Written By: Matthew Hemmings – Corporate Finance
By 2016 the number of foreign trusts in New Zealand had more than tripled from 2008, reaching 10,697, according to New Zealand’s Inland Revenue Department (IRD). Those trusts were bringing around $50 million in professional fees to the country. At that time, the Panama Papers scandal revealed that New Zealand was used as a tax haven by many South American businessmen.
Indeed, New Zealand set up the trust system in the mid-1980s when it deregulated and freed up much of its financial sector.
New Zealand’s tax authority, the Inland Revenue Department, has oversight over trusts, which are required to be registered. But trusts were not required to file annual returns if their activities were overseas and no revenue was accounted for in New Zealand.
Of course, the IRD can request details and transmit information on the trust activities to other foreign tax authorities upon their request and depending on its bilateral or OECD (Organisation for Economic Co-operation and Development) agreements with other countries. That was, however, rarely the case in the past. It has been alleged, consequently, that the trusts were being used to dodge taxes in other countries, as well as launder criminal proceeds.
Although the New Zealand government rejected the allegations, it implemented a new law that is now in force.
The Panama Papers affair revealed the extent to which New Zealand-based trusts were being used by foreigners to manage, and in some cases conceal, income and assets. The New Zealand government has then firstly passed a set of new rules, which entered into force in July 2017. Under this new regime, foreign trusts must file annual returns. Registration is not enough anymore; they have to declare their turnover, and the information given to the IRD also includes who owns the trust, what assets are in it and who the beneficiaries are. Beneficiary owners are identified—no longer only the accounting or legal consultant representing the trust.
The IRD is also promising to automatically pass on the details about those with New Zealand foreign trusts to other countries without being asked. Until now, New Zealand was automatically passing on data only to Australia. After this first move to tighten trust tax rules, it seems that the number of such trusts has largely decreased. Inland Revenue says it has received fewer than 3,000 applications to register trusts following the new rules. Another 3,000 told the tax department that they did not want to be part of the new regime, and some 6,000 are unaccounted for.
Two interpretations can be drawn about such a large decrease in the trust numbers:
- some of them may have chosen to move away to other tax havens, while
- some may also have decided to simply close, considering the risks and the costs incurred by maintaining a legal entity in New Zealand.
New Zealand authorities (tax, opposition and government) are now discussing further reinforcing its tax laws.
Foreign-controlled trusts are currently taxed only on income earned in New Zealand, leaving foreign income untouched. The registration obligation has put in the limelight a large willingness to escape any further legal constraints in New Zealand. For the government in place, taxation on overseas turnovers could totally kill the industry in New Zealand.
Judith Collins, Minister of Revenue, has confirmed that plans to tax the foreign income of New Zealand-based trusts run by overseas residents will probably see many more of them shut down. “I don’t think there’s going to be nearly as much activity in that area as there has been in the past, and I think that’s probably a reasonable thing for New Zealanders,” she explained on Radio New Zealand’s Morning Report.
And accounting firms are also warning about the risk. David Snell, executive director of tax for the accounting firm EY, said, “Having just gone through one set of reforms in regulatory reforms around disclosure, to have another set of reforms, in terms of tax payable, the timing is awkward, and the reforms do sit in an inconsistent way with the whole way our trust rules have been designed.”
However, according to the opposition, the Labour Party, the decrease in trusts illustrates that the legal montages, used by businessmen to avoid taxation, were not legitimate. Labour’s revenue spokesperson Michael Wood said the government did everything it could to resist having an inquiry or changing the rules but was eventually forced to. “Three-quarters of these foreign trusts completely disappeared when a very minimal amount of transparency has been required,” he said. “Suddenly like bats exposed to the sunlight, they’ve fled into a cave somewhere”.
According to Minister of Revenue Judith Collins, New Zealand was just doing the right thing. “Part of our commitment internationally is to help other countries to protect their tax base and on the same basis they help us…. It’s worth it for us not to be used for hiding any money, because we don’t want anyone hiding money in someone else’s place either.”
For sure, the Panama Papers made New Zealand become conscious of the tax haven it had become. Reactions have led to a new, more transparent tax system. The question of increasing taxes on overseas foreign trusts remains.