Little versus Key on trusts and havens

In question time in Parliament today Andrew Little and John Key clashed over foreign trusts and tax havens following the release of the Shewan report.

Tax System—Overseas Trusts and Disclosure Regime

2. ANDREW LITTLE (Leader—Labour) to the Prime Minister: Does he stand by his statement that “tax havens are where there is non-disclosure of information. New Zealand has full disclosure of information”, given the Shewan report “concludes that the existing foreign trust disclosure rules are inadequate” and “not fit for purpose in the context of preserving New Zealand’s reputation”?

Rt Hon JOHN KEY (Prime Minister): Yes, and I note that Mr Shewan this morning confirmed that New Zealand does currently have full disclosure of information. As he explained, records are required to be maintained by trusts, and if they are asked to exchange that information, they must do so. Mr Shewan has recommended extra measures that will see that information provided to the Inland Revenue Department (IRD) through a searchable register.

Andrew Little: Does he agree with the Shewan report that “there is a reasonable likelihood that the regime is facilitating the hiding of funds or evasion of tax”; if so, why has he consistently denied that there is a problem?

Rt Hon JOHN KEY: I cannot confirm that one way or the other, because I do not have any access to the source document, and Mr Shewan himself was unable to find any evidence that that was the case.

Andrew Little: Does he agree with the Shewan report that “under current law and enforcement practices the risk of detection by authorities is low.”; if so, why has he consistently claimed there is no problem?

Rt Hon JOHN KEY: I certainly agree with Mr Shewan that there can be improvements, because by having that information at the IRD’s level in the searchable register, it makes it easier. But New Zealand has complied with every request it has had. The same information will still be collected, and in fact under the changes that the Government has made, including the extension of the automatic exchange of information, the rules around the Foreign Account Tax Compliance Act, and others, have shown that, actually, New Zealand, by the way, does have that information and it does give full disclosure.

Tim Macindoe: What does the independent Shewan report have to say about claims that New Zealand is a tax haven?

Rt Hon JOHN KEY: It concludes that such claims are wide of the mark. The report says: “The tax treatment of foreign trusts follows New Zealand’s long established and principled policy of not imposing New Zealand tax on foreign source income derived by non-residents.” The report goes on to say: “It does not result in New Zealand being a tax haven under established OECD criteria.”

Andrew Little: Does he agree with the Shewan report that “… New Zealand is part of a global tax police force … to clamp down on aggressive tax practices.”; if so, why has he allowed New Zealand trusts to dodge other countries’ tax?

Rt Hon JOHN KEY: New Zealand’s primary purpose, from an IRD perspective, is to preserve our own tax base. Of course, it is also to have good international tax practice, and we do. As the Shewan report quite correctly says, New Zealand ranks right at the top for best international tax practice.

Andrew Little: Which is true: his claim that we provide full information to other Governments, or the Shewan report’s finding that “the paucity of information currently disclosed … appears to limit IRD’s ability to proactively provide assistance to foreign revenue authorities.”?

Rt Hon JOHN KEY: The member is selectively trying to quote from John Shewan, when this morning he made it quite clear onMorning Report that, in fact, actually, the situation is that New Zealand does have full disclosure. Mr Shewan is not recommending a significant widening of the amount of information collected; what he is recommending is that there should be a searchable register held at IRD’s level.

Tim Macindoe: What reports has the Prime Minister seen on the appointment of Mr Shewan to lead the independent inquiry into foreign trust disclosure rules?

Rt Hon JOHN KEY: I have seen several reports. The first was the joint statement from the finance Minister and revenue Minister describing Mr Shewan as “a highly regarded tax expert”. A second report claimed Mr Shewan had advised the Bahamas on how to preserve its status as a tax haven. This led to a third report—interestingly enough, actually, released 2 hours before an All Blacks test match—where the same source admitted he was completely—

Mr SPEAKER: Order! I thank the Prime Minister but I do not see any ministerial responsibility. [Interruption] Order! I want substantially less interjection from members to my right.

Andrew Little: If at least one member of the House is capable of accepting when he has got it wrong and publicly acknowledging that, when is he going to acknowledge to the public of New Zealand that he misled them about the state of our foreign trust tax laws?

Rt Hon JOHN KEY: I have not misled the New Zealand public. We certainly commissioned a report and made sure that that report comes up with some recommendations. But if I had misled the New Zealand public, I would not hide behind the liniment bottles and try to release that apology 2 hours before an All Blacks test match and pretend no one saw it. I would have the courage of my convictions.

Andrew Little: Why did he block efforts to fix foreign trusts in 2013, when the Shewan report finds that they helped tax evasion, that the risk of getting caught is low, and we do not give assistance to countries trying to stop tax-dodgers?

Rt Hon JOHN KEY: In answer to the first part of the question, the member is incorrect. In answer to the second part of the question, the Shewan report makes it quite clear that New Zealand has a very high international reputation. In fact, it says that the only damage done is by misguided New Zealand politicians trying to score domestic political points, and in fact internationally there was virtually no coverage of New Zealand, because it is well respected for what it does.

Andrew Little: Is it not time for him to stop playing silly buggers and admit what the IRD told him in 2013, what John Shewan told him last week, and what every New Zealander knows: that his Government has been harbouring foreign tax-dodgers for far too long?

Rt Hon JOHN KEY: The member, if he wants to look at responsibility, should get out a mirror, and stop apologising to John Shewan 2 hours before an All Blacks test match, and have the guts to get up and say it in this Parliament—that he is sorry.

Shewan recommends trust disclosure improvements

The report on the John Shewan inquiry into foreign trusts and tax has been released today. There’s nothing very surprising in it.

It makes a number of recommendations particularly on foreign trust disclosure rules, and John Key says they look sensible and the Government is likely to adopt most recommendations.

There’s been a number of attempts to score political points over this but I think that improving how New Zealand deals with foreign trusts is a good outcome regardless of how this came about.

Conclusions

1.2 The Inquiry concludes that the existing foreign trust disclosure rules are inadequate. The rules are not fit for purpose in the context of preserving New Zealand’s reputation as a country that cooperates with other jurisdictions to counter money laundering and aggressive tax practices.

1.3 The Inquiry considers that a significant increase in information disclosed when a foreign trust sets up, annual reporting and increased enforcement, will satisfactorily address the issues identified. Banning foreign trusts or removing the current tax exemption is not considered to be necessary or justified.

1.4 In theory, New Zealand’s existing tax disclosure and exchange of information arrangements should be sufficient to deter tax abuse, and its anti-money laundering rules should ensure that funds held by foreign trusts are from legitimate sources. However, under current law and enforcement practices the risk of detection by authorities is low. The Inquiry considers that the disclosure requirements can be justifiably described as light-handed.

1.5 Strengthened disclosure requirements should act as a deterrent to offshore parties looking to use New Zealand foreign trusts for illicit purposes.

1.6 The Panama Papers have not been released publicly by the journalists who have them and were not available to the Inquiry. There has been no direct evidence of illicit funds being hidden in New Zealand foreign trusts, or of tax abuse. However, based on the work undertaken, including a review of IRD files, the Inquiry considers it is reasonable to conclude that there are cases where foreign trusts are being used in this way. The current legislation, regulations and practice that govern disclosures by foreign trusts present both the potential and the environment for this to occur.

1.7 Publicity around the Panama Papers has the potential to cause reputational damage both to New Zealand and to many other countries. The Inquiry considers that any significant adverse impact on New Zealand internationally is unlikely if appropriate action is taken to tighten the disclosure rules.

1.8 Foreign trusts, like domestic trusts, are a legitimate vehicle used primarily to manage family wealth. New Zealand is an attractive location in which to base a foreign trust as it offers stable political, judicial and legislative settings and respect for property rights and privacy. The supporting services industry is significant, and generally comprises skilled and efficient professionals.

1.9 Allowing foreign trusts to establish in New Zealand is consistent with the Government’s policy of maintaining an open economy which welcomes foreign investment and an active financial services sector. 2

1.10 The tax treatment of foreign trusts follows New Zealand’s long established and principled policy of not imposing New Zealand tax on foreign source income derived by non-residents. It does not result in New Zealand being a tax haven under established OECD criteria. However, the Inquiry notes that the classification tax haven is an ambiguous label that is now of historic relevance. It is best not used as a basis for decision making without much deeper inquiry.

1.11 New Zealand has a strong and well-deserved reputation as an active member of OECD and other international bodies working to clamp down on global corruption, money laundering, financing of terrorism and tax abuse. It is also regarded as a country that leads by example and it rates well in international peer reviews. Actions to increase disclosure requirements would be consistent with New Zealand’s commitment to global transparency initiatives, and can be expected to be well regarded by other countries, particularly those in our tax treaty network.

1.12 Before the Inquiry began, the Government had introduced legislation to counter the use of Look Through Companies (LTCs) in foreign trust and other structures to derive foreign source income in excess of a low amount. While the Inquiry was underway the impending introduction of phase 2 of the Anti-Money Laundering (AML) rules was announced. This is expected to be enacted in 2017 and will result in lawyers and accountants being required to apply the AML rules. The Inquiry supports these initiatives and thinks that they will reduce the scope for inappropriate use of foreign trusts.

1.13 The foreign trust regime does not appear to be inconsistent with any specific obligations under current international agreements to which New Zealand is a party. However, as there is a reasonable likelihood that the regime is facilitating the hiding of funds or evasion of tax in some instances, the Inquiry considers that New Zealand’s tax treaty partners would have a legitimate expectation that some action will be taken.

1.14 The recommendations in this report are designed to achieve a balance between allowing foreign trusts to continue in New Zealand and materially reducing the scope for foreign trust structures being used for illicit purposes such as hiding illegal funds or evading tax. If adopted, the changes may result in a reduction in the number of foreign trusts, in particular those that rely on nondisclosure to achieve their effectiveness.

The report is here: Government Inquiry into Foreign Trust Disclosure Rules: Report

 

No easy foreign trust and tax fix

It’s easy for opposition parties to jump on the ‘foreign trust bad, foreign companies bad, fix it now!’ bandwagon.

It’s a lot more difficult to do anything worthwhile that will address the problems.

Dene Mackenzie at ODT points this out in No easy foreign trust fix seen.

Changing New Zealand’s tax laws relating to foreign trusts will not be easy, despite calls from opposition MPs and others calling for tax loopholes to be closed.

The easiest way to solve the problem would be for overseas countries to adopt tax rules similar to New Zealand’s, rather than trying to change the trust laws in this country, tax professionals say.

It would obviously be easiest for new Zealand to do nothing and have other countries change, but that’s not just going to happen on it’s own.

Labour Party leader Andrew Little…

…yesterday lambasted the Government’s inquiry into foreign trusts saying Transparency International had warned the inquiry into trust disclosure rules failed to address fundamental issues raised by the Panama Papers.

Transparency International warned the narrow terms of reference meant the inquiry “will merely investigate foreign trusts rather than tackle the broader spectrum of financial crime risks associated with New Zealand companies and trusts”, he said.

But beyond the Opposition rhetoric:

Tax professionals contacted by the ODT said the problem was not so simple.

“I think it’s fair to say they [opposition MPs] sense a political opportunity to fire a shot at the PM without understanding the big picture. It’s not unusual for IRD to have things on their work list and then remove them just as quickly as other priorities come up,” one expert said.

Governments around the world were concerned about big companies circumventing tax laws by parking profits offshore and about multinationals not paying enough tax.

But Governments around the world a struggling to find effective ways of improving things.

New Zealand’s foreign trust laws had a loophole that could be exploited by overseas people, despite the law being in place to protect New Zealand’s tax base.

Because of the way New Zealand’s law worked, overseas people could set up a New Zealand foreign trust to park profits that New Zealand could not tax.

If the trust had no New Zealand resident beneficiaries, no tax would be paid.

And because the trusts had to be set up and administered correctly under New Zealand law, some New Zealanders had made money by setting up trustee services to run the trusts.

Some New Zealanders are now saying this country should be seen as having a regime that allows tax avoidance.

But unlike a tax haven, which attracts capital, the foreign trust regime was not put in place to do that, tax professionals said.

“This is not easy to change as it is a fundamental building block of our tax system. We want New Zealand residents to pay tax here.”

Foreign trusts are not really a New Zealand problem…

Most tax experts believed the foreign trust issue was not a New Zealand problem and the Government should be telling overseas administrations to tighten their rules which allowed their residents to set up foreign trusts to avoid paying tax.

Even if New Zealanders had investments in a tax haven overseas, eventually the money could find its way back to New Zealand and be taxed.

…but Opposition politicians are trying hard to make it a political problem here.

One of the worst things that could happen as a result is making changes to try and appease voters but that weaken our tax and trust laws.

It’s good to see some balanced analyse of the overseas trust and foreign company tax issues from the ODT.

A slanted Panama/trust poll

Activist group Action Station have commissioned and used a poll as a part of their campaign on tax and foreign trust issues – good on them for pushing for better tax and trust laws, but their polling and publicising are slanted.

The Herald reported on a UMR poll conducted for Action Station:

Panama Papers: Majority of Kiwis ‘concerned’ about New Zealand’s new reputation

Pressure over the Panama Papers on the Government is rising after a poll showed a majority of New Zealanders were concerned about the country’s new reputation as a tax haven.

A poll by UMR Research, conducted for activist group ActionStation, showed 57 per cent of respondents were “concerned” about New Zealand being a tax haven and the misuse of our foreign trust regime for tax evasion purposes. Just 23 per cent said they were “not concerned” about the issue.

ActionStation spokeswoman Marianne Elliot said the results of the poll spoke for themselves.

“A majority of New Zealanders are concerned that sloppy trust laws, left open by the current and former governments, have allowed the world’s rich to avoid paying their fair share of taxes. Most New Zealanders are not satisfied with the Government’s current response,” Elliot said.

But the poll didn’t determine that a majority of New Zealanders thought that. Elliot has embellished the poll results with her own phrases.

Has Matt Nippert misquoted Elliot? No, he appears to have cut and pasted her words from an Action Station press release Poll shows Govt seen to be handling tax haven issue “poorly” apart from removing the first part:

ActionStation spokesperson Marianne Elliott says: “The polling shows that like ActionStation members, a majority of New Zealanders are concerned that sloppy trust laws, left open by the current and former governments, have allowed the world’s rich to avoid paying their fair share of taxes. Most New Zealanders are not satisfied with the Government’s current response.”

Nippert also reported:

The UMR poll, of 750 people between April 14 and 18 and with a margin of error of 3.6 per cent, also asked respondents how they thought the Government had handled the fallout from the Panama Papers and whether they thought the review of foreign trusts by former PWC chairman John Shewan, was an adequate response.

Again that looks to be picked out of the press release. But there was a PDF attached that shows what was actually asked in the poll.

Using a scale of 1 to 5 where 1 means very concerned and 5 means not concerned at all, how concerned are you about New Zealand being a tax haven with foreign trusts being used by people overseas for tax evasion purposes?

  • Concerned (1+2) 57%
  • Neutral (3+ Unsure) 20%
  • Not concerned (4+5) 23%

Elliot portrayed this as 57% versus 23% – excluding 20% stated in the poll as ‘neutral/unsure’. Being neutral could mean unconcerned.

But worse is the loading of the question. It refers to New Zealand ‘being a tax haven with foreign trusts being used by people overseas for tax evasion purposes’ but this is a disputed accusation and unproven.

The second question:

Now, using a scale of 1 to 5 where 1 means very well and 5 means very poorly, how do you think the New Zealand government is dealing with the problem of New Zealand being a tax haven with foreign trusts being used by people overseas for tax evasion purposes?

  • Handling well (1+2) 21%
  • Neutral (3+ Unsure) 33%
  • Handling poorly (4+5) 46%

This is an even more loaded question stating that there is a problem of New Zealand  being a tax haven and is used for tax evasion purposes.

The third question:

As you may be aware the government has appointed John Shewan, former chair of PricewaterhouseCoopers, to review New Zealand’s foreign trusts laws. Do you think that this is an adequate response to the foreign trusts issue or do you think a full public independent enquiry is needed?

  • An adequate response 31%
  • A full public independent inquiry is needed 52%
  • Neither/unsure 17%

As well as this question implying that John Shewan’s inquiry may not be be full or independent it (Action Station) chooses to describe Shewan as “former chair of PricewaterhouseCoopers”.

They chose not to describe Shewan as:

  • one of the “leading tax practitioners” at PWC over 28 years,
  • nor that after that he was “an adjunct professor of accountancy at Victoria University” since then,
  • nor that he “has been appointed by Labour and National-led governments to official bodies looking into tax”,
  • nor that he served an appointment to the Tax education Office for 9 years,
  • nor that he was part of the Tax Working Group that advised the Government in 2009,
  • nor that he is “an established commentator on tax and policy matters,
  • nor that he has been involved also in a number of high-profile tax cases”.

Source Radio NZ: Who is John Shewan?

Action Station asked the questions they wanted to, got the results that they wanted,  Elliot embellished the results with her own phrases, and Nippert seems to have simply quoted her press release.

Before having this poll done Action Station had already decided their stance – see New Zealand is a Tax Haven. Prime Minister, this needs to change.

All this media attention has created an opportunity for change by exposing New Zealand’s role in endorsing international tax dodging. We need to move quickly to seize this opportunity and call for real change, making sure the message that our trust laws need to be reformed is at the centre of the debate.

So sign the petition now calling for our government to close the loopholes that allow the world’s rich to escape paying their fair share in tax by using foreign trusts in New Zealand. We do not want New Zealand to be a tax haven for the world’s wealthiest 1%.

This is how Action Station describes themselves:

ActionStation is here to help defend our common goals; a fair society, a healthy environment and accountable politics through effective online issues-based campaigning.

They should be held accountable too, in this case for using questionable poll practices and then misrepresenting the results as a part of their campaign.

I’m all for questioning whether our tax and trust laws and practices are good enough. I look forward to the result of Shewan’s inquiry.

But I think a fair society needs fair campaigning on issues, and fair use of polling in campaigning.