Bayly AndrewTAXATION (NEUTRALISING BASE EROSION AND PROFIT SHIFTING) BILLIn CommitteeDebate resumed from 12 June.Part 1 Amendments to Income Tax Act 2007 (continued)ANDREW BAYLY (National—Hunua): Thank you Mr Chair. Yes so continuing this discussion around this base erosion profit shifting bill—very good bill very complicated as we talked last time. It's great to see the Minister in the chair Stuart Nash because I think this is an important bill—that everyone understands it. One of the areas we were talking a little bit about last time although I've got to say I was cut off at the knees—I was rapt because I was talking about thin capitalisation rules which I know that the Minister in the chair is a fan of and understands well. That's why it's also good to have the Minister because I wanted to ask some questions about thin capitalisation.Perhaps it's just worthwhile just for a sec just to recap: what do we mean by thin capitalisation? Well thin capitalisation basically means is there enough ownership equity or shareholders' funds in a business to make sure that the business is well capitalised and can meet its future liabilities? Now when you look at a balance sheet of a company on one side you have capital—shareholders and assets—and on the other side you have liabilities—Hon David Bennett: Like the New Zealand First Party?ANDREW BAYLY: That's right Mr Bennett. And so the importance of thin capitalisation—what that refers to is that some companies if they want to reduce their profits what they will do is increase their debt as much as possible and therefore the interest cost on that debt is higher than what it might otherwise be and therefore the interest deduction comes off the profit and therefore the profit is minimised and consequently the tax payable by that entity is minimised. That is basically what BEPS is all about—base erosion and profit shifting. In many cases involves using either high interest rates—and we covered that previously to some extent—or a high amount of debt. And the thin capitalisation rules are about actually making sure that the debt levels—that component—is reasonable and fair.Now last time I was talking and there are a number of submissions but particularly there's a very good submission from PricewaterhouseCoopers (PwC). They said that the treatment of non-debt liabilities should actually not be included in how you assess your liabilities but specifically went on to say that if you are going to look at them they need to better reflect how those liabilities are viewed. Now there are a whole lot of different liabilities and most people think about liabilities—if you're Mr Twyford thinking about his housing situation: lots of liability. There are other types. There are contingent liabilities that may not represent a real debt at this moment or there are other aspects of the operation. The one that is most pertinent I think is the mining industry—the extractive industry—and I was just touching on this when I was unfortunately stopped last time. When you think about an extractive industry where you're mining a quarry or oil or whatever at some stage at the end of that project you will have an obligation a liability to remediate that situation. It may be a quarry or it may be some other area that you've exploited. That needs to be bought back and it might be either to decontaminate it or it might be around how that quarry is brought back into an environmental shape.Of course what the argument of PwC was is if this non-debt component was being excluded well in some cases actually it should be included because it's actually a very relevant thing and that's something I think I'd like to hear the Minister's view on. Of course we had the officials' view on it. They said that they'd work through this issue and the standardisation approach that they are talking about allowed a New Zealand group to deduct up to 110 percent of the worldwide group debt within the context of a safe harbour—and that's an area that we actually haven't discussed previously—but that part of it was covered. I'm not so sure in terms of some of those specific entities and particularly in relation to mining.The other area is around thin capitalisation and particularly deferred tax liabilities and whether these should be included in non-debt liabilities. Again we had a host of submissions on them from very reputable firms: Chartered Accountants Australia and New Zealand Corporate Taxpayers Group Ernst & Young KPMG Powerco PwC—