NZ foreign trusts among global tax havens
New Zealand slack company registration setup has come in for a kicking of late - and deservedly so. It's one thing to have a quick and easy registration process but quite another to have shell companies used for shadowy purposes, hidden behind foreign nominee directors.
Much sport has been had by Chalkie's colleagues exposing these New Zealand shell company links to international money laundering and arms dealing. One of the trails they follow towards such unusual activity is the appearance of an obscure person or address linked to numerous companies with no apparent local purpose.
Similar observations have led Chalkie to another kind of Kiwi entity capable of being exploited by the unscrupulous. It's called a New Zealand foreign trust.
There are several key features of a foreign trust, one of them being that it pays no tax on overseas income. On its own that's a useful attribute, but when combined with another it becomes turbocharged, because foreign trusts don't have to tell anyone what they own, how much money they make, or who benefits from anything they pay out.
There are exceptions to this veil of secrecy, but we'll come back to that. And before aspiring Kiwi tax dodgers start reaching for their accountant's phone number Chalkie should point out that foreign trusts can't be used by anyone living in New Zealand.
However, it may already be apparent that if, say, you had a lot of money and if, say, you wanted to hide it from certain tax authorities, a New Zealand foreign trust could be just the ticket.
Local tax consultants are naturally alive to the opportunities and actively market foreign trusts to the wealthy global elite.
A sample of offerings yields the following phrases:
"New Zealand is not seen as a ‘tax haven' country so the use of a New Zealand [foreign] trust is generally not perceived as a means to avoid tax."
"It should be noted that New Zealand does not have a central trust registry, thus offering a considerable degree of privacy/secrecy and flexibility."
"Many governments require the declaration of all income as earned by their taxpayers and/or assets held by them. By using a structure people can avoid disclosing assets in their own name to other interested parties. The use of structures also allows them therefore not to have to lie when asked about foreign assets and/or income."
To explain the latter statement, Chalkie should point out that the beneficiary of a trust does not legally have an ownership interest in the trust's assets; hence one can shift assets into a trust and legitimately claim not to own them, even if one continues to get the benefit of them.
Isn't the law wonderful?
Returning to the issue of secrecy, some further detail is worth explaining.
According to the International Funds Services Development Group - an outfit aiming to boost New Zealand as a global financial services hub - foreign trusts gained their usefulness from tax changes introduced in 1988.
Apparently the idea was to stop Kiwis escaping the tax net by bunging assets into an overseas trust, so taxing trusts according to the domicile of the settlor, rather than the trustee, was seen as the solution.
Originally, foreigners settling a New Zealand foreign trust could do so in perfect secrecy, because a trust is technically just a private arrangement. Not only was there no register of trusts, there was no requirement to tell the government or the IRD about it as long as it had no New Zealand income.
An overseas taxman was therefore stuffed if he wanted to probe a citizen's New Zealand trust interests. Even if he asked our IRD for information, IRD simply didn't have it and had no power to get it.
The Australian Taxation Office found this particularly annoying because it suspected lots of Aussies were using NZ trusts to avoid tax.
That changed when new disclosure rules came into force in 2006, but only a bit.
Thereafter, trusts had to tell the IRD the name of the trust, the name of the trustee, and whether the settlor was Australian.
Trustees also had to keep financial details such as the trust's income and distributions, as well as the name of the settlor and the beneficiaries, and hand over the information to IRD on demand.
The Australian ones had it tough, because the IRD now routinely passes their details on to the ATO. But the rest are relatively undisturbed because the IRD won't ask for financial details unless they are first sought by an overseas taxman, and the overseas taxman has to ask for information about a trust by name, which means they first have to know it exists.
One tax consultant assessed the situation thus: "As the names of the settlors and beneficiaries are not disclosed, there is no risk of disclosure to other governments under current legislation."
Clearly, the potential for hiding assets in foreign trusts is huge.
So how many are there?
According to the IFSDG, the trust industry thought there were about 4500 in 2009.
When Chalkie asked the IRD, it said international tax treaties obliged it to keep shtum.
Chalkie thought that claim was akin to the output of a bovine back end, so asked for the info again, including the clauses of the treaties requiring secrecy.
This time the IRD said: "There are approximately 8000 foreign trusts, both active and inactive, that have registered with Inland Revenue since 2006. Of these, 126 have declared Australian settlors."
So there are more than people think, and 98 per cent of them are not subject to any routine disclosure - the IRD will not entertain "fishing expeditions" from overseas authorities.
How much they hold in assets is unknown, even to the IRD, but a well-informed tax consultant told Chalkie he knew of individual trusts holding billions of dollars worth.
The same IFSDG report estimated foreign trusts paid about $20 million in fees to their New Zealand administrators. Chalkie doesn't know how much they charge for foreign trusts, but other trustee fees are usually a fraction of 1 per cent. On KiwiSaver funds, for example, trustee fees are about 0.05 per cent of assets.
If the fees figure is in the ball park then - and it's probably an underestimate - foreign trust assets easily could be worth tens of billions.
Some readers may recall publicity last month about a study by former McKinsey consultant James Henry called The price of offshore revisited, in which he estimated "US$21 trillion of unreported private financial wealth was owned by wealthy individuals via tax havens at the end of 2010".
Chalkie reckons New Zealand's foreign trust regime is an important part of the tax haven network, not just because it allows income to be collected tax-free - that's par for the course in the offshore tax business - but because it allows ownership to be hidden so easily.
When you combine foreign trusts with a shell corporate trustee, as administrators often do, and then with trusts and shell companies in other offshore jurisdictions, as administrators often do, you get a virtually impenetrable web protecting the wealth of the super rich from tax assessment.
To give an idea of the subtleties, in May the ATO warned Australians against a scheme using New Zealand foreign trusts for tax dodging. The idea was that a New Zealand foreign trust would provide admin services to an Australian business for a fee, sometimes an excessive fee, providing the Aussie business with a tax deduction.
The fee, or the markup, would then be recycled to the business owner via the anonymity of the trust. Sometimes the New Zealand trust would be providing admin services to trusts based in Panama, Vanuatu, Samoa or Hong Kong.
Given the ATO has special powers in relation to New Zealand foreign trusts and still struggles to stay on top of them, you can see the Sisyphean scale of the task in the world's struggle against illegal tax dodging.
Of course, New Zealand could help by giving other authorities the same privileges as Australia, but for some reason we choose not to.
Chalkie can't help wondering why New Zealand maintains a regime so obviously advantageous to tax dodgers and criminals. We're not only not part of the solution, we're a big part of the problem.
- Chalkie is written by Fairfax Business Bureau deputy editor Tim Hunter.