Cullen Michael: Taxation (Base Maintenance and Miscellaneous  Provisions) Bill — First Reading 
Cullen Michael: Taxation (Base Maintenance and Miscellaneous  Provisions) Bill — First Reading 
[Volume:622;Page:18054] 
Hon Dr MICHAEL CULLEN (Minister of Revenue) 
: 
 I move  
That the Taxation (Base Maintenance and Miscellaneous Provisions) Bill be now read a first time. 
 I shall be recommending to the House later that the bill be referred to the Finance and Expenditure Committee for consideration. 
This omnibus taxation bill is the second to be introduced this year. Like its March predecessor the bill reflects the priorities of the Government’s tax policy work programme. That includes promoting growth and innovation making the tax system easier for businesses to work with reducing compliance costs and protecting the revenue base. Protecting the revenue base is the single most important theme of the present bill. 
The centrepiece of the bill is the introduction of new rules to ensure that foreign-owned banks which constitute most of the banking business in New Zealand pay sufficient tax on their New Zealand income. A notable trend has emerged recently that the growth in the profits of foreign-owned banks operating here is not reflected in their payments of New Zealand tax. The reported profits of the financial sector have been going up but the proportion of the tax paid by the sector has been going down. At the Government’s request tax policy officials reviewed the tax laws relating to banks to see whether they needed to be more robust. It has emerged that the banks can use certain features of our international tax laws such as the conduit rules to reduce the amount of tax they pay in New Zealand. 
Under present law banks can use interest deductions arising from an excessive level of debt to reduce the portion of their income that is subject to tax in New Zealand. That works in two ways. First the cross-border financing arrangements for outbound investments which have generally been funded by debt have generated income that effectively is not subject to New Zealand tax under current law. Second under the current law there is potential for banks to substitute debt for equity in financing their New Zealand businesses for the use of holding companies and bank branches. That results in their New Zealand business being thinly capitalised for tax purposes. 
The changes introduced in this bill will provide robust thin-capitalisation rules that ensure that the income of banks cannot be sheltered by interest deductions arising from excessive debt. Under the proposed rules foreign-owned banks will be denied interest deductions if they do not hold a level of capital or equity equivalent to 4 percent of their New Zealand banking assets weighted for risk. They will also be required to have enough capital in New Zealand on which no interest is deductible to fully fund their offshore investments. That means that banks will be prevented from using the expenses associated with this income as a deduction against their New Zealand income. As I announced in September the proposed changes could result in foreign-owned banks paying as much as $360 million a year more in New Zealand tax assuming current levels of bank profitability—which is probably I think it is fair to say about the biggest free hit any Government has ever got out of taxation with no impact upon the New Zealand economy. 
Members will have seen media reference to the Inland Revenue Department’s audit activity that has resulted in some banks being reported as disputing their contingent tax liability. Obviously that is an issue between banks and the Inland Revenue Department and is separate from the legislation proposed in this bill. Under the law I as Minister of Revenue have no part in such investigations of specific taxpayers. 
As another measure to protect the tax base the bill amends the dividend imputation rules to ensure that in certain circumstances when a company is sold the benefits of any prepaid tax will stay with the original group that paid the tax and cannot be transferred to the shareholders of another group. The amendments are aimed at companies that have no immediate expectation of being liable for income tax but that prepay tax to impute dividends to shareholders and then engage in transactions to have the prepaid tax refunded to them. Once enacted that revenue protection measure will apply from today. 
The bill also introduces a number of changes that improve the operation and effectiveness of tax law in other areas. It introduces several changes to the tax depreciation rules to improve their operation and reduce associated compliance costs to business taxpayers. Included are changes to the tax depreciation treatment of patents and the special tax depreciation rate rules additions to the list of the depreciable intangible property and extended deductibility for losses on buildings. 
The bill also clarifies and explains the rules on tax deductibility for business environmental expenditure such as the cost of preventing remedying or mitigating the discharge of contaminants. The current rules are rife with uncertainty about the existing scope of tax deductions that are available for environmental expenditure and I am told that some environmental costs may not indeed be deductible for tax purposes. Allowing environmental costs to be taken into account for tax purposes as other business costs are will ensure the correct calculation of taxation on income from business activities. The changes will also remove disincentives for undertaking environmental expenditure and encourage businesses to be more environmentally responsible. 
Another part of the bill simply clarifies the income tax rules on transfer of assets and liabilities to beneficiaries when someone dies. I emphasise that those changes affect only assets and liabilities that are already in the tax base such as buildings on which depreciation is being claimed and land on which the gain is taxable. It is not some attempt to back-door smuggle in some new death duties. The current law in that area is unclear and over the years there have been repeated calls from the taxation industry for reform of the rules. Uncertainty also surrounds the tax treatment of in-kind distributions of assets from trusts estates and companies as well as gifts of all kinds. To add greater certainty and consistency the bill introduces comprehensive rules that provide a uniform income tax treatment of these asset transfers both for those who transfer assets and for recipients. Those policy announcements have already been warmly welcomed by taxation professionals. 
The bill also introduces statutory privilege or a right not to disclose certain documents relating to tax advice provided by tax advisers such as chartered accountants. Although it will be subject to a number of exclusions it will place the status of communications from non-legal tax advisers such as accountants closer to that of the tax advice provided by lawyers who do not have to disclose their advice to the Inland Revenue Department. Advisers such as accountants should also be able to give candid and independent advice to their clients without having to disclose it to the Inland Revenue Department. The benefit of enabling this to occur is that legal and accounting advice will be treated in a similar way. In both cases such advice can promote voluntary compliance with the tax system and thus help to reduce compliance and administrative costs. 
The bill introduces a temporary 6-year tax exemption on income earned from non-resident drilling rigs and seismic ships involved in exploration for petroleum in New Zealand. The measure removes a tax obstacle to gas exploration in New Zealand and is part of a package of measures announced in June to boost gas exploration here. 
Those are the main features of this wide-ranging taxation bill. They and other changes proposed in the bill are described in detail in the separate 74-page commentary that has been distributed to all members of the House and which I recommend they read. I commend the bill to the House.