How the foreign trusts operated in the shade away from Inland Revenue's gaze
By Richard Harman (author)
More than half of the estimated foreign trust companies operating in New Zealand appear to have been doing so “under the table”.
In a 2014 note to Finance Minister Bill English and Revenue Minister Todd McClay, the Inland Revenue Department said there were about 8000 foreign trusts with a New Zealand resident trustee.
But they added: “This figure is based on the information disclosed to Inland Revenue under statutory disclosure requirements, but we understand that this figure may be a significant underestimate because of the existence of structures whose purpose is to defeat the statutory disclosure requirements,” the department said in its note.
In contrast, the Antipodes Trust Company (which employs the Prime Minister’s personal lawyer, Ken Whitney) told Mr McClay in a background note on the trust industry that it estimated there were up to 20,000 foreign trusts administered in New Zealand --- 12,000 more than the IRD figure.
Those trusts were therefore presumably the ones IRD suspected were defeating the statutory requirements.
Antipodes said that the law firm, Bell Gully, in a report published in January 2014 estimated the gross annual income earned in New Zealand by “this service industry” to be $25 million.
But IRD said: “The value of the fees collected in respect of foreign trusts, plus employment income for third party employees and principals for each foreign trust provider entity, amounts to approximately $24 million per anum, on average. This figure has been calculated from Inland Revenue data. “
And IRD reported to the Minister son how much tax the foreign trusts administrators themselves paid: “The contribution to the New Zealand tax take,in terms of income tax on fee income, goods and services tax, and PAYE paid on behalf of third party employees and principals for each foreign trust provider entity, is around $3 million per annum, on average. This figure has been calculated from Inland Revenue data.”
The details are all contained in a series of emails and notes flowing to and from the Beehive, Inland Revenue, and trust companies in 2014 when Inland Revenue proposed reviewing the legislation which allowed the trusts to pay no tax on any income earned offshore provided the settlors in the trust were offshore persons.
The documents have been obtained by the Greens under the official Information Act.
The only New Zealand involvement was to administer the trusts.
Inland Revenue had warned their Minister that the industry had attracted criticism internationally - “along the lines that we are a tax haven”.
Inland Revenue rejected that argument that New Zealand because tax havens were all about secrecy and New Zealand exchanged information with its tax treaty partners and had disclosure and record keeping requirements in place which enabled those exchanges to take place.
The department does not say whether those requirements could be imposed on the `12,000 trusts that existed outside its control.
“Having said that the perception that we might be a tax haven is damaging to New Zealand’s clean international reputation,” it said.
And it said this could only get worse given the OECD’s ongoing moves to crack down on what it calls base erosion of tax systems.
The Greens (understandably) have been keen to highlight the role in the exchange of documents played by the Prime Minister.
In a timeline they produced last night they say: “On December 2, 2014, someone from the Antipodes Trust writes to the Revenue Minister claiming the Prime Minister had promised them that the foreign trust regime would not be reviewed and had also recommended that they set up a meeting with the Revenue Minister to talk through its concerns.
Mr Whitney is the executive director of Antipodes Trust and has since confirmed he wrote that email.”
All along the foreign trusts issue has run on two parallel political tracks.
On the one hand, Opposition parties, apparently fortified by responses Labour has been getting from its focus groups, have been anxious to link the Prime Minister to what they believe the public will see as rich people dodging tax.
On the other, there is a serious issue about whether the trusts threaten the integrity of the whole New Zealand tax system.
Clearly Inland Revenue is worried that they do.
The fact that the trusts seem to operate so much in the shade and pay so little tax raises, even more, questions.
Presumably these issues will be canvassed in the report being prepared by the tax expert, John Shewan.