Norman Russel: Taxation (Annual Rates Foreign Superannuation and Remedial Matters) Bill — Second ReadingText is incorporated into the Bound VolumeNorman Russel: Taxation (Annual Rates Foreign Superannuation and Remedial Matters) Bill — Second Reading[Sitting date: 05 December 2013. Volume:695;Page:15322. Text is incorporated into the Bound Volume.]Dr RUSSEL NORMAN (Co-Leader—Green): I rise on behalf of the Green Party to speak to the Taxation (Annual Rates Foreign Superannuation and Remedial Matters) Bill. The Green Party will be supporting this bill because it does make some significant and important changes even though there are parts of the bill that we do not agree with. It is the bill of course that sets the annual rates and in a sense that is the bit that we disagree with the most. That is because this Government has introduced tax changes that are essentially very large tax cuts to upper income earners and increasing GST on everyone else. The cost of this Government’s tax changes to income tax rates are about $1 billion a year to pay for the tax reductions for the top 10 percent of income earners. So the top 10 percent of income earners in New Zealand were given a tax cut by this Government that is costing everybody else about a billion dollars a year. There is a $1 billion a year hole in the Budget as a result of the tax cuts that were introduced by this Government.If you think about it what that means is that the entire proceeds of the asset sales so far $4 billion is eaten up by 4 years of tax cuts for upper income earners so those cuts put a big hole in the Budget as a result of the rates that are set in this bill. That meant that it had to come from somewhere else and of course has had a significant effect on the amount of money that the Government has had to borrow and has also had a significant impact on what becomes of the money from the asset sales. Basically it is as if we did not sell the assets because we have chewed through that $4 billion. By the time of the next election we will have chewed through the lot. So the Government is actually selling assets in order to pay for tax cuts for the top 10 percent of earners in New Zealand. You only have to think about that for a second to realise the inequity of the scheme that it has introduced.Beyond that I think some of the missing elements of this bill are remarkable as well. If you think about whether the bill is truly to rationalise the tax system as the Government has said in its speeches—and there are elements of that that are undoubtedly true—what about a capital gains tax? New Zealand has at the moment a very complicated system for taxing capital gains. A lot of the complication comes from intent when you trade houses shares or other capital items was it your intent when you were engaged in that buying and selling to make a profit out of it or not? The tax system the Inland Revenue Department is required to interpret the intent of the buyers and sellers of capital items to determine whether they are traders or not. If they are traders then they are liable for the tax. If they are not traders then they are not. This creates a very complex and subjective taxation system.When the OECD did a review of New Zealand’s tax system aside from saying that it is ridiculous of course or it is extraordinary that New Zealand does not have an overarching tax on capital gains the other part that I think people do not realise is that it means that we have a very complicated system of taxing capital gains which is basedon subjective decisions about the intent of the people who make the capital gains. So if the tax official decides based on some kind of measure of behaviour that in the case of the person who made the capital gains by buying or selling their house or buying or selling their shares the intent was that they were a trader who was making money out of this then they will go and say that you have got to pay tax. But if you are not a trader then you do not have to pay the tax. It is of course very difficult and subjective for the Inland Revenue Department to establish this. Why do we not have a consistent rule for taxing capital gains like pretty much every other OECD country? That would be a much simpler tax system for dealing with capital gains than the very complicated system that we operate at the moment.But complexity seems important to the Government so it has developed this very complicated system of taxing capital gains the effect of which is to protect the income of upper income earners. We know when we look at the taxation from other jurisdictions how much income comes from capital gains and what you find is that the top 1 percent of income earners make a big proportion of their income from capital gains. They are able to avoid paying taxes on most of their income because most of their income comes from capital gains which is untaxed whereas in most other jurisdictions that income is taxed. So not only does the Government maintain a very complicated system of taxing capital gains in order to protect the tax-free income of the top 1 percent which is the effect of the current capital gains tax rules but on the other hand it also introduced tax cuts that meant that upper income earners got given a billion dollars a year by having big tax cuts and of course that has got to come from somewhere. Where that comes from is other taxpayers through increased GST which we know disproportionately affects those on low incomes and where it comes from is by selling assets. So effectively the Government has sold the assets of the people in order to fund the tax cuts for the top 10 percent of income earners for 4 years. What will happen after those 4 years? Well obviously they will run out of things to sell and they will turn to other things to sell.The other part that I think is interesting about the New Zealand tax system is the treatment of foreign trusts. New Zealand has a very unusual foreign trust system which basically means that foreigners can place assets in New Zealand in foreign trusts and as long as none of the income from within those foreign trusts comes from New Zealand there is no requirement to pay tax on the income earned by those foreign trusts. So they are tremendously effective tax avoidance mechanisms for foreigners offshore. New Zealand now has quite a significant industry of offshore people who are trying to avoid paying tax offshore putting their money into foreign trusts in New Zealand which are then not visible to their home Governments. This is part of the international problem of tax avoidance. If we take the example of a Mexican drug lord who has illegally and illicitly earned many hundreds of millions of dollars they can place that money in New Zealand and the Mexican Government will never know that that asset is in a foreign trust in New Zealand and it would effectively get no tax. There is no way for the Mexican Government to ever know the identity of the person who is the beneficiary of this foreign trust because under New Zealand foreign trust rules there is no requirement to identify the beneficiary of that trust to the external world. You need somebody in New Zealand who is the front for the trust but you do not have to identify who the beneficiary of that trust is. That is why New Zealand is now being tagged as one of the places in the world where it is safe to hide money and avoid paying tax. We have become part of the international network of tax avoidance by people who are trying to avoid paying tax internationally.This bill was a great opportunity—it is a remedial matters bill—to fix up a big hole in the New Zealand tax system around the treatment of foreign trusts. The change thatcould have been made is actually not that hard; it could have simply been transparency. No one is saying that we should apply New Zealand tax to this income that was earned offshore though you could have a debate about that. But even if you just had transparency about who the beneficiaries of these foreign trusts are then immediately those who are trying to use the New Zealand foreign trust regime to avoid paying tax internationally would become visible. It would then become immediately available to the Mexican Government or any other Government to see who is hiding money using the foreign trust rules in New Zealand which is one of the big holes in the current New Zealand system.The other part that I think it is useful to talk about a little bit is around the IT system. I think David Clark talked about this earlier because we had the Inland Revenue Department in front of the Finance and Expenditure Committee just a couple of days ago. What is interesting here is the scale of the expenditure on this new IT system. We are talking about ballpark figures of at least $1 billion on an IT system. What the New Zealand IT industry is saying is “Will IRD as part of its programme of building this system make sure that the New Zealand IT sector can bid for parts of this contract?” and essentially it is finding that the Inland Revenue Department is not being particularly facilitative towards the development of the New Zealand IT industry as it goes about building this giant new system. If anything the department seems to have given the inside running toCapgemini which is a big offshore IT company that is renowned for avoiding paying its tax. It is a renowned tax avoider in the United Kingdom and it has been given some of the inside running to get these big contracts on the IT system. It seems to me that this is not a really good way to go about it. Obviously the Inland Revenue Department wants a system that works really well which is fair enough but in the process we also need to keep an eye on economic development opportunities for New Zealand when we have these giant New Zealand Government procurement projects—and this is a giant project.None the less there are some good elements in this bill such as tightening some of the concessionary regimes around mining. Even though they are minor improvements we certainly support those improvements around mining. The tax system is very concessionary towards mining so tightening it ever so slightly is progress but New Zealand still has one of the lowest royalty regimes in the Western World when it comes to mining. Basically we say to foreign mining companies “Come in help yourselves we are not going to tax you much and if there is any mess we will pay to clean it up.” which is a bit sad. This bill tightens up some of those concessions around mining which is a good thing. There are a few other good things in there so we will be supporting this bill. Thank you.