Cunliffe David: Taxation (International Investment and Remedial Matters) Bill — First Reading 
Cunliffe David: Taxation (International Investment and Remedial Matters) Bill — First Reading 
[Volume:668;Page:15123] 
Hon DAVID CUNLIFFE (Labour—New Lynn) 
: 
 The Taxation (International Investment and Remedial Matters) Bill is a most interesting bill and it is a complex bill. I will state Labour’s position in respect of this bill in three parts. In the first part I will briefly summarise the key provisions of the bill; in the second part I will outline Labour’s position on the bill; and in the third part I will outline some of the reasons for Labour’s position. 
Let us first summarise the objective of the bill and its key provisions. We believe the objective has some merit which is that it is timely for there to be an overhaul of the controlled foreign company and the foreign investment fund regimes. There is merit in encouraging further outbound investment by New Zealand companies. The reason for that is as everybody knows we have a very substantial international investment deficit in respect of New Zealand’s balance of payments that feeds into and indeed is the largest part of the financial deficit that is responsible for our persistent and deteriorating current account. There is merit in examining the issue of whether the playing field can be levelled so that New Zealand companies operating overseas do not find themselves in the position of paying tax twice: once in the jurisdiction in which they and their foreign competitors are operating and a second time in respect of New Zealand tax on the active income part of those transactions. It therefore may make sense to restructure the law in the way that is proposed in this bill. 
Second of all it is timely for there to be a further examination of the old “grey list” exemption. The “grey list” is a bit of an anachronism in the Opposition’s view. It is made up of eight countries mainly the old Commonwealth countries that were deemed to have similar tax laws once upon a time which were carved out from the international tax rules and for which equivalence is deemed. We are willing to explore in the Finance and Expenditure Committee whether this bill adequately deals with any residual issues with regard to the treatment of the “grey list”. 
Certainly it is appropriate to remove competitive disadvantage for New Zealand companies in respect of their active income through a range of trading structures. However we are concerned firstly about the exemptions that are carved out of this bill in respect of the Australian market. As the Minister said the Australian market is the jumping-off point for many small New Zealand businesses and it is the Opposition’s concern that a blanket exemption for the Australian market may be too wide. We look forward to hearing submissions on that point at the select committee. Secondly we would expect to see submissions upon the issue of whether the de minimis threshold of 5 percent is appropriate. Thirdly we would also expect to see submissions upon the blended hybrid approach that this bill encapsulates between having either an entity base or a transaction base to the tax rules and we will be very interested in those submissions. 
Those being fair and charitable to some extent are the reasons why the substance of this bill merits consideration and why the Labour Opposition will be supporting the bill’s referral to a select committee in the first instance. We believe it is appropriate that the Finance and Expenditure Committee calls for submissions and hears from the public and from the professionals on the proper way that the tax process works. 
Labour has two overriding objectives in respect of policy. The first is of course to grow the export economy. Our criticism of the Government is that it is been like a deer caught in the headlights of the global recession. That growth is not returning to the New Zealand market and the Government is caught somewhere between wanting to cut its way out like ACT would have us do and like the Conservatives in Britain are doing or to perhaps leverage or spend its way out like the US Government is doing. But it is taking neither of those courses and is showing no new ideas. The Government is stuck and our economy is stuck and as the weeks pass and successive rounds of data come out we all understand that the recovery has not come to main street New Zealand to the towns and villages of our country. 
But the greatest reservation we have—and why we are not at this stage able to confer support for the bill beyond its first reading—is that we have learnt unfortunately to be very sceptical of the intentions of this Government in respect of taxation measures. History shows why. I think that is made clear to anyone listening in to this debate if they cast their minds back over the last 2 years. National came in and immediately under urgency passed tax reform to drop the top tax rate and to deliver gains to the top end of income earners. Then in Budget 2009 it admitted that it could not afford the fiscal cost. Having passed $8 billion worth of tax remission to the top income earners in the first year it then decided it could not go through with years two and three. 
In Budget 2010 however while the recovery was still nowhere to be seen the story changed again. The Government broke its promise not to bring in an increase in GST which has been absolutely punitive to lower and middle income New Zealanders who see their small tax breaks washed away in inflation and who are still short at the checkout queue. They are struggling. But in Budget 2010 the Government dropped the top tax rate again—all the way to 33c in the dollar. 
No sooner was the ink dry on that $14 billion tax transfer mainly to the upper end than we saw a little thing called gift duty was coming up. When the Government on its own admission is already running a cash deficit per year of $13.5 billion or so obviously having broken its promise to be revenue-neutral on the tax package I ask why it would be a priority to then find other taxes it can cut that specifically benefit the top end. The Minister would say in fairness that there is not much money in gift duty—only a few tens or hundreds of millions. Well in real New Zealand that is real money. The point is that it would be a lot more if it were not for the protections that gift duty places upon high-wealth individuals transferring income to lower tax structures like those that might be in their children’s names were they not facing some compliance cost and some additional duty for doing so. 
The point is that in the history of this Government it has had two rounds of upper-income tax cuts and it has abolished gift duty. Is it little wonder that the Labour Opposition has a healthy scepticism about its real intentions in regard to maintaining the tax base and protecting Government services from yet another loophole for high-wealth individuals? 
The principle on the Labour side of the fence is very very simple. In these tough times when money is scarce and every penny counts everybody pays their fair share. That is the decent thing to do. That is the Kiwi way and that is what we call for. That means no avoidance structures for high-wealth individuals. It means send away the army of trust lawyers and fancy corporate lawyers who are dreaming up tax-avoidance structures for the few while the many bear the load. The burden of proof is on the Government to show precisely why the measures in this bill will not make those avoidance loopholes worse. 
How bad are those loopholes? I will give but one example. Loss attributing qualifying companies—the much loved or hated LAQCs—which result in $2.3 billion per year of tax avoidance are one of the key reasons why half of the top income earners are not on the top tax rate. Half of the top 100 income earners are not on the top tax rate because they use structures like loss attributing qualifying companies. Why if the Government was sincere about fairness did it not simply ring-fence loss attributing qualifying companies so that nobody could write off on his or her personal income the losses made on a company? Instead it has brought in some fancy new structure called a look-through company which allows the lawyers yet another round of field days yet another round of high fancy-pants pricing as they dream up new structures to stay one jump ahead of the taxman for their high-wealth clients. 
We will be putting the ruler over this bill to make sure that it does not make the problem worse—that it does not create another exemption set where a high-wealth individual can create a company call it a controlled foreign company place income or assets in that company and then make use of a tax exemption to avoid paying tax in New Zealand. We will be looking at the exemptions. We will be looking at the Australian exemption. We will be looking at the 5 percent threshold. We will be looking at why the Inland Revenue Department’s recommendation of a 20 percent threshold was not followed under lobbying pressure from business. This is a bill that has some merit but which deserves close consideration.