Russell DeborahDr DEBORAH RUSSELL (Labour—New Lynn): Our colleague Chlöe Swarbrick referred to something that economist Shamubeel Eaqub said: Tax is love." In fact it was brought out again recently on Q+A on Sunday morning when Corin Dann said to Shamubeel Eaqub "Do you think people are willing to pay higher taxes?" and Mr Eaqub replied—he said "When I said 'tax is love' I got a whole lot of hate mail so I don't think so." Perhaps most people don't regard tax as love but certainly they are prepared to regard taxation as the price of civilisation. It's what we pay for a civilised society.I'd like to say that the select committee process was also remarkably civilised in respect of this bill; indeed even rather lovely—moving back in that circle. I came into the process late as a new MP so like many of the other new MPs on the Finance and Expenditure Committee we had to do a lot of work to catch up on what was actually going on in this bill. But it was a very collegial process. Sometimes we fight tooth and nail about taxation but not on this bill. We actually had a lot in common a lot of stuff we wanted to achieve together and like my colleagues I am very grateful to our officials and also to Therese Turner who helped us immeasurably in understanding exactly what was going on in this bill.So what is going on in this bill? Well it's about base erosion and profit shifting. Now what that means is the tactics by which big multinational companies can shift profits from one country to another. Typically what they want to do is they want to shift the profits from a country where they are taxed at a comparatively high rate to a country where they are taxed at a comparatively low rate. If they can do that they can erode our base of taxation in the high - tax rate country. What we're trying to do in this bill is to put some measures in place to stop those practices.Before we talk about the measures exactly how do companies shift profits from one country to another? Well they can do it by charging a management fee. So the overseas company charges a management fee to the high-tax country. That means there's a big tax deduction in the high-tax country and in the low-tax country the management fee is received as income and it's taxed at a comparatively lower rate. So that's a management fee transfer. You can do the same thing transferring goods from one country to another—all right? So the overseas company makes the goods at a low price but it charges a high price in the country which has a high tax rate. That means they get the effect of a high tax deduction. It has the effect of shifting profits across borders quite straightforwardly. The way they do it when it comes to loans or to interest rates is the overseas company the parent company will lend money into a high-tax country and in a high-tax country—and that is New Zealand in terms of its corporate tax rate—it will you know pay interest. It can claim a very good tax deduction because of that high interest that it pays and as the interest flows back to the low-tax country it's regarded as income there and it gets taxed at a low rate. So the effect is to shift profits from one country to another and ideally you shift them from a country with a high tax rate to a country with a low tax rate.It's not fair. That's the problem with doing this sort of thing. Look people are entitled to structure their tax affairs in order to pay the least tax possible under the laws. But there's a different thing going on here and it's to do with the fairness of the tax system. But what is fair? What is fair when it comes to taxation? That's actually really hard to judge especially when it comes to these multinational companies particularly if we're trying to work out whether the price they're charging across borders is actually fair and right and proper. It involves a lot of back and forth a lot of documentation and a lot of hard work.So in this bill when we are trying to ensure that we're going to tax multinationals fairly and that they pay their fair share in New Zealand what we want to make sure that we do is we don't involve everyone in a whole lot of unnecessary work. So one of the first things this bill does is it identifies companies which we think are highly likely to engage in this base erosion and profit shifting (BEPS). We've got a couple of tests for that. There were three tests. One of them we took out on the advice of submitters and the advice of our tax expert but two of them are still sitting in there. So if you've got a multinational structure where one company has a very high debt ratio so they've got a lot of debt to equity—40 percent—we say they are perhaps going to be more likely to be caught up in this BEPS stuff and so we want to have a close look at them. Or if we've got a company where they are borrowing money from a parent which is in a low-tax jurisdiction then we say they're a BEPS risk and we are going to investigate them fully. You're doing one of those factors then we're going to have a look at how we apply these base erosion and profit shifting rules to you but we've got a de minimis in there.Look if the New Zealand company only borrows $10 million or less from its overseas parent even if they were in a low-tax jurisdiction we say "No we're not going to apply the rules." and it's worth working through the numbers on that. People say "Well why wouldn't you apply the rules?" but actually there's only a small amount of tax involved. So if you think of $10 million of borrowing at a 10 percent interest rate that might be $1 million worth of interest expense. The tax deduction on that in New Zealand—the amount your tax is reduced by—is about $280000. Now if the loan has come from a low - tax rate country—say a 12.5 percent tax rate—it means that in New Zealand you would have tax reduced by $280000. In the low - tax rate country their tax would be increased by $125000. The difference is $155000 of tax. Now that's a lot of money to most ordinary people but in terms of the Inland Revenue Department spending its time and energy chasing after it they say "Let's not do this." They just say "Let's not do that particular one." So there's a safety rule in there to make sure that companies don't get involved in unnecessary work and that they don't have to sort of do too much. But then what do we actually do? You know the company here in New Zealand is still entitled to a tax deduction. Let's say we've found them they are engaging in this profit shifting—they can still get their tax deduction; it's just that we're going to impose a different interest rate. We're going to reassess the transactions and impose a fair rate of taxation and we've got a way of assessing that.You know companies do lend money across borders. That's a perfectly legitimate thing to do. But what we are trying to do is make sure that the interest rates on it are fair and reasonable. So the rule we've got is this: we look at the overall credit rating for the worldwide company and then we say "Well look the interest rates implied by that credit rating—have they implied those interest rates here in New Zealand?" But the fact is here in New Zealand we're a slightly riskier economy because we're small.So what we've said is that it's actually okay to charge a slightly higher interest rate here but how do we assess that? Well we take the worldwide credit rating and we chunk it down a couple of notches. So say you've got an A+ credit rating. We'll chunk it down a couple of notches to a—I think it's an A. I don't know exactly how those things work so maybe it's an A-. How much interest would you pay that's implied by an A- credit rating? Well that's the interest deduction you can claim. So we still allow the interest deduction; you've just got to make it at a fair and reasonable rate.So it's all quite complicated stuff but what we're trying to do with this is to make it fair and reasonable. We're not trying to deny deductions. We're not trying to stop companies from operating across borders. All we're trying to do is make sure that the interest rates that they charge are fair and reasonable. That's part of the idea of what's going on here with this.We've got a whole set of other rules in this legislation. There's rules around permanent establishment there's rules around hybrid mismatches and all of them are oriented towards making sure that companies pay their fair and reasonable amount of tax in the countries where they earn the income and that's really important. If taxation is the price of civilisation then we all need to pay towards it but we need to pay our fair share—no more no less. And if ordinary citizens see multinationals getting away with not paying their tax and they see them getting away with this base erosion and profit shifting then why would ordinary citizens want to pay their tax too? How can you say to a hard-working farmer to a small-business owner or to a wage and salary earner that they have to pay tax when the multinationals don't? That's why we need to make sure that we tax multinationals fairly so that we are all in it together—all of us fairly paying the price of civilisation."