Gareth Vaughan questions whether PM John Key is stuck in a pre-GFC time warp given his position on NZ's overseas trusts

By Gareth Vaughan

Way back in the dim, dark 1980s Rob Muldoon rather surprisingly picked up a role as narrator in the camp musical the Rocky Horror Picture Show.

One of the best known songs from the show was called Time Warp. This was quite fitting for Muldoon at the time given the once popular Prime Minister had been swept from office in 1984 against the backdrop of a fast changing world that he appeared increasing out of touch with.

Bizarrely I thought of the Time Warp song on Monday when reading and hearing current Prime Minister John Key's comments on New Zealand being embroiled in the Mossack Fonseca global tax dodging and asset hiding scandal.

According to Key, New Zealand's trust regime does not represent a tax haven and he is rejecting calls for a tightening of the regime around overseas trusts. Key also said the offshore trust industry generates about $24 million a year in revenue for New Zealanders.

As is well known, prior to entering politics Key was a highly successful currency trader making a fortune in the free wheeling 1980s and 1990s. However, his attitude to secret NZ trusts helping overseas politicians and crooks dodge taxes in their homelands and hide assets, made me think our Prime Minister hasn't moved on from the days before the Global Financial Crisis (GFC).

The GFC, remember, was a time when global banking behemoths, like the one Key had worked for in Merrill Lynch, collapsed, got taken over or bailed out costing taxpayers trillions of dollars. Citizens in many parts of the developed world lost faith in high finance. Tax collecting has become more important for cash strapped governments - witness the US FATCA initiative, the OECD's BEPS project and now its AEOI initiative.

Perhaps once admired in some circles for being able to sidestep the intimidating taxman, wealthy individuals not paying their fair share of tax are no longer admired. The public is now interested in tax, which has shifted the goalposts. The tide has gone out on tax avoidance.

Hence I find it immensely disappointing to see our Prime Minister on the wrong side of this issue.

Tax's dirty water equivalent

It strikes me that this legal yet unethical and immoral use of NZ's reputation through our secretive trusts, is to tax what the water quality, or lack there of issue, is to our clean green "100% pure" environmental image. It's simply a bad look and something we need to address post haste.

And frankly we didn't need this massive international leak of documents from a Panamanian law firm to point out that we have a problem. It has been evident for years.

In this submission to the Ministry of Business, Innovation & Employment last July on the related problem of the misuse of NZ's Financial Service Providers Register by offshore financial service providers, I noted these comments from the Wilmington, Delaware headquartered Atrium Associates LLC, which is an international company formation agent.

"If you are looking for a financial services or Forex licensed entity, we usually suggest New Zealand, Mauritius or Seychelles."

"If properly structured, a New Zealand resident company can operate as a tax free offshore company," Atrium adds.

I open with Atrium's comments to highlight there are a range of sophisticated operators out there scouring international company and tax laws so they can help clients - for a fee - maximise their "financial efficiency" and conduct their affairs "under absolute confidentiality."

A 2012 Cabinet paper noted the Companies Office monitored 77 such entities.

Another example? Here's Equinor Trust Ltd, a NZ registered trustee with links to Kiwi Deposit Building Society from a 2013 article.

In a background and business rationale paper provided to the Reserve Bank, Williams said Equinor Trust is responsible trustee for almost 150 trusts with assets "conservatively" worth more than €5 billion being boats, planes, real estate, bankable assets and share participations. Equinor Trust specialises in the establishment and operation of New Zealand foreign or exempt trusts for high net worth and wealthy families and is a wholly owned subsidiary of the Copenhagen-based Equinor International A/S, which he said specialises in onshore international wealth and tax planning and management.

"In short Equinor has some very interesting client relationships with some of the world's wealthiest individuals and families (located in all parts of the world), and their bankers and advisers," the paper said.

The €5 billion, or just under NZ$8 billion, Equinor Trust is said to oversee is equivalent to more than half the total NZ$14.5 billion of KiwiSaver funds under management.

And there's the NZ registered, but overseas operating financial service provider Breder Suasso. Here's some of what it has said about NZ trusts.

"The New Zealand Foreign Trust regime is considered to be one of the best if not the best offshore trust regimes in the world today."

And; "A properly established trust provides virtually 100% protection against creditors."

Plus; "In New Zealand there are many cases of personally bankrupt individuals who have been unable to pay their taxes or have failed in business but who still live in mansions and drive Ferraris owned by their trusts and there is nothing anyone including the Government can do about it."

Onto the 6pm TV news

Some of this sounds remarkably similar to what we heard from Mossack Fonseca yesterday. So it's not new and government officials and Cabinet Ministers have known for years NZ's reputation as a well regulated South Pacific paradise is at stake. But what the Mossack Fonseca leak has done is take the issue global, put meat on the bones, and domestically get the issue onto the 6pm TV news. 

NZ is beloved by Transparency International's Corruption Perceptions Index, and by the World Bank for the ease of doing business here. But make no mistake NZ's good international reputation is now on the line. This has been hard won and could be easily lost. And I for one put a much higher price tag on it than the $24 million figure bandied about by Key.

In a defence of NZ's tax system yesterday Revenue Minister Michael Woodhouse said we don’t tax foreign income earned by foreigners. What Woodhouse neglected to add was that we will, however, help foreigners hide it from their domestic tax authorities for a fee. (Here's the scant foreign trust disclosure currently required by IRD).

As reported in Bernard Hickey's story yesterday, IRD even advised the Government three years ago to review the tax treatment of foreign trusts and warned of the risks to NZ's reputation.

"Our foreign trust rules continue to attract criticism, including claims that New Zealand is now a tax haven in respect of trusts," the IRD wrote.

"This is largely because the mismatch between our rules and those of other countries may result in income not being taxed either in New Zealand or offshore. To protect our international reputation, it may be necessary to strengthen our regulatory framework for disclosure and record-keeping."

Sunlight is the best disinfectant

Prime Minister, sunlight is the best disinfectant. It's time full details about foreign trust beneficiaries, the nature of the assets and source of assets held were fully disclosed. Perhaps this could be done by setting up publicly available register?

As a small, remote country at the bottom of the world - clinging onto a good reputation - it's time NZ showed itself to be a fully fledged player in the global fight against tax havens and offshore financial services hubs associated with international pariahs such as Panama.

Under repeated questioning from journalists, and following numerous calls for tougher disclosure rules, Woodhouse said on Tuesday the IRD was working with the OECD on a review of the framework for disclosure around trusts and Key said NZ would change its rules if required. So perhaps there is hope the Government will be dragged kicking and screaming into doing the right thing.