By Bernard Hickey
Former PwC chairman John Shewan has recommended a range of tougher disclosure rules in his Inquiry into foreign trusts in the wake of the Panama Papers, which showed how New Zealand's tax-free trusts were being used to disguise assets and transactions from foreign tax and other authorities.
"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 jurisdications to counter money laundering and aggressive tax practices," Shewan said.
Shewan proposed a strengthening of the initial registration requirements for Foreign Trusts and allowing regulatory agencies to search the register.
He also recommended foreign trusts file an annual return that included their financial statements and details of distributions.
The full report listed four options, including:
1. Some increase in information disclosure to include details of settlors and beneficiaries in trust deeds,
2. A significant increase in disclosure with a register of foreign trusts searchable by authorities, including details of settlors, persons with effective control, non-resident trustees, beneficiaries, coupled with an annual return, expanded application of Anti-Money Laundering rules and a register searchable by authorities,
3. The same significant increase in disclosure coupled with a fully publically searchable register,
4. The full repeal of the foreign trust regime.
Shewan proposed option 2.
Finance Minister Bill English and Revenue Minister Michael Woodhouse released the 124 page report on Monday afternoon. They said the Government would look to implement the recommendations after officials had looked at the Inquiry in detail and reported back to Ministers. They said a formal response would be issued in the coming weeks.
Shewan said in the report New Zealand risked potential reputational damage because there was a perception internationally that New Zealand had weak laws around due diligence and "was generally a soft touch." He said New Zealand had been cited as a tax haven.
Key downplays early AML proposal
Shewan also recommended that the current exemption from anti-money laundering (AML) rules for foreign trust lawyers and accountants be removed before the end of this year, and before the Government's current plans to extend AML to lawyers and accountants by 2017, or even later. See Gareth Vaughan's article from last week on just how much work the Government still has to do to implement its long-mooted second round of AML reforms.
However, Prime Minister John Key said this particular proposal for an early AML implementation for trust lawyers was unlikely because it was seen as complex and quite bureaucratic. The Government preferred to include foreign trust lawyers in the full second round of AML reforms, rather than to bring them earlier than the end of this year.
'Stronger BEPS moves'
Meanwhile, Woodhouse announced a strengthening of New Zealand's tax rules as part of the Government's work with the OECD on 'Base Erosion and Profit Shifting', which is aimed at increasing tax payments by multi-nationals that are currently able to shift revenues and costs around the globe in a way to minimise their total tax payments.
Woodhouse said the next steps would include stronger rules preventing excessive payments from a New Zealand company to its foreign parent, greater disclosure requirements for multi-nationals, and further sharing of tax data with foreign authorities.
Meanwhile, the Inland Revenue Department released its own statement with more details on the plans for tougher rules for multi-nationals referred to by Woodhouse. They included:
1. Limiting the use of look-through companies as conduit vehicles for non residents investing in foreign assets that generate income that is not taxable in New Zealand,
2. Introducing hybrid-mismatch rules to prevent companies avoiding tax by structuring their businesses or financing arrangements to take advantages of differences between New Zealand and other countries,
3. Strengthening interest limitation rules to further limit the ability of multi-nationals to strip profits out of New Zealand through excessive interest payments,
4. Applying stronger OECD transfer pricing guidelines, which determine how much of a multi-nationals profit should be taxed in a particular jurisdiction,
5. Automatically exchanging a non-residents investment information internationally to limit the ability of non-residents to hide assets offshore ("This is much like FATCA but not limited to the US).
6. Requiring large multi-nationals to prepare country-by-country reports, including the allocation of income and tax paid. These would be shared with other tax authorities to get a full picture of a company's activities in all countries.
(Updated with more details)