New Zealand’s trust system is broken, and the Shewan Review lays out a way to fix it
The Shewan Review into New Zealand’s trust laws was released on Monday and it lays out what needs to be done to fix the loopholes that have lead to New Zealand being used as a tax haven.
The review was a part of the Government’s response to the Panama Papers which suggested New Zealand was being used as a tax haven by people like Malta’s energy minister, Konrad Mizzi. Although the Review is shy in stating this explicitly, by pointing out “the classification tax haven is an ambiguous label that is now of historic relevance”, the review does state that the existing foreign trust disclosure rules are inadequate and may lead to reputational damage to New Zealand.
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 (Shewan, John. 2016. Government Inquiry into Foreign Trust Disclosure Rules. NZ Government.)
To understand why this is the case it’s worth defining what a foreign trust is within New Zealand’s legal framework. Senior lecturer in taxation at Massey University Deborah Russell explains what a foreign trust well in The Spinoff, saying;
Under New Zealand tax law, trusts are divided into three groups: complying trusts, not-complying trusts, and foreign trusts. We tax each of them based on where the settlor of the trust lives. The settlor is the person or entity that puts property into the trust. This rule was introduced back in 1988, and the objective was to stop New Zealanders from squirreling assets away in trusts overseas. Even if the assets and beneficiaries and trustees are overseas, if the settlor is based here, we tax the trust.
The technical rules for designating an entity as a foreign trust are complicated, and like our other trusts, they’re based on when property was settled in the trust, when income was earned, and when distributions are made. In theory, and in practice, it is possible for a trust to change status, based on those rules. It could be a foreign trust one year, and become a complying trust the next.
However, for the most part, foreign trusts tend to remain foreign trusts. Their settlors are overseas, their beneficiaries are overseas, the assets that are in the trust are overseas
As the Panama Papers broke with the huge release of information from the firm Mossack Fonseca, it became clear that New Zealand’s trust system was being abused, showcased by more than 61,000 documents from the the Panamanian law firm mentioning ‘New Zealand’. Since law changes in 2008 were made and the update in 2011 it was revealed the number of foreign trusts had more than tripled to 10,697 this year from 3311.
Public pressure mounted over the course of a month calling on the Government to investigate the problem. Also, documents released under the Offical Information Act showed that senior figures in the trust industry had lobbied the Government in the past to put a halt to Inland Revenue looking closer at the industry, which only added to the public pressure to investigate further.
A poll that I commissioned UMR research to do showed that 57% of New Zealanders were concerned about the country being a tax haven, with almost half of those polled saying they though government was handling the questions raised by the Panama Papers poorly. The 136 page review cites this and other reports showing the publics concern for the issue.
The Panama Papers have generated significant debate in the local media over whether New Zealand is a tax haven. The Inquiry considers this debate to be a good illustration of why the OECD has moved away from using the expression tax haven, because in the context of a 21st century global economy it is wholly inadequate. Debates that focus on it tend to be futile in throwing light on the core issues or resolving them, as has been the case in New Zealand.
Although the review was limited in it’s scope, which was criticized by many, focusing mainly on reputation risks to New Zealand, it has taken a board look at the inadequacies of current trust law. Because of this, the review makes four comprehensive recommendations for the Government as a way of fixing our broken trust system, which if enacted would likely fix the problem:
- Some increase in information required to be disclosed by foreign trusts (details of settlor and beneficiaries as listed in trust deed).
- Significant increase in information required to be disclosed (details of settlor, persons with effective control, non-resident trustees, beneficiaries, trustees, trust deed) coupled with an annual return, expanded application of the AML laws and a register of foreign trusts, searchable (but not by the public).
- As for 2, but foreign trust register is publicly available.
- Amend the foreign trust tax regime to repeal the exemption from tax on foreign source income
The first and second recommendations are simple, straight-forward and easy to implement but would be a significant improvement. Currently when registering a trust in New Zealand there is very little detail required — except for basic details of the person registering it.
As part of this change the Government would require anyone registering a trust to including the trust’s settlers, protector, non-resident trustees, and beneficiaries.
The beneficiaries is the important one — as they are the ones that receive financial benefit out of the trust even if the funds are run through other corporate bodies. The Tax Justice Network explain why recording beneficial ownership is important in the context of businesses, with the same theory applying to foreign trusts:
The roof of your house caves in. It’s a huge job to fix it — and you get some builders in. They charge a fortune — but, well, what price a roof over your head? Then six months later, your roof caves in again! Time to sue the builder. Only there’s a problem. The building company has gone bankrupt. So you chase down the company owners — but find that the company’s registered in a tax haven. You go through the courts, and you’re delighted that your country has an agreement to share information with the tax haven! After a lot of work, you find out the names of the company’s directors, along with photocopies of their passports and even their shoe sizes.
Only now there’s another problem. And it’s a biggy. The company ‘directors’ are in fact ‘nominees’: directors who have merely rented their name to the company. Each of them, it turns out, are directors of thousands of companies. They are straw men hiding the real builders — those people who extracted those tens of thousands from you for ‘fixing’ your roof, and who doubtless extracted millions from many other unsuspecting punters — and who remain a mystery. The tax haven has ‘shared’ all the information it has with your country and the courts — but still you are no closer to tracking down the real, warm-blooded humans who set up the building company — humans who are quite likely to be swilling champagne now, driving their Ferraris through the streets of Monaco, and laughing heartily. While you, in your dilapidated home, wonder how to pay for a new roof.
Countries have signed lots of agreements to share information with each other. Tax havens enthusiastically sign up to these agreements. “We will give you all the information we have, whenever you ask for it,” they say. And they mean it — only it’s a trick. They simply make sure they don’t have the information in the first place. They will tell you all about the nominee directors, the trustees, and the other sham officials who make the secrecy world function — knowing that you are no closer to finding the real warm-blooded humans behind the mischief.
Transparency International NZ say the current lack of information “about the beneficial owners makes cooperation ineffective in tax evasion and criminal matters”. But this would all change if the Government adopted this recommendation of the Shewan Review as part this new process for registering for a trust would require the disclosure of the name, email address, foreign address, country of tax residence, and tax numbers at the time of registration of the it’s settlers, protector, non-resident trustees, and beneficiaries. It’s recommended that existing foreign trusts would register, and to supply this information by 30 June 2017.
The third and forth recommendation concern the way the information is accessed. Currently there is only an information sharing agreement with Australia, although IRD says they are willing to cooperate with other countries on matters relating to trusts in New Zealand, but when it comes down to it if you don’t know that you should be looking countries won’t be inspecting into any trusts held here in the first place.
The report recommends that this information is either in a searchable but not public database or made publicly available. The third recommendations seems like the probably solution the Government will take on this, but the fourth recommendation should be closely inspected. If we want to rid New Zealand of our tax haven label fully transparency in the matter is going to be needed — and that means a publicly accessible registry should be the way we go.
These recommendations are in no way radical, with the United Kingdom already acting to ensure that trustees obtain and hold accurate details of the beneficial ownership of their trusts, including details of the settlor or settlors, trustee or trustees and beneficiaries. It’s about time the Government started to catch up.
So far the Government have said they are open to enacting these recommendations but won’t make a decision until officials have taken a look over it. What’s certain though, the Review has shown that our trust laws are completely inadequate.
The Government shouldn’t have needed this amount of public outcry or an inquiry to see that our trust system is broken, but they can restore the public’s confidence and rid New Zealand of being a tax haven quickly by adopting the recommendations made in the Shewan Review.
This is needed urgently to clear up the reputational damage that has been done by the Panama Papers, showing New Zealand is being used as a tax haven.
