Key John: Taxation (Base Maintenance and MiscellaneousProvisions) Bill — First Reading 
Key John: Taxation (Base Maintenance and MiscellaneousProvisions) Bill — First Reading 
[Volume:622;Page:18068] 
JOHN KEY (National—Helensville) 
: 
 Mr Speaker I start by saying that I may have been a little presumptive in wishing you a merry Christmas last night. If this urgency keeps going the way it is I may well be wishing you a happy New Year from the same seat. National will be supporting the progress of this bill to the select committee. The bill raises some pretty interesting issues. It will be interesting to see the work of the select committee in this area. I do not think it takes very much for people to understand in one sense why the Government has chosen with this bill to look at a major policy shift around thin capitalisation and conduit rules. I think it is worth looking back just for a moment at the history of why thin capitalisation rules were put in place in New Zealand. My understanding is that they came about because of entities like I think Carter Holt Harvey that were owned by a foreign parent but had offshore investments—the rules around investments held by the New Zealand entity but owned off shore. The real question that arises in relation to New Zealand banks owned by a foreign parent is whether they have been undertaking transactions related to their thin capitalisation and undertaking structured finance conduit deals for legitimate reasons or whether they have been doing so for some other reason to reduce their tax base. That is ultimately the question. 
There are a number of views one could take. The first is that it may be a mixture of both—that in fact some of the deals have indeed been totally legitimate deals that the banks have looked to undertake and to house in New Zealand because of the nature of New Zealand tax rules. But I think it is also worth noting that some of the deals may well have had a structured component. It is interesting that the Minister of Finance has made it clear that he thinks the revenue impact post the passing of this legislation—assuming it goes through the House—will be of the order of $360 million. He has indicated to the public that that $360 million is likely to be poured back into growing his tax base which would allow him to fund more spending initiatives which we know this Government loves to undertake. 
On a number of fronts I think he is wrong on that count. I do not think the Minister will get $360 million of additional revenue. I say that for a number of reasons. Nor do I believe that the Inland Revenue Department is likely to be successful in its claims against the banks to the extent it is arguing. I say that because from what I can see every bank in New Zealand has a different accounting firm and a different legal firm advising it in relation to these conduit deals and despite the fact that they all have different legal opinions and different accounting advisers not one bank in New Zealand has chosen to put a provision in place for the relationship around these conduit deals. To put it in simple terms the Inland Revenue Department is telling the Minister that it will win and that it will deliver $360 million of revenue which the Minister of Finance is very gleefully happy to accept bank and spend. Not only has he banked the future revenue he thinks he will get; he has banked the post revenue he thinks he will claw back from the banks. 
I make this statement in the House today: he will not be successful to anywhere near the extent that he thinks he will. I think he knows that because many of those banks are sitting on rulings from the Inland Revenue Department that say that the deals they undertook in New Zealand were legally correct. If the banks have a ruling that say that the deals are legally correct and the department is telling them that they are somehow not correct and that it will get that money off them then that will be an interesting legal tussle. 
If it was one of the banks in New Zealand with one set of accountants and one set of lawyers then I might have a bit more confidence that the department and the Minister might be successful. But it is not. It is every bank in New Zealand from what I can see or all the major offshore-owned banks. They all have different legal opinions and different accounting treatments. The first recommendation I would make is that the Minister stops banking the money that he thinks he will get from the department because he is very unlikely to get it. 
Secondly I think he needs to take a very close look at these rules. The thin capitalisation rules will essentially look in very simple terms at the way outward-bound and inward-bound investment can be deducted and at what the base level of registered equity needs to be for a New Zealand bank. That will be determined to be 4 percent. In effect a large number of the conduit deals that had outward bound investment were used to effectively reduce the banks’ equity in New Zealand and therefore their registered New Zealand income. 
The interesting question is whether these rules will work. The answer in some part is that they will. But it was equally the case when the thin capitalisation rules were brought into New Zealand on Carter Holt Harvey’s request. They were never deemed to be used for things that ultimately the registered banks may have done. I think the select committee should have a very good look at this. No one is arguing that if the New Zealand banks are not paying their fair share of tax they should be. The banks have been well consulted on this issue and have been engaged in the process. They understand the issue. I am just very sceptical about what it is likely to achieve. 
I will make some comments about why I think it is very unlikely that the $360 million that the Minister has argued for banked and pre-spent is likely to arrive. I do not think that it has dawned on the Inland Revenue Department that a number of the transactions that were undertaken in New Zealand were in relation to the conduit deals here. But quite a number of transactions were done because with the New Zealand tax rules it made sense to park those transactions in New Zealand. The moment that those thin capitalisation rules change under this bill some of those transactions will simply not take place here. One cannot do a linear calculation and say that just because the rules have changed one can now apply this income tax treatment to every deal that took place in New Zealand because they will not be here. The reality is that a lot of them will not be here. 
So the banks will pay more tax. The banks will change their activity around thin capitalisation. Whether or not it was legitimate they will change their treatment and pay more tax as a result of this bill I have no doubt. But I make the comment that it is very unlikely that it will be anywhere near the level that the Minister thinks it will. 
I will move on to the relationship to the 6-year income exemption for offshore systemic surveying undertaken. We welcome that move— 
Rod Donald 
: Yes. 
JOHN KEY 
: —unlike the Greens who do not think it is a good idea to try to recognise that New Zealand has a major energy issue. New Zealand is running out of energy. The Green Party thinks that a really good idea is to get pensioners to turn off their heated towel rails. That will not fix New Zealand’s problem. We have a growing economy that is using more energy. Our No. 1 gasfield is running out of gas. This Government has not done nearly enough to get out there and make sure that New Zealand does not run out of energy. The Minister of Finance knows there are two major reasons that foreign companies state that they do not want to come to New Zealand in a hurry and No. 1 on that list is energy. They are worried about running out of energy in New Zealand. This move if it does anything to encourage more drillers into New Zealand is welcome. 
I will make a final comment which is not about the issue that Mr Carter raised in relation to Cook Islands superannuation. I will leave that to the experts. But it is in relation to the statutory privilege around tax advisers. That is a welcome move. It makes sense for that information to be privileged as it has been for some time. I will make this comment. The rules are incredibly technical with many caveats. They require the advisers to sign away their life in blood and that seems to be a function of much of the legislation being passed under urgency by this Government.