Polity: Is being a tax haven worth it?
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The interesting thing is how the stories – today's ones, but even more so the AFR story that Stuff basically squandered on Friday – show how much the use of NZ trusts was accelerating:
In 2013 Mossack Fonseca had been on a marketing drive, cutting its prices to build up its New Zealand office.
"Chase the money," head office in Panama urged its New Zealand staff.
Mossack Fonseca offered two New Zealand products to its overseas clients: an NZ foreign trust, and a Look Through Company (LTC).
As long as the trust and the LTC had no income in New Zealand and had no New Zealand beneficiaries, then they paid no New Zealand tax.
But there was another advantage because technically the LTC was taxed, it's just that the tax rate was set at zero.
One French investor who moved his holding company from Luxembourg to a New Zealand LTC knew he would pay no tax.
But New Zealand has a double-tax treaty with France, which meant that he could repatriate the profit to France where it was not taxable because it had already been "taxed" in New Zealand.
While New Zealand's tax laws are a major plus for foreign investors, it's not the only attraction. They also come to use New Zealand's good reputation.
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I find it hard to believe the government, senior ministers and all, are spending so much time defending a position based on its value to us of $24 million a year.
There has to be more to it than that and that, frankly, worries me.
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But New Zealand doesn’t just have its share of wealthy tax-dodgers.
This is an entire country embarrassed and tarnished by the contents of Mossack Fonesca’s secret files.
New Zealand is a large chapter of the Panama Papers. It is referenced a staggering 60,940 times.
Roger Thompson – Mossack Fonesca’s man on the ground – features in 4560 documents, and his firm Bentleys well over 3000 times.
This is a damaging chapter, because unlike some of the other jurisdictions featured - Panama, the British Virgin Islands, the Bahamas, for example - New Zealand has a clean reputation to lose.
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izogi, in reply to
But there was another advantage because technically the LTC was taxed, it's just that the tax rate was set at zero. One French investor who moved his holding company from Luxembourg to a New Zealand LTC knew he would pay no tax. But New Zealand has a double-tax treaty with France, which meant that he could repatriate the profit to France where it was not taxable because it had already been "taxed" in New Zealand.
I don't understand this part.
When I've had income from overseas, like when my former employer paid my last salary payment some time after I'd shifted and become a NZ tax resident again whilst still working for them... or where money I left in an account overseas earned interest (and was taxed RWT), it didn't work this way at all. There was no obvious rule in NZ where IRD simply ignored that income simply because it'd had "some" tax deducted. Instead, IRD asked how much tax had been taken from it already, and used that to offset the amount I owed to New Zealand.
If France completely ignores its residents' income simply because another country has indicated having taxed it regardless of rate, shouldn't France also be taking some joint responsibility here?
I'm sure there's more to it than this, I don't doubt that someone with appropriate skill could manipulate the existing rules for their desired outcome. I'm not at all trying to absolve NZ from some ethical responsibility here, but that explanation of "New Zealand taxes at 0%" seems overly simplistic.
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I want to know why National changed the law in 2010 to make this possible. Who's bright idea it was? Who lobbied the gov ernment for this change? which cabinet ministers championed it? was Key's 'lawyer' involved? if so did he lobby Key?
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linger, in reply to
NZ is signatory to a number of reciprocal tax agreements whereby all that matters is that the other country has taken the appropriate amount of tax under its own system. Japan is one such case. However, these generally only apply if you are resident in the other country, and therefore unquestionably subject to its tax regime. So you might have fallen through the cracks of those agreements because you were resident in NZ at the time.
Of course, the whole question of residency becomes more arbitrary when we're looking at company tax, rather than individual income. -
izogi, in reply to
Yes, possibly. For me it was Australia, though as far as I remember, IRD's IR3 form (and accompayning instructions) does not ask where the money was earned. It only asks how much foreign income was earned compared with how much foreign tax was paid on that income, even going as far as to specify the conversion rates that must be used on a month-by-month basis.
I'd expect you're right about the company & residency thing, though. Maybe someone who's well versed in tax law and trust management and company creation knows how to legally avoid answering the question, or shuffling money around to answer it differently from how I did. Really my main confusion with the AFR explanation is why other countries apparently don't scrutinise how much tax was paid for their residents, but only that any tax was paid, if that's indeed part of the story. It didn't seem to go far enough to fully explain.
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Short answer: no, because Main Street sees little if any of the benefits.
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It works like this....
Scenario...
I live in France, I sell tractor parts made in France to "I need a tractor part, Foreignland ltd.".
I have to pay for those parts I get from "Tractor Parts, France ltd." in Francs, which shows up as a loss on my books, I get tax relief in France.
"I need a tractor part, Foreignland ltd." pays "I will look after your money for you, NZ, ltd" (an LTC) no income here, just money from overseas, so 0% tax I get "tax paid" ticket from that nice Mr Key & co, "IRD ltd"
When my money arrives in France it has already had "tax" paid.
I get to rip off France twice. -
Rich of Observationz, in reply to
About right, except that there haven't been francs for over 16 years.
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it pulls in $24 million a year
Better still, from the same IRD estimate, that only results in $3m tax paid here. That's the benefit to public coffers. It's almost like these tax-dodge advisers are using the same tricks to reduce their effective rate to $12.5%. Bold atlasses, all. Ambishus.
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izogi, in reply to
Better still, from the same IRD estimate, that only results in $3m tax paid here.
Yeah, but you'll put a few lawyers on the benefit, which the rest of us then have to pay for. So really it costs more.
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Steve Barnes, in reply to
About right, except that there haven’t been francs for over 16 years.
True…
And in Foreignland they no longer use earwax as a currency but hey….
;-)
That's where Currency Traders come into the picture and that's a whole new ball of earwax, arbitrage, you can trade that tractor part money for 90 days, if I remember correctly, before you have to pay me in Euros that were US Dollars and Yen or whatever for the last 3 months and making that nice Mr Key & co a tidy profit,if he had lost on that deal, he could insure against that.AHHHhh, the plot sickens.
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Will no one think of the lawyers.
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ThoughtSpur, in reply to
Not sure which heuristic device is better suited:
• Where there's smoke…
• Methinks he doth protest too much -
Alfie, in reply to
There has to be more to it than that and that, frankly, worries me
Exactly. Keep in mind that Mossack Fonseca is only a small part of the conceal-your-money offshore puzzle. While Key and his mates have undoubtably sold NZ to the world's super-wealthy as a tax haven, I suspect that it also works exactly the same, the other way around.
In other words, while this won't be revealed in the Panama Papers, many wealthy New Zealanders will be using other offshore companies to hide their assets and avoid paying their fair share of local tax. That's why there's a bit of a scramble going to make this issue go away.
Following Key's refusal to keep his RNZ appointment today, Katherine Ryan commented that Key is making himself look increasing guilty as this drama unfolds.
"All perfectly legal", "nothing to see here", "the IRD has other priorities"...
Of course there's more to this and some rather important people would rather we didn't find out about it.
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The solution is obvious - if a zero tax rate is the only problem. Do not 'tax' the money at all (meaning change the legislation such that it is not taxed rather than taxed at 0%), close the loophole yet allow perfectly legal and 'moral' trusts to persist.
This is so obvious (presuming that's the only immoral use of the trusts) I cannot believe anyone could agitate against it with honest intent.
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Steve Barnes, in reply to
I suspect that it also works exactly the same, the other way around.
Indeed...
Scenareo...
I live in New Zealand and I am the beneficiary a Trust, in the Hidden Islands. The Trust, who's trustee is "Me With a Different Hat" gets payed all the money I earn from Greedy Bastard NZ ltd, the trust gets "taxed" at Hidden Islands tax rate, 0% and as such, my money I get from my Trust has had "tax" "taken" and I have a bit of paper that says so.
I pay no tax in NZ.
This relies on the point that although I am the "beneficiary" of the Trust and strictly speaking I cannot be the beneficiary and trustee under NZ law (this is a grey area in some respects) as the Trust is offshore all I need is that other "hat" to make it "Pretty Legal" -
Sacha, in reply to
while this won't be revealed in the Panama Papers, many wealthy New Zealanders will be using other offshore companies to hide their assets and avoid paying their fair share of local tax.
Unless they've been stashing their loot via Niue or the Cook Islands. Wonder why Key was named in connection with the latter ..
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izogi, in reply to
Paul Brislen:
There has to be more to it than that and that, frankly, worries me
Alfie:
Exactly.
It also looks suspect to me, but I'd not rule out government's PR machine simply trying to let themselves down lightly, as opposed to largely admitting to an outright failure on their watch to bother to do anything about it for so long. Malice versus stupidity, and so on.
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The core problem is our tax system being out of alignment with 99% of other nations by taxing the local settlor rather than the local trustee, as Deborah Russell wrote recently.
Many other countries tax trusts on the basis of where the trustee lives. If the trustee lives in your country, then you tax the trust, but if the trustee lives overseas, then they don’t tax it.
This means there is a mismatch between New Zealand’s rules for taxing trusts, and other countries’ rules for taxing trusts, and that mismatch creates a loophole that can be exploited.
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Rich of Observationz, in reply to
Part of the problem is that trusts are a middle-class dodge in NZ, which isn't the case in other countries.
If you have a trust in the UK, HMRC will look at you funny and charge the trust income tax on all income over GBP1000, plus capital gains (even if the trust owns a family home, because trusts don't live in houses) and they'll expect the trust to operate at arms length (e.g. if you live in a house belonging to a trust, you have to pay rent on it).
Apparently (I owe this information to Cactus Kate, who apart from anything else, is at least an expert in this area) most NZ trusts are of very dubious standing - one person is settlor, trustee and beneficiary and typically has full control of the trust's bank account.
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Bart Janssen, in reply to
at Hidden Islands tax rate
Perhaps a good reason why Key is reluctant to talk about The Cook Islands and their part in the Panama papers.
But all this is moot because we're talking about it in terms of it discrediting Key and National in the eyes of the public, which just won't happen.
What is far more relevant is if this disclosure of NZ as a place where shifty businessmen evade taxes starts impacting our trading partners.
"So you want us to buy your milk powder and meat - well then how about you stop sheltering our tax evaders." -
It was interesting to listen to the following interview Guyon Espiner had with one tax expert on Morning Report this morning:
"Robin Oliver is a former Deputy Commissioner of Policy at Inland Revenue and now a director, and tax advisor, at Oliver Shaw"Listen from 4:45 on and hear how Robin Oliver and others advised the government on 22 Jan. 2015 that they saw a need for greater regulatory controls of such trusts.
He commented that he was told by the government that they had greater priorities. Add that together with John Key's "former lawyer" Whitney, and what came out of industry lobbying against an IRD proposed review of foreign owned NZ trusts, and we get the impression the government was simply not interested in addressing anything to do with foreign trusts held in New Zealand.
This morning even Paul Henry did in his breakfast show seem to be a bit more curious and concerned than normal when talking with John Key, and it was even admitted by Key that his "former lawyer" is still working for him, now not as a registered, practicing lawyer, but as a "consultant", looking after the same affairs he had looked after before for our dear PM.
With what we learned to day, I think it is fair to say, this is all rather murky and suspicious what has been going on for years, and even Fran O'Sullivan admitted that the Cook Islands are still allowing things that were supposed to be cleaned up after the revelations that came with the "Winebox Affair" Winston Peters had exposed.
John Key is dodgy, he looks dodgier than ever, and this time his attempts to discredit Nicky Hager as nothing but a "leftist conspiracy theorist" may not succeed.
As we have well established old boys networks operating in New Zealand, I bet Key did not want to disadvantage and restrict old buddies who operate trusts, some perhaps overseas contacts he may still have from his many years working in merchant banking.
I wonder what "advice" he gave to clients when working for Merryl Lynch and so?
https://en.wikipedia.org/wiki/John_Key"In 1995, he joined Merrill Lynch as head of Asian foreign exchange in Singapore. That same year he was promoted to Merrill's global head of foreign exchange, based in London, where he may have earned around US$2.25 million a year including bonuses, which is about NZ$5 million at 2001 exchange rates.[4][14] Some co-workers called him "the smiling assassin" for maintaining his usual cheerfulness while sacking dozens (some say hundreds) of staff after heavy losses from the 1998 Russian financial crisis.[5][14] He was a member of the Foreign Exchange Committee of the New York Federal Reserve Bank from 1999 to 2001.[15]"
Given his CV I bet he knows much more than he admits to know, as his previous employment will have required him to know all the ins and outs about tax saving systems and opportunities, including "tax havens" and what countries may offer tax avoidance.
And we know, the government has other priorities, such as dishing out to beneficiaries, tenants of Housing NZ, and other clientele, who would never bother vote for them. Paula Bennett has come to the rescue again, announcing another 41 million for assisting people needing emergency housing. Who really cares about those trusts that John and his many mates have? -
Russell Brown, in reply to
What is far more relevant is if this disclosure of NZ as a place where shifty businessmen evade taxes starts impacting our trading partners.
“So you want us to buy your milk powder and meat – well then how about you stop sheltering our tax evaders.”It's actually puzzling that some of the usual commentators can't get their heads around this.
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