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Report: Inquiry into Foreign Trust Disclosure Rules

Government Inquiry into Foreign Trust Disclosure Rules
June 2016

[…]

Part 1 Executive Summary

Purpose of Inquiry

1.1 The Inquiry is required to examine New Zealand’s foreign trust disclosure rules and to report on whether the rules, and the enforcement of them, are sufficient to ensure New Zealand’s reputation is maintained when considered alongside the country’s commitment to various OECD and other international agreements. In short, are the rules fit for purpose?

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.

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 non-disclosure to achieve their effectiveness.

[…]

Full report: [PDF] Government Inquiry into Foreign Trust Disclosure Rules

Treasury website: Government Inquiry into Foreign Trust Disclosure Rules — The Treasury - New Zealand

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