Cullen Michael: Taxation (International Taxation Life Insurance and Remedial Matters) Bill — First Reading 
Cullen Michael: Taxation (International Taxation Life Insurance and Remedial Matters) Bill — First Reading 
[Volume:648;Page:17386] 
Hon Dr MICHAEL CULLEN (Minister of Finance) 
: 
 One would hate to hear the member when he is opposing a bill if that was a speech in support of one. The member certainly managed to praise with faint damns this particular measure and he managed in the course of that to miss the entire main thrust of the legislation while focusing on some minor issues within it. 
Dr the Hon Lockwood Smith 
: Minor issues? 
Hon Dr MICHAEL CULLEN 
: Minor issues indeed—minor issues indeed. 
Let me come to the most important part of this Taxation (International Taxation Life Insurance and Remedial Matters) Bill. It follows on very nicely from the previous legislation we have been discussing. What this important part on the active/passive distinction is about is whether this country will have an outward-looking taxation system or an inward-looking one. Of course what the member did not tell us was that this part of the legislation replaces the failed legislation that he helped put in place in 1991-92 which did not have any such exemption for active income. There will of course be some who will argue that what this will do— 
Dr the Hon Lockwood Smith 
: But it did have a good grey list. 
Hon Dr MICHAEL CULLEN 
: “Locky” has had his speech. I ask him to strap the budgie-smugglers down and listen for the next few minutes. What some people will argue about this bill— 
Dr the Hon Lockwood Smith 
: What an arrogant Minister! 
Hon Dr MICHAEL CULLEN 
: What is arrogant is continuing to interject when somebody else is speaking. It is high time the member learnt some manners instead of just talking in a poncy fashion. There is a difference between those two things. 
What some people will argue about this bill is that it will encourage people to move manufacturing capacity offshore. The reality is—[ 
Interruption 
] I knew the Greens would; they could not help themselves. As soon as the word “international” appeared in the bill we knew we would be in trouble in terms of the Greens’ vote on this bill. As soon as we had the term “controlled foreign company” they probably thought that it meant an overseas multinational. It means a New Zealand company that controls foreign companies offshore. The fact is that some manufacturing capacity will move offshore to lower-cost countries. The real issue is firstly whether we want New Zealand companies to internationalise or whether we believe we can make our living just by taking in each other’s washing for the foreseeable future. The obvious fact is that New Zealand companies will have to bulk up and internationalise to succeed or we cannot increase our productivity levels within this country. 
The second thing is that if companies succeed in either having some manufacturing capacity offshore or investment offshore or having very substantial parts of their business dependent upon exporting so that the majority of their income comes from offshore activity then our current taxation system with its lack of an active exemption encourages those companies to move all capacity offshore including head office including design and including back-office functions. That is the choice that developed economies—particularly small developed economies such as New Zealand—face. Are we to play a long defensive game trying to keep what little we have instead of trying to expand and develop to develop those international connections and to retain the highest-quality highest-paying highest-value parts of the production system within New Zealand? 
If we opt for the “little New Zealand” policy we will in the end defeat ourselves. We will in the end have a declining economy not an expanding economy. If we opt for an outward-looking approach which requires an active exemption then there is a very real prospect that we will be more capable of succeeding economically than we have done over the last 40 or 50 years. That is the choice that a small isolated economy in the south-west of the Pacific faces. We cannot succeed by trying to mimic the economic patterns of behaviour of the low-income mass production countries in Asia. If we think that that is the route to success then we have really got things profoundly wrong. 
When New Zealand introduced under the previous National Government the current tax rules taxing New Zealand companies on their worldwide income it was theoretical perfection. To take Dr Lockwood Smith’s point it has lower compliance costs because not having an active/passive distinction by itself obviously has lower compliance costs. But the reality is that the lower compliance cost is bought at the expense in the end of poorer economic performance. Once we have an active/passive distinction of any form then first of all that in itself increases compliance costs. But secondly to buttress New Zealand’s tax base so as to not lose all that taxable income— 
Dr the Hon Lockwood Smith 
: That’s right—you can’t afford to let it go. 
Hon Dr MICHAEL CULLEN 
: That is right—precisely! If we want all our taxable income to move offshore so that there is no tax within New Zealand then we do not need buttressing rules around it. Those buttressing rules create compliance costs. The member cannot have it both ways—or maybe he can; I do not know. But he needs to understand that the point about doing this is that it creates a risk. It creates the risk that we lose the tax base offshore and that also will not be helpful for New Zealand. That cannot help New Zealand’s future in terms of its need for money for investment in infrastructure skills and so on and so forth. 
That is the most important part of this bill. It is by sheer coincidence that that part of this bill comes in on the same day as the Committee stage of the New Zealand-China Free Trade Agreement Bill. But the two bills in fact have a great deal of interrelationship in terms of the underlying philosophy about having an outward-looking growing New Zealand economy as opposed to an inward-looking gradually retreating and declining New Zealand economy. 
The second main part of this bill is the insurance changes. The member should support those because at the end of the day the changes here merely align the rules around the taxation of insurance with those of general companies and other financial sector parts of the economy. Yes we know that Sovereign objects to this and we know that a former member of the National Party has been lobbying on behalf of Sovereign. But in fact there has been a great deal of consultation with the insurance industry as a whole and the bulk of the insurance industry is actually reasonably happy with this—nobody is ever happy unless we simply cut their tax. 
Any change will always have some degree of opposition to it but there are long transitional provisions within this bill that protect. This particular part of the legislation is not revenue-positive for quite a large number of years to come; in fact it is actually revenue-negative for some considerable number of years to come. But it is an important change because it leads to a fairer taxation system around insurance and it removes the bias against life insurance in favour of term insurance which the current taxation system provides. The taxation system should be neutral between those two options. It should not be determining a choice between those two options. The choice should be based purely upon people’s own economic and social needs in respect of term insurance versus life insurance. 
Much of the rest of this bill consists of a vast range of technical changes. For those who want to get really excited there are retrospective provisions that go back to 1986 and to get even more excited those provisions relate to the Parliamentary Service. In other words the Inland Revenue Department has caught up with a problem in the law that has remained unamended for 22 years and that should have been amended and now it is deemed to apply from I think 1 April 1986 or from whenever the Parliamentary Service came into operation. 
The other main feature of the bill is significant reductions in compliance costs in terms of thresholds for a whole range of aspects of the tax system as they apply to small to medium sized enterprises. One could always argue that those reductions should go further. Indeed we looked at other options that had more significant revenue costs attached to them but these do have quite significant revenue costs. 
This is not a bill that increases the Government’s tax revenue at all. It reduces the Government’s tax revenue both in the short term and in the long term. A reduction in active exemption obviously reduces the Government’s tax revenue. The compliance cost changes around thresholds reduces the Government’s tax revenue. The life insurance changes reduce the Government’s tax revenue over the next few years. 
This is well-thought-out legislation. It is large and it is complex. The select committee will need to spend a lot of time on this legislation and I am sure it will find reasons for changing some of its details. But let us not pretend that a tax system should not have integrity that protects the tax base of New Zealand but simply resigns all tax to offshore jurisdictions—tax rationality does not say that; that is just pure right-wing ideology. That is not a rational tax system; that is a very silly tax system.