebook which are not paying their fair share of tax in New Zealand on their New Zealand - derived revenue. We thought this opportunity should be used to try to fix that wrong as well. The Government in respect of both of those suggested amendments said no.