Adams Amy: Taxation (International Taxation Life Insurance and Remedial Matters) Bill — In Committee 
Adams Amy: Taxation (International Taxation Life Insurance and Remedial Matters) Bill — In Committee 
[Volume:656;Page:5960] 
AMY ADAMS (National—Selwyn) 
: 
 It is a delight to take a call in the Committee stage of the Taxation (International Taxation Life Insurance and Remedial Matters) Bill. I have probably taken up half of my speaking time just going through the title. As the previous speaker Craig Foss mentioned the bill before us is broken into six parts but interestingly enough the breakdown is grouped by amendments to the various Acts rather than by subject areas. Part 1 contains the bulk of the detail of the bill. Many of the substantial amendments are in this part. 
Mr Foss the chairman of the all-powerful Finance and Expenditure Committee has already alluded to the committee spending a considerable number of hours working its way through the bill trying to make what was already comprehensive legislation as good and as comprehensive as we possibly could. I think the changes the committee has made to this part are worthwhile. We can be very proud of the work we have done. 
I want to take a moment to talk about the international tax rules component of the bill because they are the centrepiece of it. I want to reflect on the need for reform in this area. Until now New Zealand operated under a “grey list” system whereby we identified countries whose tax system we felt was relatively comparable to ours. It effectively allowed controlled foreign companies operating in those jurisdictions to be treated as tax-neutral. 
However there were three problems with that system. New Zealand was one of the few countries that worked in that way. Most countries operated a system akin to the one we are now moving to whereby instead of having a “grey list” of approved countries and everything else they looked at the type of income that the controlled foreign company was earning. If the controlled foreign company was earning active income in overseas jurisdictions then that income was exempt but passive income—the likes of royalties rents dividends interest and so forth—was taxed in the parent jurisdiction. So straight away New Zealand was at odds with many of our major trading partners. The problem with that was that it created an incentive for New Zealand businesses with offshore operations to move their headquarters to countries with more favourable tax rules. It is not an objective of our tax system to drive our parent companies offshore. If that is the effect then it is something we need to address. This bill starts to do that. 
Another issue we had with retaining that “grey list” structure was that increasingly we were finding that our trading companies and our growth companies were not looking as much to our traditional trading parties: the motherland the States Australia and the like. The growth opportunities were more and more in the non - “grey list” countries. New Zealand businesses that expanded into areas like China South America and the Middle East found that their compliance costs and their tax costs were substantially higher than their competitors’. That put New Zealand businesses on an un-level playing field. We are not seeking through our tax system to put New Zealand businesses into the international market place with one hand effectively tied behind the back. So that was one of the things that we wanted to address. 
The other issue—in order to complete my list of the three issues we had with retaining the “grey list” structure—was that the “grey list” exemptions were effectively allowing businesses to build structures that could save them domestic tax. That is not the purpose of these sorts of rules. 
So we can see very clearly why the policy driver was to move away from the “grey list” structure that we had and move to what we will now have through this “light” bill which is as I said a system where income is regarded as active or passive and is classed accordingly. I think it is worth mentioning that within that system we will still have an exemption for up to 5 percent of passive income. We will not require companies to overly complicate their accounting and return processes for what is effectively a de minimis proportion of their income if it is passive income. So if 95 percent of their income is active all the income can be taxed in the jurisdiction where it was earned. If more than 5 percent of a controlled foreign company’s income is passive it will have to be taxed in New Zealand. By doing this we are looking at reducing the tax barriers to businesses that want to expand offshore while minimising their compliance costs. At the same time we are ensuring we maintain a level of protection for our domestic tax base. 
I think most people would concur that those are sensible policy foundations for these changes. They certainly were not easy to make and the Finance and Expenditure Committee had a number of concerns when we worked through them one of which related to ease and accountability.