Cross-Examination: The Panama Papers - Who You Gonna Call? Trustbusters!
Content Contributor, Jasper Lau
In recent months the infamous ‘Panama Papers’ have dominated hundreds of news outlets around the world. These documents have shed an inconspicuous light on the affairs of the rich and powerful, raising questions about global tax avoidance. For New Zealand, the fallout from the Panama papers has become primarily focused on the issue of Foreign Trusts and whether there are legitimate concerns as to the role they play with regards to global tax dodging.
Amid claims that New Zealand is a ‘tax haven’, there has been an order by the New Zealand government to review the rules surrounding disclosing foreign trusts.[1] On the more extreme end of the spectrum, Leader of the Opposition, Andrew Little, has advocated for the banning of the operation of foreign trusts in New Zealand.[2]
What are Foreign Trusts?
Trusts in a legal context, are simply binding arrangements when a person (the settlor) transfers legal ownership of assets/property to certain indivduals (or a company, in many cases). These individuals are called ‘trustees’, and they act for the benefit of certain persons (beneficiaries) named by the settlor. There are often good reasons to set up a trust, such as the preservation of wealth, asset protection, succession planning, or for commercial purposes.[3]
The Income Tax Act 2007 provides that a trust is a ‘foreign trust’ if no settlor has been a resident in New Zealand at any time in the period that; starts on the later of 17 December 1987 and the date on which a settlement was first made on the trust.[4]
The problem with Foreign Trusts in New Zealand
Normally if a person is deemed to be a resident in New Zealand, then their worldwide income is taxable under New Zealand law. Similarly, if the income is sourced from New Zealand, we can also claim the right to tax that income. However, under New Zealand law, trusts are taxed based on the status of the settlors. This means that if the assets in the trust are not sourced in New Zealand, and the beneficiaries are not residents, then usually the trust will not be taxed here. In other countries, taxation of trusts are based on where the trustee is a resident, not the settlor. The existence of foreign trusts in New Zealand means that non-resident settlors here who have given assets (not sourced from within New Zealand) to a New Zealand trustee for beneficiaries living overseas would normally not have the trust taxed in New Zealand, nor be taxed by their respective country.[5]
Across the world, New Zealand is seen as a safe and reliable country with strong tax and trusts laws. This allows wealthy individuals across the globe to deposit money and assets through foreign trusts in New Zealand without being taxed. This raises concerns about the fairness a system where the super-wealthy are able to avoid paying taxes, as well as legal issues as to the potential for offshore income and non-resident settlors who might be using foreign trusts in money laundering schemes. This is certainly the view of New Zealand academic Ron Pol, who speculates that these foreign trusts could be used as a money-laundering scheme for drug cartels and even for human traffickers.[6] He has highlighted how one New Zealand trust has already been associated with Unaoil, a Monaco company under investigation for helping bribe ministers and officials in the Middle East.
Arguably, one of the key reasons foreign trusts are increasingly used in New Zealand is due to the high degree of confidentiality they provide. The only information about these trusts provided to the tax department is a Foreign Trust Disclosure (IR 607) form, which includes the name of the trust, as well as the name and address of a local trustee. An exception to such privacy applies to Australian resident settlors. In this situation, the Australian Tax Authority has the power to investigate individuals that ought to be paying tax in Australia[7]. But other than that, there is no formal public register for foreign trusts, making it impossible to know who the beneficiaries are and where the money is coming from. The Inland Revenue Department is unable to audit foreign trusts because it has no information about them.[8]
What do the experts say?
Although there are differing opinions on what should be done about foreign trusts, or whether there is even an issue at all, most experts agree that greater transparency is needed surrounding the disclosure of information around these trust.
The government’s response to the Panama scandal has been the appointment of former PwC chairman, Mr John Shewan, who has been tasked with conducting an inquiry and making recommendations on the rules and disclosure conditions surrounding the trusts. A report is expected by June 30th.[9] However, according to University of Auckland law professor Michael Littlewood, the easiest route to alleviating criticism of the regime would be to make the details about the trust settlors, trust assets, and trust beneficiaries, publicly available.[10] Littlewood argues that under the current regime, Australian settlors already have to disclose their residency, and therefore it would make sense to extend this rule to all countries.
A similar sentiment has been shared by economist Gareth Morgan, who also believes greater transparency is needed.[11] He questioned whether New Zealand’s international reputation is being damaged by our accepting service fees in exchange for the protection of these trusts. Should we continue to accept foreign trusts being hidden in New Zealand,
Furthermore, economist Bill Rosen has questioned the actual economic benefits to New Zealand society as a whole by having these foreign trusts.[12] He has expressed dismay that our foreign trust scheme is helping individuals overseas avoid paying taxes. It should be noted that Gareth Morgan has proposed we adopt a ‘squatters tax’, which would provide a new source of revenue of New Zealand, and could be a solution to Rosen’s question.
However as Professor Littlewood concedes, it was likely that people using New Zealand foreign trusts to avoid tax would simply move their money elsewhere should the law surrounding foreign trusts in New Zealand be changed.
Conversely, Prime Minister John Key, has said it would be a dangerous knee-jerk reaction to the Panama papers to simply ban foreign trusts from operating in New Zealand.[13] Key believes foreign trusts have played a legitimate role in New Zealand over the years, and an outright ban could have unintended consequences for tax structure in New Zealand. Furthermore, he has stated that New Zealand has excellent tax rules, and this is supported by tax expert, Terry Baucher, who is confident that Inland Revenue would be able to cross-reference any anomalies. Moreover, another solution could be a beneficial ownership and activities register, accessible only by tax and enforcement authorities, which would allow the IRD to monitor any illegal activity whilst leaving legitimate commercial deals in peace.[14][x_pullquote type="right"]Key believes foreign trusts have played a legitimate role in New Zealand over the years, and an outright ban could have unintended consequences for tax structure in New Zealand.[/x_pullquote]
In addition to the sentements expressed by Key and Baucher, Roger Thompson, who is a co-founder of tax firm Bentley’s and was named in the Panama Papers, has defended the use of foreign trusts.[15] Thompson has stated that New Zealand being painted as a tax haven is a gross exaggeration, and that foreign trusts can offer protection and flexibility for overseas individuals who might be susceptible to arbitrary state seizure of assets. A current study estimates there could be at least 11,000 of these foreign trusts within New Zealand, which could potentially earn the country as much as $50 million in professional fees.[16] Furthermore, other experts believe the foreign trust issue is not a New Zealand issue, and that the New Zealand government should be telling their overseas counterparts to tighten their own rules regarding their residents not paying tax.[17]
It is implicit from the Panama Papers that foreign trusts in New Zealand do play a part in the practice of tax avoidance around the world, although the exact extent to which we contribute to this problem is unknown. Regardless of how large our role in global tax evasion actually is, perception often becomes reality, and consistent criticisms of our tax system arguably have the potential to tarnish New Zealand’s reputation in the long run. It remains to be seen what, if any, measures New Zealand will take in response to this situation.
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[1] Editorial “Review could change NZ trust laws” Radio New Zealand (online ed, New Zealand, 12 April 2016).[2] Editorial “Labour would ban foreign trusts” Radio New Zealand (online ed, New Zealand, 8 May[3] The FindLaw Team “What is a trust?” FindLaw New Zealand <http://www.findlaw.co.nz/articles/4238/what-is-a-trust.aspx>.[4] Richard Taylor “Using New Zealand based foreign trusts” (2015) 22(1) JITTCP 27 at 28.[5] Deborah Russell “Foreign trusts 101: a plain English introduction amid the Panama Paper haze” The Spinoff (online ed, New Zealand, 10 May, 2016) <http://thespinoff.co.nz/politics-media/10-05-2016/foreign-trusts-101-a-plain-english-introduction-amid-the-panama-paper-haze/>.[6] Tom Pullar-Strecker “Foreign trusts hiding darker secrets than tax avoidance, says expert” Stuff (online ed, New Zealand, 5 April 2016).[7] Deborah Russell, above n 3.[8] Tom Pullar-Strecker “Panama Papers: IRD says it has probed foreign trusts as experts fret” Stuff (online ed, New Zealand, 5 April 2016).[9] Tom Pullar-Strecker “Blunt warning for foreign trusts that NZ’s rules will tighten” Stuff (online ed, New Zealand, 13 May 2016).[10] Patrick O’Meara “Govt warned foreign trust quick fixes not enough” Radio New Zealand (online ed, New Zealand, 18 April 2016).[11] Gareth Morgan “Panama Papers and a foreign squatters tax” National Business Review (online ed, New Zealand, 12 May 2016).[12] Patrick O’Meara, above n 12.[13] Editorial, above n 2.[14] Ron Pol “Ron Pol says 'tax haven' misses the point: New Zealand’s reputation offers a competitive advantage, and opportunity” Interest (online ed, New Zealand, 11 April 2016).[15] Editorial “Mossack Fonseca NZ’s registered office responds” Radio New Zealand (online ed, 9 May 2016).[16] Gyles Beckford “Is NZ a tax haven or safe haven?” Radio New Zealand (online ed, New Zealand, 13 April 2016).[17] Dene Mackenzie “No easy foreign trust fix seen” Otago Daily Times (online ed, 6 May 2016).