Wake up call for well-regarded tax system

Peter Dunne knows the new Zealand tax system well, having been an MP for three decades and Minister of Revenue for a number of years.

On his blog this week he says that while New Zealand’s system is generally well regarded the Panama papers trust/tax issue is a wake-up call from complacency.

New Zealand’s tax system is generally well-regarded. In part that is because of our focus on a broad base, low rate approach to personal and corporate taxation, and in part it is because our system is relatively easy to comply with as a consequence.

However, there are now clear signs that the comparative simplicity and transparency of the New Zealand tax system, under which we have basked for so long, may not be the advantage we once thought it was.

Recent events like the global revelations about the tax paid by certain multinationals who are everywhere when it comes to their operations, but seemingly nowhere when it comes to their tax liabilities, and the release of the Panama Papers make it clear that New Zealand’s tax system with its emphasis on self-assessment, is being used in a way that was never intended to shelter various forms of international income.

For the first time, we are having to confront the label of “tax haven”, and it is uncomfortable.

Now, the solutions to these issues are not easy, nor limited to any one country, and it would be the height of idiocy to believe that New Zealand can simply draw up its ramparts, and all the problems will go away.

In a global environment, with capital flows occurring in the twinkling of an eye, it is just not that simple, and any politician who suggests otherwise is simply a liar.

Some opposition politicians are at least implying that New Zealand should just ‘fix’ the problems. They are either ignorant, or lying.

Any lasting solution has to be an international one, which it is why it is important we continue to work alongside the OECD and like-minded countries to achieve a viable outcome.

Our self-assessment system has generally worked well as far as local taxpayers go, but we may be a little naïve in assuming that large, foreign investors seeking a tax bolt-hole will be just as genuine in playing by our existing rules.

Tax is essentially the price we pay to belong to civil society. Implicit is the assumption that we pay our share, according to our means. In return, the state provides certain key services from which we all benefit: health, education and welfare services; public security and national defence, for example.

Any perception that some are not paying their share, or worse, are actively subverting the system to their advantage, which may have nothing to do with New Zealand, other than we are a convenient shelter for income, starts to tear at that implicit national contract.

And it appears that some politicians are prepared to try to build perceptions for political advantage – perceptions that could be damaging to the country if they get some legs.

I still believe in the basis of our broad base, low rate tax system, with its relatively easy levels of compliance.

Our challenge now is to ensure that in a rapidly changing set of international circumstances our ability to enforce our tax rules and ensure compliance; gather all the tax revenue properly due; and, ensure everyone pays their fair share, is not compromised.

The Panama Papers’ disclosures are a sobering and timely wake-up call in that regard.

Hopefully the John Shewan inquiry will either assure us our tax system is about as good as it could be, give or take a few tweaks.

Or it will highlight actual deficiencies that can practically be addressed.

Full post here.


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.

The PM/lawyer/trust story

NZ Herald and One News are making a big thing of a story about John Key, his lawyer (who  is apparently is not a lawyer any more), the Antipodes trust company and lobbying.

One News: John Key’s lawyer’s involvement in lobbying government over tax laws revealed

John Key’s personal lawyer lobbied the Government not to change the controversial tax laws.

This is the latest twist in the Panama Papers saga – and it’s raising more questions for the Prime Minister and the role of his lawyer Ken Whitney.

Earlier this month Mr Key shrugged off the revelation that he had a cash deposit with Antipodes Trust, a company that specialises in foreign trusts. His office explained this away by saying the deposit was lodged with Mr Whitney, who had recently moved firms to the Antipodes Trust.

However, Companies House documents show that Mr Whitney has been involved with the firm since its inception more than 20 years ago.

And Official Information Act document also reveals that Mr Whitney and the Antipodes Trust were heavily involved in lobbying the Government not to change the controversial tax rules.

NZ Herald: The Antipodes email: The PM, his lawyer and foreign trusts

John Key’s personal lawyer cited a conversation with the Prime Minister when lobbying a Minister about a potential crackdown on the lucrative foreign trust industry.

Time and analysis will show whether there is anything significant or damaging to Key in this story.

There’s another interesting aspect to the story – it appears to have been provided to selected news outlets, One News, the Herald and Radio NZ, and not given to Newshub or Stuff, at least not initially.

Giving one or some media outlets news, in this case one print, one television and one radio outlet, is a technique used to get those outlets to give the news more prominence as an ‘exclusive’ .

The story came from the Greens, who clearly decided to share w tvnz, rnz & herald.

Clearly from Greens – are you saying that was shut out?

Anybody there from Greens – was shut out from story?

it seems fairly obviously it was provided first to Tvnz over tv3 like it was to Herald over stuff

So its just a queue waiting for a press release? Sad.

Is tax a positive thing?

To some people it seems that tax is a positive thing – as long as it’s others who pay more of it.

Liam Hehir raises this in Panama Papers have little impact so far in New Zealand

At an even more abstract level, the question is raised whether the Panama Papers point to a more generalised problem of wealthy people exploiting loopholes to minimise tax in a way that is legal, but somehow unfair.

The Panama Papers may not themselves be directly on point here as far as New Zealand is concerned, but the argument is that they serve as a useful entrée to the subject. And it is an interesting debate.

The purpose of taxation used to be the efficient raising of the revenue required for state spending.

There now seems to be a view that, far from being a necessary evil, the levying of tax is a positive thing unto itself. Under this model, it’s greedy for those who already pay the most to not want to pay more than they are legally required and it’s somehow not greedy for the rest of us to demand that they do.

A good philosophical question. But if you want New Zealanders to treat it as food for thought, you’ll need to serve up more than the thin gruel of lame international comparisons.

Is the paying of tax a positive thing?

Or is it a necessary evil that evil rich people should be made to pay more of?

Poll driven flip flop

It was classic John Key – last week he batted off and played down criticisms of New Zealand tax and trust legislation, but he arrived into this week suggesting and then announcing a review of those laws by an ‘international tax expert’, John Shewan.

Media and political opponents predictably called this a flip flop and a u-turn. And it didn’t take long before there were accusations of being internal poll-driven.

Danyl at Dim-Post in Panama Papers thoughts:

In terms of Key’s reversal from last week on whether our trusts need investigation, I wonder if National now have a formal process in which they respond to breaking stories like this.

Phase one. Deny everything while blaming Labour.

Stage two. Poll.

Stage three. If the polling hits some pre-arranged benchmark then reverse your position and/or announce an inquiry.

Nick R responded to that:

I reckon that’s probably how it works. And it works very well, because the polling seems to be very accurate and the occasional abrupt U-turn in policy position never seem to hurt the PM at all. When he does this, it is so fast that it barely seems to attract any comment at all, and certainly not negative comment.

It often does attract comment.Like amirite at The Standard:

How’s the Dearest Leader polling? Fantastic, only he had to flip flop 360 degrees on his ‘NZs foreign trusts practices are legit-stance, move on, nothing to see here’ to saying he’ll appoint an independent expert to review the policies.

I thought a flip flop would have been more like 180 degrees but the intent of this comment is clear enough.

And like the Greens in Inquiry into foreign trusts must restore NZ’s reputation:

The Green Party is welcoming John Key’s U-turn on foreign trusts…

Danyl happens to be on the Green campaign committee but this could be a coincidence.

Back at Dim-Post Tinakori posted:

My god, a government that often listens to public opinion and/or waits to see if there is substance in an issue. Is that weird or what?

Surely you don’t expect a government to announce an inquiry into a subject the moment it becomes a news story or an issue in Parliament.

Winston Peters and the Greens seem to be quick to call for inquiries, despite a lack of evidence being available. Peters in particular is keen on promoting fishing expeditions based on little more than his innuendo.

The public sector would be engaged in nothing but inquiries if that were the case.

Some issues resonate and some don’t. Some issues have substance and some don’t. Some issues have legs and others don’t…….

Once again, the test is what would you be saying if the incumbent government was one you favoured. I can see the blog post now demanding a measured response to the issue du jour.

That’s politics.

John Key has mastered the art of dampening down or fobbing off issues, and then after a while reacting contrary to his initial indications.

Even if this is in response to polls gauging what the public think and want is not a bad thing at all in a democracy.

And I’m sure David Farrar isn’t the only expert Key goes to for advice.

I’m sure Key gets some advice from the advisers that work in his office, from Government departments and from people around the country and around the world.

While he is open to criticism with the way he manages issues and manages the media, being prepared to react in line with public opinion should be seen as a positive.

And Key’s opponents seem to flip flop between accusing him of being poll and public opinion driven, and being an elite rich person who is out of touch with ordinary New Zealanders.

That’s more like flip flops in futile frustration.

The media just seem to love exaggerating things, sometimes to extremes, to create headlines and drive clicks.

Review of foreign trust disclosure

As indicated by John Key this morning the Government have announced a review of foreign trust disclosure rules.

Beehive advice of the announcement of review of foreign trust disclosures

Cabinet today agreed to appoint highly regarded tax expert John Shewan to conduct an independent review of disclosure rules covering foreign trusts registered in New Zealand, Ministers Bill English and Michael Woodhouse say.

“Ministers decided that in light of the ‘Panama Papers’ being released last week, it’s worth looking at whether the disclosure rules are fit for purpose and whether there are practical improvements we can make,” Mr English says.

“Our rules require foreign trusts to be registered and to keep detailed financial and other records, which can be requested by Inland Revenue and passed on to tax authorities in other countries.

“In addition, we have a strong tax treaty network with the express purpose of discovering and preventing tax avoidance.

“As we’ve said, we’re open to considering changes to disclosure rules if that is warranted. So we’ve asked Mr Shewan to take a thorough and independent look at the current regime to check that it’s fit for purpose,” Mr English says.

The terms of reference include reviewing foreign trusts’ disclosure rules as they apply to record keeping, enforcement and the exchange of information with other tax jurisdictions.

Mr Shewan has been asked to report back to the ministers by 30 June.

Mr Woodhouse says it’s important to keep the foreign trusts issue in context.

“Claims that New Zealand is a tax haven are wrong. We have a robust tax base and we’re operating under stronger disclosure rules introduced by the previous Labour government in 2006.

“As Michael Cullen said at the time, he sought to develop a policy that worked for all concerned – enabling New Zealand to cooperate with other tax jurisdictions, while not disrupting the legitimate financial transactions of foreign trusts.

“Just three years ago the OECD rated New Zealand as “compliant” in this area – the highest possible rating. It’s due to look at our tax transparency rules again next year.

“In the meantime, the OECD has called a specially-convened meeting in Paris this week to consider issues raised by the ‘Panama Papers’ and our Inland Revenue is sending a representative to that meeting.

“We will certainly consider any issues raised there and we’re prepared to look at changing the disclosure rules if Mr Shewan’s review finds this is warranted,” Mr Woodhouse says.

It hasn’t taken opposition parties and the Twitterati to start their Shewa bashing, byt he is regarded was probably the foremost tax expert in New Zealand.

Panama papers: NZ to examine tax laws

It hasn’t taken long for John key to switch to damage control over the Panama papers. he has announced that the Government will get an international tax expert to ‘independently examine New Zealand’s tax laws in the wake of the Panama Papers revelations’.

Newshub – Key: Independent look at NZ tax law after Panama

The Government is hiring an international tax expert to independently examine New Zealand’s tax laws in the wake of the Panama Papers revelations

Prime Minister John Key told Paul Henry he’s taking a paper to Cabinet this morning proposing the appointment. Mr Key says changes may be necessary.

“We’re ranked in the top 20 in the world for disclosure,” he says.

“Trust firms have to know the source of their revenue and they have to keep good records as they are regularly audited.

“If there can be improvements, we’ll make improvements and we’ll get this independent voice to look.”

This is after Key defending New Zealand’s trus and tax laws last week in parliament – see “New Zealand is not a tax haven”.

Key doesn’t agree with Winston Peters’ call for a Commission of Inquiry (that Labour supports) – Labour supports Panama Papers inquiry

Winston Peters wants a full scale investigation into whether the country’s being used as a tax haven and Labour’s Andrew Little agrees.

“It’s an issue about us being set up in a way that prevents other countries from collecting their fair amount of tax, and we shouldn’t be party to that. It ought to be inquired into,” he says.

A Commission of Inquiry does seem premature with only vague New Zealand connections to the Panama papers so far and it being likely to take months to examine the Panama papers.

Time will tell whether the international tax expert move will be enough damage control – an expert will be open to questioning about their credentials.

In the meantime the opposition attacks on key continue.

The Standard: Key changed the law to turn NZ into a tax haven

The definition is pretty simple: “A tax haven is a state, country, or territory where, on a national level, certain taxes are levied at a very low rate or not at all.”

New Zealand is a tax haven. We became a tax haven in 2011 as a result of a law change directly instituted by John Key. Chapman Tripp – “New Zealand’s leading full service law firm” – helpfully explains:

A publication dated 10 october 2011:

New Zealand now an attractive tax location for offshore managed funds

Foreign investors in a New Zealand fund with only foreign investments will now bear no New Zealand tax on their income, whether or not the fund distributes that income. The tax change, which came into force in September 2011, should make New Zealand managed funds an attractive alternative to funds resident in Luxembourg, Ireland or the Caymans.

Robins at The Standard:

The proposal to change to 0% tax was the direct instruction of John Key

The change to 0% tax went ahead (here’s the IRD’s page on Foreign investment PIEs), at which point NZ became a tax haven. End of story.

He also links to “the secrecy aspects of havens” – see the earlier post by Deborah Russell.

Expect Key to try to damp down any potential damage, while the Opposition will no doubt see this as their next big thing to beat National over the head with.

It’s far too soon to know how this will play out.

Panama papers: more on NZ to come

Peter Bale, head of the Center for Public Integrity involved with the investigation of and release of the Panama papers, says that it will take time to analyse the huge amount of data but is certain there will be New Zealand information revealed.

“You can be absolutely certain, I think, or as near to certain that there will be significant numbers of New Zealanders and of New Zealand entities, certainly New Zealand entities, within this data set.”

Bale was interviewed on The Nation this morning. This will be repeated tomorrow morning, or you can see the interview here.

Interview transcript relevant to New Zealand:

Lisa Owen: And turning to New Zealand, then, when will New Zealand be available? Have you looked at any New Zealand data yet? Will you look at it? What’s happening with the New Zealand side of things?

Peter Bale: I haven’t personally looked at New Zealand data. I haven’t personally been a journalist working on the project. I’m responsible for them, but I’ve left that very much to them. But I discussed it with them today. We have not had a media partner in New Zealand particularly on this project. There’s a number of countries where we just were unable to stretch fully to covering every country.

You can be absolutely certain, I think, or as near to certain that there will be significant numbers of New Zealanders and of New Zealand entities, certainly New Zealand entities, within this data set.

The history of New Zealand’s position on offshore companies, people registering trusts there from offshore and also things like New Zealand’s relationship with Niue and some of the other places that we know Mossack Fonseca has used, means that you should assume that there is a very strong New Zealand connection, and certainly with New Zealand-registered companies there.

Lisa Owen:  Sure. And will there be New Zealand names as well? Will there be New Zealand people as well?

Peter Bale: You can assume that too, I think, based on a discussion I had with my team today about this. And going back to some of the history that there’s been over the last four years and beyond with New Zealand companies and New Zealand individuals who have been active in this area of offshore companies and perhaps working with Mossack Fonseca, we’re pretty certain that there will be New Zealand names in there.

I just can’t go into more detail than that at the moment, purely because I haven’t looked at the data myself and we need to go deeper on it. But it is one of the countries that we… We now have many, many requests from media organisations who were not part of the wider team and from countries where we were unable to get to, or even whole industries that we were unable to analyse.

And so there’s still much more to come, I’m afraid. Actually, I’m not afraid of that; I’m quite excited by that. Still much more to come.

Lisa Owen: Okay. Some people will be afraid and others obviously excited. 12,000 trusts are here in New Zealand all because of this kind of tax avoidance. Does that make New Zealand a tax haven in your view, these 12,000 trusts?

Peter Bale: So, I’ve discussed this with my colleagues. I am not an expert, personally, in this area. Gerard Ryle, the director of the ICIJ, certainly believes that New Zealand is a favourable country for this kind of activity.

And I think New Zealand too knows that it has some issues with the ease of setting up trusts and the way trusts are identified. I think even the prime minister there has talked about this and noted that your trust law was last revised in 1988. So I think New Zealand recognises that there are issues there itself.

And I did note before I came here, New Zealand rates number four on the Transparency International Corruption Index, just under most of the Scandinavian countries, and Australia is number 13, so we all have issues in this area. But I am told that New Zealand does have some issues in this trust area, but I wouldn’t pretend to be an expert.

Report and full transcript at NBR: Kiwi at heart of Panama Papers leak ‘certain’ New Zealanders will be named


Panama papers, Putin and the US

Vladimir Putin was implicated by recently released Panama papers, but Putin claims the release was part of a US plot to weaken Russia.

The US State Department has rejected Putin’s allegations

NZ Herald: Putin says Panama Papers part of US plot to weaken Russia

President Vladimir Putin has denied having any links to offshore accounts and described the Panama Papers document leaks scandal as part of a U.S.-led plot to weaken Russia.

Putin also defended a cellist friend named as the alleged owner of an offshore company, describing him as a philanthropist who spent his own funds to buy rare musical instruments for Russian state collections.

Speaking at a media forum in St. Petersburg, Putin said Western media pushed the claims of his involvement in offshore businesses even though his name didn’t feature in any of the documents leaked from a Panamanian law firm.

Putin described the allegations as part of the U.S.-led disinformation campaign waged against Russia in order to weaken its government.

“They are trying to destabilise us from within in order to make us more compliant,” he said.

The Washington-based International Consortium of Investigative Journalists said the documents it obtained indicated that Russian cellist Sergei Roldugin acted as a front man for a network of Putin loyalists, and, perhaps, the president himself.

The ICIJ said the documents show how complex offshore financial deals channeled as much as $2 billion to a network of people linked to the Russian president.

Putin said Roldugin, a longtime friend, did nothing wrong. He said he was proud of Roldugin, adding that the musician spent his personal money to advance cultural projects.

The US State Department has responded.

State Department spokesman Mark Toner rejected the notion that the U.S. is behind the allegations. “I would reject the premise or the assertion that we’re in any way involved in the actual leak of these documents,” he told reporters in Washington.

The lack of prominent Americans named so far in the Panama papers raised some suspicions that the papers may have been filtered by someone with targeted interests. An explanation has been put forward – Mossack Fonseca simply didn’t have many US clients.

Washington Post reports:

One nagging question since the Panama Papers story broke is why so few prominent Americans have so far shown up holding offshore accounts.

The lawyer at the center of the scandal has an explanation: he prefers not to have them as clients.

In an interview with The Associated Press, Ramon Fonseca said that he and his German-born partner at Mossack Fonseca like to vacation in the U.S., but they have longstanding ties to Europe and have always focused their business there and Latin America. The few American clients the firm has taken are mostly to handle visas and other requests from Panama’s burgeoning expatriate retirement community.

Germany’s Sueddeutsche Zeitung, the newspaper that first obtained the 11.5 million confidential documents that make up the Panama Papers, said the files included copies of 200 American passports and 3,500 shareholders in offshore companies listed U.S. addresses. That’s a small fraction of the more than 220,000 offshore companies Mossack Fonseca says it has created in the past four decades.

No doubt there is a lot to come out yet.


Trust requires trust changes

After the Panama papers trust story broke pressure has been heaped on John Key and the Government over New Zealand’s association, with accusations that New Zealand is a tax haven that harbours illegal money hiding and laundering.

Key has a difficult and very important job in dealing with this.

Calls have been made to change how we allow foreign trusts to be formed here, with far better disclosure than Key’s claimed “full disclosure”.

Vernon Small: New Zealand’s trusted reputation demands changes to foreign trust rules

NZ deserves points for good behaviour on this front.

However, this is now an issue of reputation and New Zealand’s standing in the world.

And to claim that the required level of record keeping is “full disclosure”, as Prime Minister John Key did this week, is a bleak joke. To claim it negates accusations NZ is a tax haven – because we do not have such levels of secrecy – is equally laughable. If it doesn’t make New Zealand a “tax haven” – and it sure looks like one – it at the very least makes it “a haven” from scrutiny. Just look at the advertisements spruiking New Zealand’s advantages to foreign trusts.

However you look at it, Key made a significant political blunder this week by instinctively defending the tax and trust regime (and by extension those who might exploit it) in the face of domestic and worldwide suspicion. Don’t ask me, ask the supporters of Donald Trump and Bernie Sanders.

To make matters worse he cited the benefit to New Zealand – some $24 million in fees harvested by lawyers and accountants setting up and managing the funds. What price New Zealand’s reputation – something IRD and other officials had already warned about? And is it morally defensible to effectively say any loss of revenue from trusts here is some other country’s issue and we are focused on defending our own tax base? An “each country for itself” approach hardly sits well with international steps, which New Zealand has enthusiastically joined, to deal with corporate profit shifting and base erosion.

By midweek Key was gently rowing back, pointing to OECD work on the issue and opening the door to change to improve the foreign trust regime.

But by appearing to side with the so-called “1 per cent” he handed a cudgel to his opponents to beat him with. It is the very characterisation of Key that they have tried – and struggled – to make stick; the rich former money trader whose sympathies rest with the world’s big money and corporates to the detriment of the “battlers”.

So what should or can the Government do about it?

The tax rules on trusts are probably fair enough, although they differ from many other jurisdictions. It’s the interaction between those and the level of secrecy enjoyed by foreign trusts that creates the problem. You can’t ask for what you don’t know exists. Australia recognised this in asking for the IRD to proactively supply information where an Australian is involved – hence that question on the IRD form.

New Zealand at the very least should ask for the country of origin of any settlor as a first line of disclosure and then make a call whether that should be provided to their home country – if only to buttress our reputation for clean dealing in the post-Panama Papers era.

To some countries that disclosure could be automatic. To others – or in the case of people and organisation with trusts and legitimate fears at home – we could take a more restrictive approach.

Or we could stop registering foreign trusts and have done with it.

It might not be simple to just suddenly scrap the foreign trusts.

But changing to more disclosure won’t be simple. If thousands of trusts have been set up in New Zealand on the understanding that there is a degree of confidentiality then it would be difficult to suddenly remove a shroud of secrecy.

But doing nothing and fobbing off concerns is not a good option.

To retain or regain trust New Zealand needs to address foreign trusts in a meaningful and demonstrable way.