Taxing matters and the Panama Papers

Tax has been headline news since the release of the “Panama Papers” – the huge trove of hacked files from a Panama based legal firm. The highly confidential papers are particularly damaging to those using shady offshore tax havens to conceal wealth or income.
New Zealand has been linked to these murky deals because of what some see as a loophole in the taxation of trusts and minimal disclosure requirements which permit foreign trusts to be fronted by a NZ resident trustee.

According to the Australian Financial Review, “New Zealand’s 12,000-plus offshore trusts pay no New Zealand tax on foreign earnings. Their beneficiaries are not registered and their accounts are not filed with any public body.”

Opposition MPs are now accusing their counterparts of allowing NZ to become a tax haven. There are two critical aspects to tax havens: advantageous tax rates and invisibility. Invisibility is achieved by not requiring disclosure and declining to share information with overseas tax authorities.

NZ’s foreign trust disclosure laws were strengthened in 2006. According to an IRD technical paper produced at the time,

“The new rules will enable New Zealand to meet its exchange of information obligations with its double tax rules will also ensure that New Zealand is better placed to meet its informational obligations as a member of the international community and organisations such as the OECD…Previously, a foreign trust that received a foreign sourced amount of income was not required to provide information to Inland Revenue or keep records for New Zealand tax purposes about that income…Australian authorities, in particular, were concerned that foreign trusts were being established in New Zealand to avoid Australian tax.”

Clearly NZ is participating with other countries in the sharing of tax information, and with Australia in particular. The foreign trust disclosure form specifically asks (at question 3) if the settlor is resident in Australia. (The settlor being the party vesting their assets into the trust.) Answering yes to that question would no doubt trigger information sharing between the NZ and Australian tax authorities.

There are many reasons why assets are held in trusts and why a foreigner may have a trust in New Zealand. However, given the murky world of tax, I imagine some are used to avoid the payment of tax overseas by not distributing the income to the trust’s overseas beneficiaries. There will also be some being used to conceal the ownership of wealth obtained through unlawful or dubious means.

The central issue is not whether NZ is a tax haven; it is whether NZ is doing enough to curb the laundering of wealth and avoidance of tax by overseas residents. Could New Zealand do more on disclosure? Of course it could. I personally am a little surprised that question 3 is not more encompassing to identify the settlors country of residency, rather than merely ask if they are an Australian resident. I would also expect the identity of the settlor to be disclosed (and authenticated). Those bits of information would be useful to exchange with other tax agencies when asked.

The government has appointed tax expert John Shewan to lead a review of the country’s foreign trust disclosure rules. That report is expected by the end of June. It will be interesting to see if the recommendations include the additional disclosures mentioned above.

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